What We Do

Sparrows Capital adopts a rigorous evidence-based approach to investing.

This results in a style that can be described as:

  • Strategic
  • Risk Based
  • Factor Based
  • Cost Efficient

The intention is to harvest an enhanced market return across the full investment cycle. We achieve this by designing bespoke portfolios for our clients using selected highly efficient investment vehicles including ETFs and Index Funds.

 

 

Risk Profiling

We ask each of our clients to respond to a detailed, 57 question risk questionnaire. This has been designed in-house with a view to establishing both your attitude to risk, your financial capacity to tolerate market volatility and your objectives. The questionnaire, and subsequent discussion with you of its detailed output, forms the foundation of our personalised investment recommendation.

Risk questionnaire

57 questions founded in behavioural psychology designed to ensure that we have a clear, unambiguous picture of your risk tolerance, risk preferences, financial capacity, time horizon and objectives.

Risk tolerance

Risk is inherently subjective*. Two individuals presented with the same fact set may interpret the risks therein differently. Equally importantly, two people may display very different reactions to the same risk outcome, with consequent impact on their investment discipline.

* (reference Slovic, P., The Perception of Risk (London: Earthscan Publications Ltd., 2000): 392)

Financial capacity

A relatively objective measure of financial situation, taking account of your net worth, income, liabilities and objectives.

Output

Analysis of your responses will allow us to build an initial model asset allocation to act as a basis for discussion. It will also highlight any anomalies in your answers and any notable risk preferences.

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Strategic Asset Allocation

We construct a bespoke asset allocation for each client, taking account of your individual risk profile. Asset classes are selected from across the investable universe and assembled to provide an optimal mix of risk / return characteristics. This asset and risk allocation is critical, as it will be the fundamental driver of your subsequent portfolio returns.

Initial asset allocation

We build the efficient frontier mix based on the output of the risk questionnaire.

Iterative discussion

The output of the risk questionnaire, together with the initial asset allocation, is discussed with you in detail. This allows us to fine tune our understanding of your risk profile, explore any anomalous output, and then to apply appropriate adjustments to the allocation. This may include currency hedges, factor tilts, inclusions or exclusions of specific risks.

Strategic asset allocation

Defines the risks to which the portfolio will be exposed, and therefore the future market returns.

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Screening, Selection and Execution

Your strategic asset allocation (SAA) is expressed in the market via a qualitative and quantitative selection of efficient investment vehicles, which are carefully screened and vetted by us.

 

Market screening

We screen the universe of ETFs and index tracker funds to identify the most appropriate investment vehicles. We identify those instruments which are most representative of each component of your strategic asset allocation, including any recommended factor tilts. We score the relevant instruments for tracking error, liquidity and cost.

Due diligence

We review the fund prospectus, with a focus on structure, methodology, counterparty risk, and lending policies.

Investment policy

Your SAA and agreed set of investment vehicles, together with execution, hedging and rebalancing strategy will be recorded in an investment policy for your agreement.

Execution

We provide transaction instructions to your custodian, and may make specific recommendations as to execution brokers, exchanges, conditions and timing. If appropriate, we may recommend a cost averaging execution strategy.

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Ongoing Monitoring, Rebalancing and Reporting

Our monitoring and review processes ensure that the portfolio performs as expected, that the risk allocation remains as intended, and that the underlying instruments remain relevant and best in class. We take action as appropriate, and we keep you updated.

 

Monitoring

We continuously monitor your portfolio and underlying investments. We analyse the effect of market moves to explain value changes and to control portfolio drift.

Rebalancing

Market fluctuations will affect the asset allocation over time, with the result that the risk allocation can move away from the initial strategic asset allocation. We will effect rebalancing trades once the allocation exceeds pre-defined thresholds in order to maintain the intended risk exposure. This is an important element of strategic investing.

Reporting

In addition to the online reporting available to you, we produce a quarterly investor pack outlining changes in portfolio values, explaining the drivers of returns, and reviewing the underlying holdings for continued relevance.

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Sparrows Capital Limited is authorised and regulated by the Financial Conduct Authority
Incorporated and registered in England and Wales Company Registration Number: 08623416
Registered Office: Office 7, 35-37 Ludgate Hill, London EC4M 7JN

 

Pillar 3 Disclosures

Background

These are the Pillar 3 disclosures made by Sparrows Capital Limited (“Sparrows”) in accordance with the UK Financial Conduct Authority’s (“FCA”) Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”).

The European Union Capital Requirements Directive (“CRD”) created a regulatory capital framework consisting of three ‘pillars’ namely:

Pillar 1 – sets out the minimum capital requirements that firms are required to meet;

Pillar 2 – requires firms to take a view on whether additional capital should be held against capital risks not covered by Pillar 1; and

Pillar 3 – requires firms to publish certain details of their risks, capital and risk management process.

Disclosure policy

The rules in BIPRU 11 provide that Sparrows may omit one or more of the required disclosures if it believes that the information is immaterial. Materiality is based on the criteria that the omission or misstatement of material information would be likely to change or influence the assessment or decision of a user relying on that information for the purposes of making economic decisions. Where Sparrows considers a disclosure to be immaterial, this will be stated in the relevant section.

