Scott joins Cor Capital with 20+ years of experience across previous firms, most recently as Portfolio Manager at Playfair Asset Management (domestic and global equities), and before that a distinguished career as Director at UBS (formerly Credit Suisse). He developed and executed successful investment strategies that outperformed key benchmarks in a risk-controlled fashion, as well as advising some of Australia’s largest financial institutions (superannuation funds, domestic and globally focused long-only equity funds, regional hedge funds).

Commenting on the appointment, Tom Rachcoff, Managing Director said: “We’re delighted to have Scott join the Cor Capital team. I have known Scott for many years and have had the pleasure of working with him. His experience complements our long-established investment process and supports our commitment to preserving capital and delivering non-volatile returns for investors. His strong analytical skills and investment expertise will be of great value.”

Scott said “I have been a long-term investor in the Cor Capital Fund which is a testament to my firm belief in the core philosophies. With this first-hand experience, I know the strengths of the investment process, and I look forward to applying my own skills and experience to enhance our research capabilities and contribute to disciplined business growth.”

Tom said, “Furthering our research capabilities and expanding investment solutions, will be value accretive to all of Cor Capital’s stakeholders.”

Scott added “The Cor Capital Fund’s performance through time speaks for itself. It has been true to label as an uncorrelated, defensive liquid alternative with deliberate upside capture. The strategy can hold a place in a wide range of investor asset allocations. I’m very pleased to be joining the team and I am excited about the opportunities for the business going forward.”

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Mark De Wan has joined Melbourne-based fund manager Cor Capital to help it expand its market reach and grow awareness of its track record across adviser networks. Founded in 2012, the Cor Capital Fund has been used successfully by family offices and self-directed investors to generate stable real returns.

Managing Director and Founder, Davin Hood, said of the hire that “Mark’s appointment reflects a new phase for the Cor Capital Fund as we bring our unique offering to the intermediary advice market. Since establishing the fund, we have cultivated the ‘all-weather’, ‘keep-me-wealthy’ experience for a discerning group of investors and now get to show something that’s well-tested to a new group, which is exciting.”

Mr De Wan has built broad and deep relationships across the advice market over his 20+ years in sales. He previously worked at Ellerston Capital, MLC, NAB Wealth and UBS Asset Management after beginning his career in financial planning.

Mark said “The Cor Capital Fund offers an unconventional combination of assets with some extra built-in insurances. There is value in its contrarian, disciplined management, and its daily liquidity. Advisers will also like the transparency of the process, which is rare for a fund with performance attributes that are pretty much ‘alternative’ and ‘absolute return’ in nature.”

The Cor Capital Fund invests broadly across large-cap equities, bonds, and cash, as well as precious metals. Its large physical gold bullion position is designed to protect its portfolio from events and conditions that would cause a sell-off of most financial assets. Broad weightings also mean the strategy is better placed to harvest volatility between assets.

According to Mr Hood “Gold is misunderstood as a portfolio tool. We have the largest allocation to gold assets of any multi-asset fund in the country, but have half the volatility and drawdowns of equities, and even so-called balanced funds in recent times. Gold price volatility and gold mining stocks cause havoc for many investors and results are often disappointing. However, with a contrarian mindset and active risk management, gold can contribute to portfolio growth beyond that of the common strategic ‘sliver’, or tactical speculations.”

With current inflation and monetary challenges, and developing geopolitical risks, now is a great time to be bringing a strategy that can avoid disasters yet still grow to the advised market.”

Mark added “I am delighted to join the team and represent the award-winning Cor Capital Fund in this newly created role. My engagement with Davin and co-portfolio manager, Tom Rachcoff has been equable from the beginning, and I look forward to getting started.”

The Cor Capital Fund holds a 4.25 ‘Superior’ rating from SQM Research and can be found on a range of fund platforms.

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“With much of the evidence suggesting SMSFs will not enjoy the strong tailwind of strong equity market returns in the next decade as they did in the last, as well as having cash and bond yields at historical lows, SMSF trustees will place a premium on preserving their capital.

“This focus will apply particularly to those SMSFs that are in retirement (nearly 50%) or those nearing retirement and can ill afford to put their retirement nest eggs at risk.”

Hood says the investment scene, both domestically and globally, is high risk, whether it’s assessed from a geopolitical, economic or health viewpoint.

“Although that’s the investment reality, it’s not reflected in the pricing of risk assets. But that day of reckoning must come – the markets can’t continue to defy economic reality forever.

