Fund manager Anthony Gibson aims to capture two-thirds of global equity upside but no more than a third of any downside
Coronation's flagship global fund of hedge funds is set up with an in-built long bias and is currently overweight Japanese equities.
Launched in 1996 and run by one of the group's founders, Anthony Gibson, it invests in 19 underlying long/short products.
Gibson is assisted on the portfolio by a team of three which includes Maria Doran, a senior analyst at the group.
The Coronation Global Equity Alternative Strategy Fund has an overall performance objective to capture two-thirds of the upside of global equity markets and to participate in no more than a third of any downturn. Doran says Coronation attempts to balance net long-biased funds with more flexible funds that are quicker to re-position their exposure to face changes in the market.
Coronation Global Equity has favoured Japan since 2004 when Gibson took the view the economy and stock market were on the mend. Among the factors he perceived were changes in corporate governance, a greater emphasis on shareholder value and a banking system increasingly coming to grips with bad loans.
Despite this, Coronation stresses that the portfolio is constructed from a bottom-up basis, although a top-down strategy is used to ensure the portfolio remains diversified by geography, market cap and investment style.
According to Doran, the group favours managers who build portfolios that are more concentrated and less benchmark-focused than those of traditional equity funds. Of the current portfolio, around half of the underlying funds have been held for more than three years.
Within Europe, Gibson is maintaining a neutral stance, not least because he sees better opportunities in Japan. According to Doran, since 2003 Coronation has focused on less conservative managers in Europe, going for those who have used leverage to try and maximise returns.
In the US, the fund of hedge funds is underweight. Doran says: "There are so many players in the US market that it is much more crowded and everyone is competing to generate returns from an increasingly efficient, yet volatile, stock market. Coronation subscribes to US managers with more of a long-term contrarian view such as the value investor FrontPoint Value on the West Coast."
The hedge fund world is renowned for dropping managers who start to underperform but Coronation claims to take a different approach. Doran stresses the group is happy to back managers who have had poor patches of performance in the past, as long as they learn from their mistakes.
As an example she cites a European manager who launched in 1998, had a strong run in 1999 and 2000 but then lost 17% in 2001 and 9% in 2002. During this period the manager had been using MSCI classifications as the basis for portfolio construction and had few restrictions placed on long/short ratios at sector and portfolio level, according to Doran.
She adds that once the manager started to use his own sector classifications it helped to isolate the stockpicking from large market directional bets, leading to annualised returns of more than 30% in 2003 and 2004.
Doran says: "We would sell a fund primarily if it was achieving return and volatility levels outside our predetermined expectations for that manager and an unsatisfactory reason was given for this upon investigation.
"A major warning sign for us is a lack of transparency coupled with a change in the manager's attitude, but equally we are patient if a manager is going through a tough period yet sticks to their investment strategy.
"Many managers learn valuable lessons through such periods when the fund may temporarily underperform."
The fund uses the MSCI World index as a proxy for global equity returns and it is benchmarked against it for performance fee purposes.
It has an annual management fee of 1%, as well as a performance fee of 10% of returns above those produced by the benchmark.
From 1996 to March 2004, the portfolio was benchmarked against the capital-only version of the index, which returned 4.58% annualised during this period, but then switched to the total return version which has produced a rather more impressive gain of 11.5% from March 2004 to September 2005.
According to Coronation, its portfolio has returned 11.75%pa returns, net of charges, since launch.
The average fee across the underlying managers is 1.5% annual management and 20% performance fee. The minimum investment is E125,000 or the dollar equivalent, and the fund is domiciled in Ireland.
Holds 19 underlying portfolios.
Product maintains a long bias.
Benchmarked against MSCI World index, total return.
Domiciled in Ireland with minimum investment of E125,000.
1% annual charge and performance fee of 10% of gains above benchmark.
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