‘Post-modern portfolio theory’ helps make money manager Cougar Global hard to categorize

It’s not everyday that a global investment conference is held and the views of Francis Fukuyama, Samuel Huntington and Graham Allison are mentioned in the first five minutes.

But that was the case earlier this week at an event titled “Geopolitics is back with a vengeance” that was put on by Cougar Global Investments in Toronto.

The aforementioned authors — who respectively wrote The End of History, The Clash of Civilizations and Destined for War: Can America and China Escape Thucydides’s Trap? — were referenced by James Breech, who started Cougar Global with his wife, Vicky, in 1993.

While Cougar, which oversees $1.4 billion of assets, has been owned by the money management arm of U.S.-based Raymond James since 2015, it’s not a typical money manager.

Among the distinctive features: It only invests in ETFs, because of the diversity and low fees such securities provide; its primary investment goal is the preservation of investor capital; and it doesn’t fall under the label of value, growth or momentum investing.

The firm, which invests globally, with about five per cent of its investments in Canada, is highly macro- and data-driven, employing a mix of quantitative, statistical, qualitative and fundamental analysis to select which ETFs to buy and sell.

“We don’t manage money in the way that 98 per cent of asset managers manage money,” said Abe Sheikh, the firm’s relatively new co-chief investment officer and a JP Morgan alumnus. Rather, he says, they use “post-modern portfolio theory.”

What does that mean? In constructing their portfolios, their goal is to maximize expected return with minimum downside risk — a variation on the more normal objective of maximizing expected return for a given level of risk.

One of its key inputs — the data comes from a slew of service providers — is what the firm calls “risk of loss.” In the presentation, it focused on the S&P 500 (where the risk of loss is 3.5 per cent) and U.S. Treasuries (where it’s 23.4 per cent.)

“We are in one of those periods where stocks are not risky and where bonds are very risky,” added Sheikh, a situation that calls into question the normal response of adding fixed income to a portfolio to be safe. ”That’s not the case right now.”

Another non-normal measure is “chaos,” a measure that includes security issues, terrorism, political uncertainty, populism/protection, natural disasters/pandemics and financial risks. After peaking at 18 per cent in mid-2011, it has fallen steadily to around eight per cent, with Sino-American tensions being the foremost contributor.

“An eight per cent chaos reading means one month of chaos over the next year,” said Sheikh.

Chaos that manifests in financial market turmoil is one of the five factors that Cougar uses for its global macro economic scenario analysis. The others are: the probability of growth (58 per cent reading), the probability of inflation (one per cent), the probability of stagnation (33 per cent) and the probability of recession (zero per cent.)

Cougar then uses computer models to simulate what markets will do given those probabilities. For that it relies on how markets reacted in the past. “And it does it 5,000 times,” said Breech.

Cougar has four funds: conservative, conservative growth, moderate growth and growth. The main difference between the four mandates is the allocation to equities, ranging from 47 per cent for the conservative to 98 per cent for growth. While all mandates invest in the S&P 500, the funds with the larger equity weights invest in European, Japanese and emerging market ETFs.

How has the process worked out? According to GIPS (Global Investment Performance Standards) compliant measures, all four of its mandates have posted positive returns on a calendar year basis since 2006, with the exception of 2011.

Financial Post

bcritchley@postmedia.com