“SMSFs will not be immune to any market correction of risk assets. In fact, many will be particularly vulnerable for several reasons.

“Failing to get good advice either because of its rising cost (this has been accentuated by the ongoing exit of advisers from the industry post the Financial Services Royal Commission) or a misplaced confidence in their ability to make the right investment decisions are one of the top reasons for disappointing investment returns in our opinion.

“Further, in the past decade, and despite historically low interest rates in recent years, these SMSFs have been ‘protected’ by their investment in fully franked ASX shares (at March 2020, they comprised $167 billion or 26% of all SMSF net assets, a number depressed by the sharp sell-off in the second half of that quarter) that have provided capital growth and healthy dividend income.

“It’s our contention that investors should not expect a similar performance from equity markets in the coming decade, and that dividend income is also likely to be constrained, at least for the next few years.

“Put simply, the traditional 60/40 type portfolios (60% growth/40% defensive) that many SMSFs rely on will, in all likelihood, fail to meet their investment objectives in the coming years.”

Hood says the combination of weaker, and, just as importantly, more volatile markets for risk assets, and lower dividend returns, will be compounded by investors often failing to be able to articulate long-term investment strategies and stick to them.

US research house Dalbar publishes quantitative analysis of investor behavior and has shown individual investors consistently underperform mutual funds because of poor decisions on when to buy, sell or switch out of mutual funds.  With an expectation of increased volatility, investors holding higher allocation to risky assets will probably make more poor investment decisions under stress.

“SMSFs, which, by law, must have an investment strategy, are still prone to make poor, short-term decisions, or, alternatively, are so locked into their strategy that they fail to make tactical decisions that can enhance their fund’s performance.

“Large institutions have the wherewithal to use different investment strategies to improve returns, such as defensive option strategies. But these strategies take SMSFs into territory they often don’t understand and certainly don’t embrace.

“But knowing they will need to find alternative ways of generating growth and income while preserving capital, there will be a growing appreciation of the need to find fund managers that can achieve these objectives without the need for high level of complexity or costs

“After the GFC, SMSFs increasingly shied away from fund managers that had failed to deliver during that crash and charged high fees for the privilege of doing so, with the bull market in equities in the past decade rewarding that strategy. [At 31 March 2020, managed fund assets stood at $39 billion or 6% of total net SMSF assets.]

“But in the wake of the COVID-induced recession they may no longer have that luxury if analysts are correct in predicting much lower returns in the next decade, opening the door for fund managers with investment strategies that aim to protect their capital, maintain purchasing power and provide alternative sources of return not tied to high allocations to equities.”

Against its peers the Cor Capital Fund is placed in the top decile over one, three and 5-year timeframes on the Netwealth platform; and in Morningstar’s Australia ‘multi asset – balanced’ database of 131 funds ( the Cor Capital Fund was the #1 performer over 1 and 5 years, as at 31 July 2020.)

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“This scale of market interference is staggering and likely needed to continue to stave off the eventual ‘end of cycle’ reckoning,” notes Davin Hood, Managing Director at Cor Capital, a Melbourne based investment manager.

“Traditional asset allocations have been heavily tied to equity market growth and the continual decline in risk free interest rates over the past 30 years. However, for the next period in markets, it is likely investors will not enjoy the same tailwinds given current valuations,” he adds.

“Expectations for traditional fixed income to buffer equity risk is diminished given global zero-risk free rates and high bond valuations. Traditional 60/40 type portfolios will face significant risk as bond and equity correlations increase.

“Therefore, in this scenario, it makes perfect sense that portfolio construction philosophies should be adjusted. This calls for increased allocation to alternative strategies to improve risk adjusted outcomes, setting up a potential golden era for liquid alternatives focused upon absolute returns to improve investor outcomes.”

Hood adds: “Larger institutions have always used a wide range of potential tools to meet uncertain future including alternatives and portfolio hedging.  For example, some astute superfunds have been increasing their internal capabilities around derivatives, introducing long volatility allocations and utilising defensive option strategies.

“However, for retail investors and financial advisers, the menu of available solutions has been relatively narrow.  This is understandable given the pre-requisites for daily liquidity, growing focus on passive SMA implementation and lower fees.

“The attraction of hedge funds and liquid alternatives is their ability to participate less or actively take advantage of negative market environments.  This absolute return mindset should focus on the reduction of drawdowns to allow for the power of compounding of returns.