Sparrows is also permitted to omit one or more of the required disclosures where it believes that the information is regarded as proprietary or confidential. Proprietary information is that which, if it were shared, would undermine Sparrows’ competitive position. Information is considered to be confidential where there are obligations binding Sparrows to confidentiality with its clients and counterparties.

Where Sparrows has omitted information for any of the above reasons, a statement explaining this will be provided in the relevant section.

Unless stated as otherwise, all figures contained in this disclosure are based on Sparrows’ audited annual reports for the year ending 31 December 2020.

Frequency

These Pillar 3 disclosures will be reviewed on an annual basis as a minimum. The disclosures will be published as soon as is practical following the finalisation of Sparrows’ Internal Capital Adequacy Assessment Process (“ICAAP”) and its annual accounts.

Verification

The information contained in these disclosures has not been audited by Sparrows’ external auditors and does not constitute any form of financial statement.

Publication

Sparrows’ Pillar 3 disclosures are published on its website.

Scope and application of CRD requirements

These disclosures are made in respect of Sparrows, a BIPRU firm authorised and regulated by the FCA, providing financial advice and discretionary investment management services.

Risk management objectives and policies

Sparrows’ risk management policy reflects the FCA requirement that it must manage a number of different categories of risk. These include: liquidity; credit; interest rate; market; and operational risks.

  1. Liquidity risk

Sparrows manages all cash and borrowing requirements to maximise potential interest income whilst ensuring it has sufficient liquid resources to meet the continued operating needs of its business. This is supported by a robust budgeting and forecasting process that has the full involvement of the senior management team.

  1. Credit risk

The main credit risk for Sparrows relates to income from fees, the risk being that a client does not pay amounts due for services provided by Sparrows.  In most cases, management fees are charged to clients on a quarterly basis. Concentration risk is defined as the risk of loss of income through external changes having a disproportionate impact on overall income due to a reliance on revenue from certain sectoral, geographic areas and/or businesses.  Credit risk concentrations include significant exposure to an individual client or group of clients and credit exposures to clients in the same economic sector or geographic region.

A significant proportion of Sparrows’ income is received from clients that are part of the same group as Sparrows’ major shareholders.  This ongoing interest in the activities of Sparrows by the group mitigates the risk of the group jeopardising Sparrows’ income flow.

Sparrows is exposed to country risk as a number of clients are based in a non-European Economic Area country.  As these clients are all high net worth or ultra-high net worth long-term investors with spare capital invested in globally diversified liquid financial instruments, the risk of being unable to meet unforeseen financial needs and payment of Sparrows’ fees is low.

Based on the analysis of concentration risk, the risk of non-payment of fees has been assessed as minimal.

  1. Interest rate risk

Sparrows has no exposure to interest rate risk as it has no debt, no margin, and no client cash deposits.

  1. Market risk

The main market risk for Sparrows relates to falls in the value of assets under management following a market downturn, which would lead to lower management fees. To mitigate its market risk, Sparrows regularly analyses various different economic scenarios to model the impact of economic downturns on its financial position.

  1. Operational risk

Operational risk is defined as the potential risk of financial loss or impairment to reputation resulting from inadequate or failed internal processes and systems, from the actions of people or from external events.

Major potential sources of operational risk include outsourcing of operations, IT security, internal and external fraud, implementation of strategic change and regulatory non-compliance.

Sparrows operates a robust risk management process that is regularly reviewed and updated by its Board. The Board formally reviews all significant risk issues at least annually as part of the ICAAP.

All senior members of staff bear responsibility for internal controls and the management of business risk as part of their accountability to the Board.  All staff are responsible for identifying the risks surrounding their work, implementing controls over those risks and reporting areas of concern to their senior member of staff.

  1. Other risks

Sparrows operates a simple business model. Accordingly, many of the specific risks identified by the FCA do not apply. For example, the firm has no material outsourcing arrangements and does not hold client assets.

Capital resources

Pillar 1 requirement

In accordance with the FCA rule GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), Sparrows’ capital requirement has been determined as being its fixed overhead requirement and not the sum of its credit risk capital requirement and its market risk capital requirement.

The Pillar 1 capital requirement for Sparrows was £384,000 as at 31 December 2020.

Pillar 2 requirement

Sparrows’ overall approach to assessing the adequacy of its internal capital is set out in its ICAAP report. The ICAAP involves separate consideration of risks to Sparrows’ capital, combined with stress testing using scenario analysis. The level of capital required to cover risks is a function of impact and probability. Sparrows assesses impact by modelling the changes in its income and expenses caused by various potential risks over a 1-year time horizon. Probability is assessed subjectively. In addition, Sparrows has reviewed the outputs of its risk reviews to quantify any risks identified. This has identified a number of key business risks, which (having reviewed the guidance in BIPRU 2.2.61-65) Sparrows has classified against the risk categories outlined in FCA rule GENPRU 1.2.30R.

