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Coronation Fund Managers? Most in the hedge fund industry know of the group but frankly not much about it?
We are comfortable with a lower profile. So I suppose it will come as something of a surprise to many to find that we have been managing funds of hedge funds for our pension fund clients since 1996.
In fact, in the early nineties, the founders of Coronation Fund Managers successfully managed a hedge fund for one of the great doyens of the industry. We have always had an orientation towards absolute returns and minimising downside volatility in the way we manage money.
Today Coronation manages over $9 billion, almost all on behalf of pension funds and other institutions. This includes our first fund of hedge funds, the Coronation Global Equity Fund, which was set up nearly eight years ago in Dublin, specifically for our pension fund clients at that stage. This fund has grown steadily since with assets of almost $600 million today. It has been managed since inception by one of the Coronation founders, Anthony Gibson and has delivered annualised dollar returns of over 12%.
While on the subject, we have three principal funds. They are all sector funds and cover the entire hedge fund universe, namely a relative value arbitrage/event driven fund, a long/short equity fund and a global macro/tactical trading fund. This sector approach is somewhat unusual in this industry where initially most funds of funds have tended to be multi-strategy. As all our funds have track records of almost four years to eight years, this sector approach provides many interesting opportunities to create client needs-driven sector funds, based on real track records, rather than carve-out pro formas.
What are the origins of Coronation?
Coronation was started in 1993. I guess the owner/manager culture of Coronation is evident in its genesis and is not original in this business. After failing to achieve an equity stake and profit sharing arrangement with their previous institutional employers, almost the entire investment team of fund managers, research analysts and support staff started Coronation Fund Managers.
Today, most of the original founders of the group are still actively involved in managing assets and running the business. In the past ten years Coronation has grown its assets entirely organically, managing both long only and absolute return assets. This has been achieved by focusing exclusively on asset management (we try to outsource most things including distribution) and on the consistent delivery of superior investment returns.
The founders, management and staff today own 55% of Coronation Fund Managers. Other major shareholders are Allan Gray Investment Counsel (owner and manager of the highly successful Orbis hedge funds with +$2 billion hedge fund assets) and Old Mutual (FT listed asset manager). Capital International, the major global asset manager based in LA, was previously a large shareholder.
What makes Coronation stand-out in what is becoming a crowded market?
The key differentiating factor is the undoubtedly the make-up and the attitude of the team, as well as the level of hands-on experience of the three senior members of the investment team. They have on average 15 years investment experience and 7 years experience in managing large funds of hedge funds, as well as single hedge fund strategies. This is further evidenced in my mind by their background and successful track records investing directly in the underlying asset classes.
This enables them to understand and analyse, from a fund management perspective, the sources and nature of the risks and potential returns of the most complex hedge fund strategies. Importantly, they understand and assess the construction of the underlying trades and hedges, also enhancing the level of discussion with and disclosure from the underlying hedge fund managers.
The other important factor in my mind is the way in which all the research analysts are directly integrated into all aspects and each step of the investment process, including responsibility and accountability for part of the investment performance. They are a really smart bunch, who have worked together for some years now and impressively, are just as focused as I am on the performance numbers, probably not surprisingly given that they all have their own money in our funds.
How would you describe your investment process?
Coronation is very much a process-driven organisation. All of us have institutional fund management backgrounds and therefore recognise the critical importance of discipline and process in managing money. We have an established and institutionalised investment process, practice and routines which we have always regarded as important factors in our relatively long track record of consistent, superior, risk-adjusted returns. While our processes are very disciplined, we do recognise that mistakes are inevitable and very much part of taking risks and that the key is to understand the lessons learnt and make ongoing and incremental improvements.
What is the "added value" that you provide to your clients?
The practical experience of managing specialist funds of hedge funds for pension fund clients helps us to understand some of the real issues and construct specialist portfolios geared to their specific risk profiles.
So we are active in designing solutions, using our sector hedge funds and quantitative portfolio modelling and construction process. Various asset allocation and currency overlays are also introduced, plus the ability to add or exclude different sectors, strategies, styles, types of hedge funds etc. As a matter of fact, we were recently approached by one of the larger consultants in the US who liked our sector specific range of funds, which they too believe is the future direction of institutional activity in FoHF's.
Tell us about the range of Coronation funds?
