Merrill Lynch has launched a new research product, the ML Alpha Surprise Model Index to track the performance of a basket of stocks selected from the S&P 500 using the firm's proprietary Alpha Surprise Model.

The ML Alpha Surprise Model Index has historically offered a higher level of return and a lower level of risk than the S&P 500. It has generated 11.4 percentage points annual total return since December 1999 compared with the S&P 500's 1.2 per cent over the same period, with lower.

"The insight of the model is demonstrated by its track record, and the philosophy behind it is simple: we seek to capture the most undervalued high conviction calls from our analysts using an objective, quantitative process," said Savita Subramanian, quantitative strategist at Merrill Lynch.

The model focuses on those companies for which Merrill Lynch equity analysts have a high degree of conviction in the direction of earnings estimates. Starting with these high conviction stocks, the model then identifies those that appear to be undervalued, and generates a list of stocks that are attractive based both on the earnings expectations and valuation.

"For the Alpha Surprise methodology, we rank stocks selected from the S&P 500 using a 75 per cent/25 per cent weighted combination of our Merrill Lynch versus Consensus Earnings Surprise Model (the growth or "surprise" component) and our Dividend Discount Model (the "alpha" component)," said Mr Subramanian.

"The 'surprise' component identifies stocks where Merrill Lynch analysts have earnings forecasts that are significantly above consensus estimates, and the 'alpha' component identifies those stocks that are inexpensive."

The ML Alpha Surprise Model Index is constructed as an equal-weighted basket of the Alpha Surprise Model's stocks, which are selected each month. The daily price and total return indices are available on Bloomberg.