Sparrows Pillar 2 capital requirement, which is its own assessment of the minimum amount of capital that it believes is adequate against the risks identified, has been assessed as no greater than its Pillar 1 requirement.

There is a considerable surplus of reserves above the capital resource requirement deemed necessary to cover the risks identified.

Regulatory capital

The main features of Sparrows’ capital resources for regulatory purposes, as at 31 December 2020 are as follows:

Capital item: £000
Tier 1 capital (called up share capital, share premium account, profit and loss account, externally verified interim net profits) 1,140
Total of Tier 2 and Tier 3 capital (broadly long and short term subordinated loans)  –
Deductions from Tier 1 and Tier 2 capital  –
Total capital resources, net of deductions 1,140

Sparrows holds regulatory capital in accordance with the CRD. All such capital is classified as Tier 1 capital and is therefore of the highest quality.

Remuneration Code Disclosures

Sparrows is subject to the BIPRU Remuneration Code. This section provides further information on Sparrows’ remuneration policy.

BIPRU Remuneration Code Staff

Sparrows has identified, and maintains a record of, BIPRU Remuneration Code staff (“Code staff”), i.e. staff to whom the BIPRU Remuneration Code applies. This includes senior management and members of staff whose actions may have a material impact on Sparrows’ risk profile. All of Sparrows’ Code staff fall into the “senior management” category of Code staff (rather than the “risk taker” category) for the purposes of the BIPRU Remuneration Code.

Decision Making / Remuneration Committee

Sparrows does not have and is not required to have a Remuneration Committee. The Board is responsible for Sparrows’ remuneration policy including determining the framework and policy for remuneration and ensuring it does not encourage undue risk-taking; agreeing any major changes in remuneration structures; reviewing the terms and conditions of any new incentive schemes and in particular, considering the appropriate targets for any performance-related remuneration schemes; and considering and recommending the remuneration policy for senior staff taking into account the appropriate mix of salary, discretionary bonus and share-based remuneration.

In determining remuneration arrangements, the Board will give due regard to best practice and any relevant legal or regulatory requirements including the BIPRU Remuneration Code.

Link between pay & performance

There is a discretionary variable pay element to the Sparrows’ remuneration package.

Quantitative information on remuneration

The FCA rules require certain firms to disclose aggregate information on remuneration in respect of its BIPRU Remuneration Code staff broken down by business area, senior management and other Code staff, including “risk takers”.

Sparrows has only one business area – investment management & advice.

Sparrows has 5 Directors but no material “risk takers”. Director remuneration is agreed formally at Board meetings. The link between performance and pay is inevitable in a small firm, but Sparrows’ risk-averse strategy and robust risk management systems mitigate any risks.

Privacy Policy

At Sparrows Capital we are committed to safeguarding and preserving the privacy of our visitors. This Privacy Policy explains what happens to any personal data that you provide to us, or that we collect from you whilst you visit our site.

We do update this Policy from time to time so please do review this Policy regularly.

Information We Collect

In running and maintaining our website we may collect and process the following data about you:

  1. Information about your use of our site including details of your visits such as pages viewed and the resources that you access. Such information includes traffic data, location data and other communication data.
  2. Information provided voluntarily by you. For example, when you register for information or make a purchase.
  3. Information that you provide when you communicate with us by any means.

Use of Cookies

Cookies provide information regarding the computer used by a visitor. We may use cookies where appropriate to gather information about your computer in order to assist us in improving our website.

We may gather information about your general internet use by using the cookies. Where used, these cookies are downloaded to your computer and stored on the computer’s hard drive. Such information will not identify you personally. It is statistical data. This statistical data does not identify any personal details whatsoever.

You can adjust the settings on your computer to decline any cookies if you wish. This can easily be done by activating the reject cookies setting on your computer.

Use of Your Information

We use the information that we collect from you to provide our services to you. In addition to this we may use the information to provide information to you that you request from us relating to our services and to inform you of any changes to our website or services.

Storing Your Personal Data

In operating our website it may become necessary to transfer data that we collect from you to locations outside of the European Union for processing and storing. By providing your personal data to us, you agree to this transfer, storing or processing. We do our upmost to ensure that all reasonable steps are taken to make sure that your data is treated and stored securely.

Unfortunately the sending of information via the internet is not totally secure and on occasion such information can be intercepted. We cannot guarantee the security of data that you choose to send us electronically. Sending such information is entirely at your own risk.

Disclosing Your Information

We will not disclose your personal information to any other party other than in accordance with this Privacy Policy and in the circumstances detailed below:

  1. In the event that we sell any or all of our business to a buyer.
  2. Where we are legally required by law to disclose your personal information.
  3. To further fraud protection and reduce the risk of fraud.

Third Party Links

On occasion we include links to third parties on this website. Where we provide a link it does not mean that we endorse or approve that site’s policy towards visitor privacy. You should review their privacy policy before sending them any personal data.

Access to Information

In accordance with the General Data Protection Regulation (GDPR) you have the right to access any information that we hold relating to you. Please note that a reasonable charge may be payable.

Contacting Us

Please do not hesitate to contact us regarding any matter relating to this Privacy Policy at info@sparrowscapital.com.