Kaizen utilizes a multi-step process that analyzes mutual funds both quantitatively and qualitatively. This process is grounded in the financial markets research and uses reporting analytics to identify suitable managers in each asset class.
The fundamental philosophy upon which this process is built is based on a “core and explore” philosophy. We know that risk and return are highly correlated. To achieve greater investment returns, investors need to be willing to accept greater investment risk (typically defined as short-term volatility). We also know that different asset classes (i.e. bonds, large cap stocks, real estate, etc.), have different risk profiles and therefore provide different risk premiums to investors willing to accept their inherent risk. Expected investment returns are based on an investor’s allocation to the various asset classes available in the marketplace. The primary determinant of a fund’s investment performance is going to be its asset class exposure.
Since the average mutual fund manager cannot add value on top of the asset class returns and because asset class returns are so readily available through index and passive investment products, we start with our default assumption that we may index any given asset class. From here we look at the universe of actively managed investment products to determine if we can identify one of a minority of active managers that are likely to add value net of their fees.
Kaizen will analyze funds for due diligence items such as : fund composition, style purity (style drift) and risk adjusted return analysis.
Our investment selection process is as follows