“Luckily, there are absolute return focused strategies that fit nicely into the liquid alternative bucket, or as a partial substitute for bonds, and even a core portfolio building block for risk adverse portfolios that avoid added complexity of many opaque hedge fund strategies which can be easily understood by investors- both large and small,” says Hood.

For example, “All Weather” multi asset portfolios with a focus on protecting capital is one straight forward option.

“These portfolios which are typically long-only multi asset portfolios aim to perform within all potential market environments including recession/growth and inflationary/deflationary environments,” says Hood.

Cor Capital Fund’s “All Weather” approach is the top ranked multi-asset portfolio for 1 and 5 year returns according to Morningstar.

“Cor Capital’s approach to absolute returns does not utilise complex strategies which include short selling, borrowing or any bank credit risk instruments.  Instead we focus on providing a stable real return with an absolute return objective prioritising capital stability. The strategy avoids illiquidity premia and borrowing and instead focuses upon actively re-balancing its purposely designed portfolio to harvest volatility and provide a welcomed alternative source of return.”

Recent market volatility has presented ample opportunity for added return.

As of July 31, 2020, the Cor Capital Fund 1-year return net of fees was 11.62%.

Hood adds: “For investors seeking to reduce exposure to equity risk premia and gain higher rates of return than cash and bonds, all weather approaches that are designed for defending capital and withstanding market surprises, may be an attractive solution.

“Avoiding complexity in an increasingly uncertain world is a welcome relief.”

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The Cor Capital Fund (the “Fund”) is a multi-asset real return fund with an absolute return objective. The Fund aims to deliver attractive real returns (well above Australian inflation, net of manager fees) while aiming to avoid negative returns over any 12-month period (in all investment environments).

The Fund sits in the top decile over one, three and 5-year timeframes, and on Morningstar’s Australia ‘multi asset – balanced’ database of 132 funds, the Cor Capital Fund was the number 1 performer over both 1 and 5 years, number 2 over 3 years, as at 31 May 2012.

According to SQM Research “the Cor Capital Fund is a differentiated strategy within the Multi asset real return and Alternatives universe of funds”, and notes its “analysis pointed to strong defensive characteristics in the face of extreme equity tail risk.”

The Fund’s philosophy has counterparts with the “all weather” style of investing (including ‘risk parity’), and more closely with the “permanent portfolio” style (popularised by the influential US financial commentator Harry Browne). Cor Capital has enhanced its own take on this philosophy over many years, with additional focus on harnessing volatility being one example.

The Fund is relatively unusual in the Australian context as it has distinct structure of limiting investment to four broadly weighted asset sectors: Large cap Australian equities, precious metals, Australian bonds and Australian cash.

SQM Research states: “The very experienced portfolio management team of Davin Hood (Managing Director and Portfolio Manager) and Tom Rachcoff (Executive Director and Portfolio Manager) strongly believe in the strategy. They have more than 50% shareholding in the company and are co-invested in the Fund, providing a powerful alignment of interests with investors.

“The Fund’s investment philosophy can be described as unconventional and contrarian. It exhibits a ‘very modest view of the value of forecasting’ as the Manager puts it. The strategy design is subjective while its implementation is largely objective via quantitative models.  The Manager believes that asset class returns are largely driven by changes in the expected rate of economic growth and inflation. This is not an unconventional view. What is unconventional, particularly amongst active absolute return fund managers, is the belief that changes to such expectations are uncertain and unpredictable for practical investment purposes.

“The Fund has displayed strong performance across all time periods when compared with the peers. The relative outperformance has been more significant in recent years,” notes SQM Research.

SQM Research notes the Fund’s 1-year performance (to April 2020) has been notably strong.

Over the twelve months to April 2020, the Fund returned 9.71% (after fees) compared to 2.17% for the benchmark (CPI in this case). This is an outperformance of 7.55%.

The Fund has a consistent track record with SQM Research noting “it has outperformed its benchmark (CPI) in 98% of rolling three-year periods since its inception.”

Davin Hood, founder of Cor Capital, commented the Fund was established to meet a demand from investors with a ‘keep me wealthy’ mindset.

“Reliable medium-term investments with liquidity are difficult to find. The Fund is designed to be a smooth ride under a wide range of market conditions. It is an expressly ‘all weather’ investment vehicle ideal as a core holding in most portfolios. This explains why we don’t forecast prices or specific outcomes; we focus on asset dynamics instead, like volatility, and big picture risks such as inflation or growth surprises. One of the only things we rely on is the consistency of the human response given certain market conditions, of which there are relatively few,” says Hood.

———-

[1]  as at Apr-2020.

