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 and investment professionals are taking notice. We asked Abe Sheikh, chief investment officer and portfolio manager at Cougar Global, about the firm’s distinct approach to risk and its reaction to volatility.
Cougar Global offers clients access to a specialized top-down investment philosophy with a focus on protecting on 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 the Cougar investment process.
In our opinion, many investors became complacent as the equity bull market entered its 10th year. Given the spike in financial market volatility in early and late 2018, we believe being able to navigate the current volatility regime is essential for portfolios looking to compound returns over the long term. Hence, there is opportunity for a tactical risk-aware asset allocator like Cougar Global to add significant value to client portfolios.
We expect the U.S. economy to continue to grow at a moderate pace in 2019, albeit slower than 2018 and international economies to pick up as we move through 2019. Our 12-month forward Macroeconomic Scenario Analysis (MES) reflects a cautiously optimistic view. Our major concern about financial markets today centers on high stock market valuations, particularly in the United States. U.S. stocks are expensive when company profit margins are normalized to historical averages. And while stocks can continue to rise if lofty expectations are met or exceeded, with high prices and rosy forecasts comes the risk of disappointment. If clients are too aggressive in their equity allocations, this can lead to large portfolio losses if stock markets adjust to a new – perhaps even slightly less rosy – reality.
On a shorter term basis, we are also aware that investor sentiment has gone from extremely bearish to extremely bullish, primarily due to the Federal Reserve’s dovish pivot. Revenues, profit margins and forward earnings expectations are at all-time highs in the United States. Just as it is wise to avoid fear-driven panic selling during extremely volatile periods in financial markets, it is also wise to avoid greed-driven euphoric buying during extremely bullish periods.
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. As the exhibit below shows, 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 to overcome the shortcomings of Modern Portfolio Theory and the use of volatility as a risk metric.
Exhibit 1: Prospect theory tells us that losses are more painful than gains are pleasurable
Rigorous research, advanced statistical modeling and macroeconomic scenario analysis are combined with the tactical use of highly liquid ETFs to create investor-centric portfolios focused on minimizing downside risk.
Cougar Global’s process allows the investment team to adapt to changing market and economic conditions by reviewing the asset mix for each strategy monthly and rebalancing as necessary.
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.
All investments are subject to risk. Asset allocation and diversification do not ensure a profit or protect against a loss. There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable.
This material may include forward-looking statements. These statements are not historical facts, but instead represent only beliefs regarding future events, many of which, by their nature, are inherently uncertain. You should not place undue reliance on forward-looking statements as it is possible that actual results and financial conditions may differ, possibly materially, from the anticipated results and financial conditions indicated in these forward-looking statements. There are uncertainties, unknown risks, and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.
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