Portfolio diversification through innovation

Entering 2021, financial advisers and investors are facing many challenges when it comes to managing their portfolios. On the one hand, low interest rates and quantitative easing policies have all but removed the diversification and income benefits of traditional fixed-income investments. On the other hand, the same policies have sent equity markets back to pre-pandemic highs, despite the uncertain economic outlook. Combine this with the now unexpected spike in government bond yields and valuations are becoming the primary talking point.

An increasing bond rate environment is something that many current market participants may have never experienced, with government policy effectively backstopping markets throughout their careers. A number of experienced investors have suggested investors have three options: to do nothing and accept lower returns; to go all-in and take more risk in pursuit of returns; or to rethink their approach and seek to do something different.

It is this last option that we have focused on for this series of articles that seeks to uncover what many consider to be “innovative” managers of the future. In using the term “innovative,” we do not mean investing into big data, quantum computing or genomics, but rather those innovating the traditional form of long-only bond and equity investment. These opportunities span cryptocurrency, real assets, non-traditional fixed income, multi-asset and commodities strategies.

Part 1 – Cor Capital 

Cor Capital is a specialist multi-asset strategy that seeks to deliver investors medium-term returns, without the significant volatility that comes from a traditional 60/40 or “balanced” portfolio. The fund carries the dual objective of protecting and growing the wealth of investors, but with a real focus on protecting against drawdowns. The ‘protect and grow’ your wealth is a common marketing line for multi-asset strategies, but Cor Capital’s performance in 2020 and during each period of market volatility confirms that it is true-to-label. 

How are Cor Capital innovating?

Portfolio managers Davin Hood and Tom Rachcoff have identified that the accuracy of the economic and investment forecasts relied upon by most investors is generally poor, and have constructed a specialised, multi-asset investment approach, based on avoiding complexity and instead focusing upon more robust fundamental diversification for all economic environments, that enables the strategy to take advantage of inevitable market surprise and human behaviour to deliver consistent risk-focused returns. The Cor fund is innovating in three key ways: firstly through the implementation of an updated Australian version of the ‘permanent portfolio’ approach made famous in the US, providing more asymmetric exposure to risky assets through a limited option purchase program and providing an alternative source of return through the systematic rebalancing of its fundamentally diversified portfolio, to harness volatility.  

What is the approach?

The beauty of the Cor Capital approach lies in its relative simplicity and avoidance of complex strategies or instruments in providing investors with a capital-stable real return. The portfolio managers seek to diversify broadly across all asset classes, with 25 per cent invested into precious metals, equities, bonds and cash at any given time. The value-add opportunity comes in the “improvements” made to the original permanent portfolio, including regular rebalancing of each of the four asset classes, and making contrarian adjustments by increasing the underperforming portions on regular occasions. Importantly, the investment decisions are completely rules-based, removing the risk of behavioural biases impacting performance.

Ultimately, the portfolio aims to ensure that investors can expect positive returns regardless of the economic backdrop, whether that is inflation, growth, recession or deflation, and the movements between these.  

Characteristics and performance

The proof is in the pudding for this multi-asset strategy, which has delivered on its objective to increase the value of the portfolio above the rate of inflation, while not experiencing a negative return over any 12-month period. In 2020, the fund delivered an enviable return of 7.2% with volatility of just 9.7% – less than half that of the equity market, which fell 1.5% for the year. Longer-term performance is similarly strong as shown in the table below:

Of most interest for investors seeking non-correlated returns, but more importantly, capital protection during volatility, has been the performance during every equity market drawdown since 2014. During the March 2020 crisis the S&P/ASX 200 fell by 20.65 per cent but the Cor Capital strategy lost just 3.8% and recovered quickly. Across the 15 largest drawdowns since inception, the S&P/ASX 200 has fallen 84.73 per cent in total, the strategy has fallen just 10.63 per cent during the same events. 

The fund benefited from a strong year for gold bullion in 2019 and 2020, but didn’t miss out when the vaccine news was released, with the equity component taking the mantle in the short-term, proof of the longevity of the strategy. At present, the fund is neatly balanced with 25 per cent in equities, with equal weighted indices preferred, 25% per cent in fixed income, 25 per cent in gold bullion (held at the Perth Mint), and 25 per cent in cash. The fund is rated “superior” by SQM Research and charges a management fee of 1.0% a year.  

The Cor Capital fund’s focus upon capital preservation, exposure to asset-price trends and maintaining purchasing power through real rates of return, makes the strategy attractive to a growing set of investors with shorter investment horizons and “balanced” portfolios seeking more defensive liquid alternatives, albeit with low cost and less complexity.

In Part 2 of this series, we’ll examine the Apollo Capital Cryptocurrency strategy.-

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.