The Corazon Capital investment process reflects the fact that the most important contribution to performance in a portfolio is derived from its tactical asset and style allocation.
Research has shown that the decision controlling the proportion of the total investment to be assigned to each asset class or style accounts for 85% of a portfolio return. Individual fund and security selection (10%) and market timing (5%) account for the remainder. Tactical asset and style allocation lies at the heart of our investment policy. We recognise that businesses and stockmarkets globally may move in cycles. Different asset classes and styles of investment are appropriate at different stages of these cycles.
A tactical asset allocation decision, for instance, could be taken to adjust exposure to bonds when it is perceived that the trend in interest rates or yields may alter. A tactical style allocation decision could see reduced exposure to one type of hedge fund strategy or style in favour of another to reflect a change in the global liquidity or other business cycles. An example here might be a move from equity market neutral to a more directional equity market long-short strategy in times of economic recovery.
The other vital factor underpinning the asset allocation decision is the client’s own investment objective. A portfolio’s structure depends in large part on the client’s preference for capital growth or income, liquidity requirements, investment time horizon, attitude to risk and currency exposure. These are established at client meetings to provide a clear picture of a client’s requirements. Corazon Capital analytical procedures are used to identify the optimal asset allocation for the client.
Corazon Capital Investment Process
The key elements to the Corazon Capital investment process are summarised in the chart above. The first step is the formulation of investment guidelines and modelling the initial asset allocation or style for a client’s portfolio. The next stage is to select the best-of-class investments to place in each asset or style category, be it a traditional investment (equities, bonds and mutual funds) or an alternative investment (hedge funds, asset backed strategies, property or commodities). Once portfolio construction is complete, each client portfolio is actively managed to maximise investment returns and, if required, accommodate any change in client investment objectives. The manager selection process is described in detail in the next section.
Corazon Capital Fund Screening
Whilst a number of client mandates require us to hold or trade directly in bonds, equities and cash, the majority of our client assets are invested in onshore and offshore mutual funds. This universe currently includes over 65,000 funds. How, then, do we choose our "Champions"? Our methodology blends quantitative and qualitative skills to filter the universe to a more manageable size. We analyse manager performance, strategy, investment process and operational risk to identify candidate funds. This is a four step process.
Stage One: Preliminary Analytic Filter
The first stage applies our preliminary analytic filter to the funds universe to identify a sub-universe of funds with a minimum audited track record, a minimum amount of assets under management, consistent performance and which meet a range of risk and quality criteria. Over time, this has supplied a list of around 500 funds on which we hold detailed information. When there is a change in our tactical allocation policy, this list forms the basis of subsequent searches for the leading managers in a given sector (eg European equities) or style category (eg long-short equity).
Stage Two: Quantitative fund pre-selection.
This determines the Corazon Capital Quantitative Score (which may be A,B,C or D) from a range of nine statistical measures.
Corazon Capital Quantitative Score |
| Compound Return | Tracking Error | Upside/Downside Ratio |
| Sharpe / Sortino Ratios | Correlation | Alpha |
| Up/Down Quarters | Consistency | Value Added Analysis |
Stage Three: Focused Due Diligence
The leading funds in the peer group that this process identifies are then subject to focused due diligence. This covers strategic and operational areas and is a qualitative process.
Strategic Due Diligence | Operational Due Diligence |
In-depth manager interviews |
| Methodology | Size and quality of organisation |
| Risk Control | Assets under management |
| Sustainable "edge" | Length of experience |
| Capacity / growth in assets | Reputation |
| Transparency | Third-party reference checks |
Only those managers with sufficiently high quantitative scores are interviewed. The due diligence process gives rise to Corazon Capital Strategic (A,B,C,D) and Operational (A,B,C) Ratings, which when combined with the Corazon Capital Quantitative Score produces a summary Corazon Capital Rating (A,B,C) for each manager. At any given time, there are about 150 funds with a Corazon Capital "A" Rating. These constitute our potential buy list.
Stage Four: "Champion" Fund List for Portfolio / Ongoing Review
The final decision to invest is driven largely by the investment objectives of a particular portfolio and global liquidity issues. The "A" Rated funds on the buy list are allocated accordingly. There are around 50 "Champion" funds in Corazon Capital client portfolios at the present time.
Our investment process is designed to be proactive. Manager performance is subject to constant review and funds are rescored on a regular basis to assess their ongoing suitability. Computation of the Corazon Capital Sell Rating (C,D) takes account of a similar variety of quantitative, strategic and operational factors to those discussed above. Sell procedures are as disciplined as buy procedures.