Blue Ocean

global wealth

Investment Advisory
Financial Planning

Wealth Management

Due Diligence

The proliferation of index funds and ETFs over the past two decades has transformed how capital is allocated to a portfolio. The evolving passive trend, coupled with dislocated global equity markets and the fear of underperformance by active managers, further exacerbates the inherent challenge of identifying an optimal strategy. The Blue Ocean Global Wealth investment due diligence process synergizes the art and science of objective analysis. In other words, it balances and amalgamates a qualitative and quantitative understanding. Our ISG employs a rigorous institutional framework, which is guided by our prudence, experience, and technical capability. We evaluate and use a diversified mix of passive and active investment strategies.

Quantitative analysis, based upon numbers and statistical modeling, and thus resembling a science, is cornerstone to our due diligence process. An essential tool for assessing a portfolio manager’s risk-return profile, alpha source, and consistency, it assigns mathematical significance to performance results, helping the ISG differentiate between luck and skill.

Quantitative measurement uses returns-based and holdings-based data. Returns consist of a portfolio’s numerical return stream, while holdings refer to an investment’s individual stocks, bonds, or alternative positions. These two complementary evaluation methodologies are best used in tandem to evaluate performance. Although they fundamentally differ in their application and yield, the complementary relationship of these two dimensions of performance attribution is advantageous in the asset allocation and due diligence process.

Return-based analysis focuses on the historical returns of the aggregate portfolio relative to its benchmark, represented by a market or asset class index. It measures absolute and relative performance, volatility, risk efficiency, and execution consistency throughout a market cycle. Return-based analysis delineates an investment’s return characteristics and provides clarity on the diversification of idiosyncratic risk. Fund performance is assessed against its competition or peer group style.

We have conviction and reason for including or removing each investment component within a portfolio. We observe macroeconomic trends, which help us better understand which market cycle favors a particular style, such as momentum or quality. We select active investments when we believe a particular investment’s return will exceed that of its benchmark or peers over a pre-specified time horizon. Internally, we consistently monitor, evaluate, and weigh the opportunity cost of all investments within our portfolios.

Holding based attribution analysis helps due diligence professionals understand the impact of portfolio manager investment decisions in terms of asset allocation, security selection, activity, and investment policy. Our quantitative methodology anatomizes each portfolio or strategy considered by region, country, sector, industry, characteristics, turnover, liquidity, number of holdings, and Active Share. We reconcile bottom-up stock selection and top-down allocation effects with the value created by those decisions. The ISG systematically evaluates historic performance attributions against alternatives and over multiple time frames, affording us perspective and transparency on every contributor to and detractor from performance.

Qualitative analysis resembles an art and requires knowledge, discipline, and practice. Instinctive conclusions, based on non-quantifiable information, provide context for organizations, investment teams, philosophies, processes, and risk management. Factors are constructively assessed and may include industry cycles, management expertise, focus, size, culture, maturity, labor relations, research and development, and financial stability. As part of our institutional due diligence process, we assess a portfolio manager’s size, incentive compensation structure, depth and breadth of mandates, and capacity. Investment teams must judiciously couple human capital with infrastructure and culture. When skilled investment teams allocate resources and time appropriately, the positive results reflect their intuition, wisdom, and decision-making capability.

Schedule phone consultation to learn about a financial planning relationship with Blue Ocean Global Wealth