All the existing funds have established track records. For example, the low volatility Coronation Relative Value Fund has attractive annualised returns and a Sharpe ratio of 2.2. Its worst monthly drawdown over the past four years was -0.83% reflecting how tightly the returns are distributed.
While the Macro Fund invests in all the macro strategies and styles and has a comparatively low annualised volatility for a macro fund of funds at 5.2%, with an annualised return over 10% over the past four years. The Global Equity Fund has delivered annualised returns over 12% since it started eight years ago, and what's really pleasing about this return is the fact that it has been achieved with declining volatility over the past three years, so the standard deviation is now down to 5.7%.
While the core focus is the management of funds of hedge funds, Coronation also manages a fund of long only funds focused on delivering absolute returns and minimising drawdowns. This focus is attractive and, not surprisingly, is increasingly a requirement of investors who are restricted from investing in funds of hedge funds.
And the people who manage them?
Our CIO is Arne Hassel, who previously spent seven years at Goldman Sachs Asset Management (GSAM) where he was head of their fund of funds outside of the US. Before that he headed GSAM's Global Currency Management, which included single hedge fund management. Previously, he was responsible for European fixed income and currency management at SEB (Enskilda).
Anthony Gibson is one of our other senior fund managers and has successfully managed large institutional funds for the past 20 years and the Coronation Global Equity Fund since inception in 1996. Stuart Davies, who used to be CIO responsible for managing the assets and investment team at NIB, a large funds of hedge funds group, has a great track record managing arbitrage and event driven strategies and has been with us for nearly five years.
What about distribution?
We focus exclusively on manufacturing performance so all non-core activities, including distribution are outsourced. We have a number of carefully selected specialists in the different target markets, who are highly incentivised and also supported by a special team. Good introducers and distributors are hard to find and I am always keen to talk to people who understand the asset class.
What are some of the challenges?
The identification and anticipation of profitable opportunity sets for hedge fund strategies is always of critical importance. Our experience draws on an understanding of what factors drive returns across the range of different hedge fund strategies and a process that analyses the potential impact on returns and risks. We consider these factors closely when constructing a diversified portfolio.
Capacity constraints are an innate concern within the industry and especially for some of the large businesses, yet we think Coronation is in a 'sweet-spot' in terms of our "mid-cap" size and ability to reserve and access capacity to meet or targeted growth.
Should pension funds be invested in hedge funds?
We think it is reasonable to expect equity returns in the future to be constrained by more modest real earnings growth and continued high levels of volatility. Given this environment and the serious underfunding of pension fund liabilities, pension funds are finally recognising the need to reduce equity allocations and adopt different methods of managing risk. We have long argued that the level of active risk in large pension fund portfolios is surprisingly low. Active management can add alpha as differences in fund manager skill and information does exist. Furthermore, as active risk is uncorrelated to market risk, it can be added to the portfolio without materially increasing overall risk and, in fact, reduces overall risk in most instances. This separation of a portfolio's return-generating risks enables risk to be efficiently allocated to generate the highest possible returns.
Since we have been managing fund of hedge funds for our pension fund clients, we are increasingly being asked our views on asset allocation and portfolio construction. I suggest that the focus should increasingly be on more efficient capital budgeting in order to maximise alpha generating opportunities per unit of capital. This would result in the appropriate level of what is scarce capital being allocated to passive market exposures at an appropriate price, while the remainder of the capital can be put to work in actively managed, absolute return strategies. This change of thinking is important as hedge funds can increasingly be used to "port" the active return to overlay assets, given the ability of hedge funds to consistently deliver attractive LIBOR plus returns in an environment where many traditional active managers have largely failed to add value on a risk-adjusted basis.
How does Coronation assist this search for alpha?
The challenge for Coronation is to find those few and often well hidden hedge funds and absolute return managers who can consistently create alpha at an acceptable level of well-managed and targeted risk. As markets get more efficient and the traditional opportunity sets shrink, we think we the experience, flexibility and innovation to be able to find and recognise new opportunities. I believe that our long established networks, together with our owner/management culture will continue to provide an optimal investment environment for our team.
I think of us as being a "big/small fund manager" - big enough to have the necessary skilled teams of specialists, infrastructure and motivational profitability, yet small enough to provide a "hedge fund-like" environment, with no operational distractions, focused solely on performance.
For further information, please visit our website www.coronationfunds.co.uk or contact: Ramona Glass +44 20 7389 8851 or Sarah Callaghan +44 20 7389 8869.
