Cooper Investors (CI), the $13 billion funds management house from Melbourne, has managed to stay surprisingly under-the-radar for most of its 18 years in existence, despite racking up an impressive track record. Since launching the CI Australian Equities Fund in 2002, they’ve built up an offering of six strategies, all of which have outperformed their benchmark since inception.
After nearly three years running the strategy internally, CI have recently decided to open their Global Endowment Fund to investment. Given the rarity of a new CI product, and the fund’s already impressive record, I got in touch with the team to find out what sets it apart.
With an ever-increasing demand for retirement products, both globally and locally, and low rates making many traditional products impractical. In 2014, the CI team seeded the Pensions Fund along with an existing institutional client to meet this need. The goal was to create a more conservative equities strategy, with less volatility and downside capture.
According to The Association of Super Funds of Australia, nearly 1.5 million people were receiving some kind of self-funded pension or income stream in 2016, with nearly half of retirees now being self-funded.
“As we are all living longer, we believe that equities must form part of a retiree’s portfolio so that it can continue to grow,” Peter Cooper, Founder of Cooper Investors, told Livewire.
The Pensions Fund is primarily Australia-focused, hoping to capture the benefits of franking credits. But in 2016, CI saw the need for a global strategy and decided to seed the Global Endowment Fund. Like the Pensions Fund, it aims to capture less of the volatility and downside typical of equity markets, but it does this with a concentrated portfolio of just 35-40 stocks.
“Stephen Thompson, Director and Portfolio Manager had been thinking about this space as his investing needs were changing and due to his position on the board of a charity we concluded that retirees, charities and foundations have the same investment goal; to protect their corpus and live off the income,” said Cooper.
The ageing population is clearly an issue that’s been on Cooper’s mind for some time. Nearly 18 months ago, I spoke with Peter on The Rules of Investing podcast and he identified the ageing population as the biggest investment theme for the next 30 years. Having successfully invested in this theme for several years, now he’s building products to benefit.
“If you ask me the question ‘where did I get lucky in my 30-year career, and how am I going to get lucky in the next 30 years?’ This is the one,” Cooper told us on the podcast.
But how can reduced volatility be achieved with a concentrated portfolio? Portfolio Manager, Chris Dixon sees a relentless focus on true diversification as central to the approach. Just holding 30 stocks isn’t sufficient; he aims to hold 30 stocks that display as little correlation as possible.
“The Fund seeks to be as diversified as possible as we see that markets tend to become very correlated in sharp falls – hence the old phrase ‘all correlations go to one in times of distress’. The aim is to hold stocks that are all very different – different countries, industries, business models and with different drivers of Value Latency,” said Dixon.
While traditional wisdom might suggest that being diversified means owning a huge number of stocks, the benefits of increased diversification drop off significantly with more than 30 positions. According to Meir Statman’s 1987 study, “How Many Stocks Make a Diversified Portfolio?”, a well-diversified portfolio can be achieved with just 30-40 stocks.
So far, this has proven true, with the fund exhibiting lower volatility than its benchmark, the MSCI All Countries World Index, at around 88%.
"The Fund owns assets as varied as a Canadian toll-road, US cell towers, Nordic car insurance, mid-market banking software, diagnostic reagents and gold royalties. The trends driving these areas are positive and structurally long-term in nature,” Dixon said.
Additionally, the fund also avoids investing in turnarounds, cyclical companies, or stocks with high levels of debt on the balance sheet. These types of companies can exhibit high levels of volatility to the downside and avoiding them is one of the main ways to reduce the risks.
Instead, The Fund prefers to invest more in ‘bond-like’ equities such as infrastructure, utilities, and REITs. These stocks typically have more stable and predictable cashflows due to the regulated nature of their assets, which means less chance of being surprised by an earnings downgrade. Bond-like stocks can, however, be more sensitive to interest rates – this has been beneficial in recent years as interest rates have fallen, but if this trend reverses it could affect returns. Avoidance of overly geared companies is key here, as some bond-like companies can carry high debt loads.
Taking a long-term view
The CI Endowment Fund (formerly known as the CI Pensions Fund) just racked up five years of performance earlier this year. Since inception, the portfolio outperformed the broader market on 17 of the 22 down-months and captured just 67% of the downside – meaning that on average, if the market fell 1% in a month, the portfolio fell 0.67%. It’s also outperformed its benchmark by 1.81% p.a. over the last five years.
The CI Global Endowment Fund is off to a good start too, having outperformed its benchmark index on all six of the negative months experienced since inception, capturing just 62% of the downside and 100% of the upside on average.
With the CI Global Equities Strategy (Hedged), which is also managed by Chris Dixon and Allan Goldstein, also having outperformed its index by a handy 4.33% p.a. over the last five years, there’s little doubt that both investors in the fund and the team at CI will have high expectations for this innovative strategy. And with rumours of other big funds management houses scoping out this area of the market, they'll surely not be the only one watching.
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Long-term Investing involves analysing opportunities for capital growth, risk spreading & diversification as well as strategic decisions. Your article will surely help to find some ASX listed companies and best Australian shares to invest in.