Our ongoing Q&A series features Carillon Tower affiliate managers sharing their diverse investment philosophies and thoughts on the market.
Volatility has returned to the markets in recent months and investment professionals are taking notice. We asked Abe Sheikh, chief investment officer at Cougar Global, about the firm’s distinct approach to risk and their reaction to recent volatility.
Cougar Global offers clients access to a specialized top-down investment philosophy with a focus on protecting the downside. Our tactical portfolios are designed to participate in bull markets, while trying to avoid bear markets. We utilize a variation of Post-Modern Portfolio Theory, attempting to generate compound growth for clients, primarily by avoiding loss of principal. The recognition that asset classes behave differently depending on how investors react to the incoming macroeconomic information is at the core of Cougar investment process.
Our paper was in response to the unprecedented spike in financial market volatility in February 2018. Accompanying the rise in volatility, stock markets around the world experienced large losses, with the main culprit being rising bond yields triggered by a rise in inflation expectations. One of the key takeaways from the paper is that it was too early to assume that rising yields will derail the economic recovery and that knee-jerk selling in reaction to the spike in volatility is a mistake. We also discuss why “shorting” volatility – a strategy that experienced big losses in February – is dangerous and in a class of yield-chasing strategies that Cougar Global does not pursue due to its downside-risk characteristics. We concluded the paper by discussing why volatility in general – despite its widespread use – can be a poor measure of risk, particularly for multi-asset-class portfolios and how Post-Modern Portfolio Theory and Prospect Theory can help investors develop better downside risk metrics.
Our economic outlook over the next 12 months is positive. In the U.S., supportive financial conditions, fiscal spending, and fewer regulations are aligned to provide a boost to real GDP growth. Accordingly, we have significant exposure to equities. While we expect financial market volatility to continue, we think a global trade war will be avoided. Many U.S. allies have received exemptions from tariffs, and the administration is now focused on China to gain concessions on major I.P. infringements. Rising Sino-American tension is now the foremost contributor to our Chaos weighting. De-globalization is generally inflationary and negative for large multinational companies as global supply chains are disrupted. Therefore, we have increased our exposure to U.S. small cap companies.
At Cougar Global Investments, our preferred risk metric is the “probability of loss” over a 12-month time horizon, using empirical return distributions bootstrapped to our expected (not historical) economic environment. We incorporate the fact that there is an asymmetric relationship between investors’ reaction to gains and losses. This is an application of Post- Modern Portfolio Theory, Rational Beliefs Theory and Prospect Theory, the latter being the pioneering Nobel prize-winning work of Daniel Kahneman and Amos Tversky. It is our attempt at overcoming the shortcomings of Modern Portfolio Theory and the use of volatility as a risk metric.
Cougar Global Investments is a globally-oriented macro asset-class portfolio manager that uses a disciplined portfolio-construction methodology which combines macroeconomic analysis with downside-risk management. Cougar Global’s guiding belief is that the goal of investing is to generate consistent compound growth, primarily achieved by seeking to minimize loss.
To learn more about Cougar Global Investments click here or contact us at 800.521.1195.
Carillon Tower Advisers is a global asset-management firm supporting autonomous boutiques spanning investment disciplines and asset classes, each with a focus on risk-adjusted returns and alpha generation. We believe this lineup of institutional-class portfolio managers can help investors meet their long-term business and financial goals. Ultimately, this structure allows investment teams to focus on what they do best: managing portfolios.
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