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November 29, 2005

Alpha: What It's All About

By Michael Scotti

Portfolio manager one day, head trader the next. That's the seemingly improbable situation that Nanette Buziak found herself in this past March. Buziak moved from J.P. Morgan Asset Management, where she ran a $25 billion enhanced index portfolio, to head equity trading at ING Investment Management, which manages $40 billion in equities.

The move from portfolio manager to head trader looks like a logical one. Buziak, besides running her portfolio at J.P. Morgan, also oversaw an effort to bridge the gap between trading and portfolio management, bringing the two closer together in the investment process. It's all about capturing alpha, she says, and it starts with communication.

"Trading is a source of alpha," Buziak says. "I'm trying to restructure the desk where we are part of the alpha generation process and not just trade executors."

It was precisely this dual understanding of trading and portfolio management that prompted former J.P. Morgan exec Fredric "Rick" Nelson, and current ING chief investment officer, to tap Buziak to help restructure the far-flung operation.

ING had Aeltus Investments in Hartford and both Furman Selz Asset Management and ING Funds (Pilgrim) in New York. Now, trading is centralized at a single New York office, except for one quantitative trader in Hartford.

In New York, a centralized trading desk is encircled by portfolio managers and analysts in an open layout. This promotes better communication, Buziak says. In streamlining the communication process, sectorization of the trading desk was a necessary strategy. With specialized traders, there is a better flow of information, not only internally, but also with the Street, Buziak says. Sales traders know who to call with information or when shopping a stock. The new structure encourages brokers to call with value-added information because there is less confusion surrounding who to speak to.

But brokers haven't been immune to changes at ING. It has consolidated its brokerage list by one-third since March. It had 155 brokers then. Within a month, the list was down to 45. To better leverage brokerage services, that number could be cut even further, Buziak adds.

Trading costs have dropped by about 10 percent at ING since the desk became centralized, Buziak says, citing Plexus Group's trade cost data. The lower trading costs are due primarily to lower commission rates, but also because of reduced implementation costs, Buziak says.

The traders have a better understanding what information drives portfolio managers' thinking and their models. "Traders are much more in the flow," she says.

Within the next nine months, she expects both will be fully in sync. The hope is that translates into greater alpha capture.

About half of the firm's trading volume is executed electronically with algorithms, she says. ING trades with two firms, but Buziak is looking at adding other algorithmic providers. Using more brokers' algorithms underscores her willingness to experiment. "I'm open to trying new things, because that is the only way we'll know if these tools work or not," she adds.

ING Investment Management

Equity AUM: $40 billion

Desk: 6 Traders (NY); 1 (Hartford)

Broker List: 45 Firms

Avg. Comm.: 3.0 cents

Trade Cost Analysis: Plexus and ITG

OMS: Charles River