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The reason why is that this group of investors don’t just lose a big portion of the value of their accumulated investment – they lose doubly, because they don’t have the time to redress the fall.

They are pre-retirees and retirees, and to them, a market fall across the asset classes – like the first quarter of 2020 – represents “sequencing risk.” And its effects can be diabolical.

“Sequencing risk represents the danger of experiencing poor investment performance at the worst time. While some investors have decades to ride out volatility and heavy capital losses, investors nearing and in retirement are not among them,” says Tom Rachcoff, Director, at Melbourne-based absolute-return fund manager Cor Capital.

“They need to pay greater attention to the risk of permanent capital loss and the sequence of returns while still attempting to maximise return.”

The problem that emerged for this investor group in early 2020 originated in the long bull-market decade that preceded it, says Rachcoff.

In both equities and bonds, the markets’ performance since 2009 globally had seemed like a one-way street for investors, as central banks around the world sought to stabilise a financial system with negative-interest rate policy (NIRP) and its close cousin, zero-interest rate policy (ZIRP) policies. While these were intended to stimulate weak economies, the inevitable result was the increased risk taking needed in portfolios to meet expected rates of return or CPI + thresholds – because the risk-free rate gave so little nominal reward.

“‘Pinning your ears back’ and taking on higher exposure to risky assets was rewarding,” says Rachcoff. “However, investors often become complacent by long periods of high returns, only to be blinded by sudden downturns, and that’s what we saw in the first quarter of 2020.”

The major problem was that in a fall so sudden, and from a cause so unexpected in modern memory as a global pandemic, asset-class correlations “tended towards one” – negating the insurance benefit of diversified portfolios, that investors thought they possessed.

“While the average superannuation ‘balanced’ fund holds between 60%–80% of diversified ‘growth’ risk exposures, investors were reminded that all growth risk is sold in ‘risk off’ environments,” says Rachcoff. “As in the GFC, 2020 first-quarter performance saw most asset classes fall and diversification benefits disappear in a systemic ‘risk-off’ environment.”

By the end of the first quarter of 2020, many investors – including those that could least afford the risk – found themselves shocked at the impact to portfolios.

“Superannuation portfolios that had tilted to infrastructure and real estate as defensive proxies, for example, received an unwelcome reminder that these assets have plenty of exposure to GDP economic growth expectations,” says Rachcoff.

Rachcoff says many SMSFs, retirement and high-net-worth portfolios positioned prior to the Covid-19 Crash such that investors thought they had placed a priority on protecting wealth and generating more stable real returns instead of seeking maximum return.

“However, many of these investors did not realise that they were ‘at risk,’ and were sitting on a roller-coaster ride through the sequencing risk zone, with a better-than-even chance of succumbing to human behaviour if markets got stressed. And they got very stressed,” he says.

Rachcoff believes the secret weapon in neutralising sequencing risk is an approach that builds an ‘all weather’ portfolio, that seeks to give investors stable growth through a real return, but is designed to defend wealth. Further, by reducing big losses – investors avoid the potential for poor investment behaviour by avoiding high stress.

“Ideally the pre-retiree and retired investors would have a portfolio that can perform well in a bull market phase, but more importantly, work to protect capital within the extreme ‘risk off’ environments,” he says.

The Cor Capital Fund’s approach, which in simplified terms allocates approximately 25% each to four low-correlation “buckets” – cash, bonds, precious metals and developed-market equities – and systematically rebalancing these weightings. The fund has been able to perform like a balanced fund in a rising market, but perform like cash and gold in a down market (that is, to be defensive.)

“Our fund enjoyed a small positive return in the first quarter of 2020, underscoring an ability to preserve capital, and delivered +8.13% net return for the 12-months ended 31 March 2020,” says Rachcoff.

“The Fund has also participated in the stock market rally since quarter-end, with the one-year return rising further to +11.83% as at 31 May 2020, placing the fund at the pointy end of the top decile over one, three and 5 year timeframes, for all the 140-plus multi-asset and alternative funds, reporting publicly on the Netwealth platform,” says Rachcoff.

For Cor’s SMSF and investor clients within the retirement risk zone, the ability to sleep at night has been both an emotional and financial win, Rachcoff says.  “Given the uncertainty for global growth and ever-present likelihood of market surprises, the roller coaster ride is left to those that choose to stomach the risk,” he adds.

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Investment manager Cor Capital’s Tom Rachcoff says: “It happened during the Global Financial Crisis (GFC) and now we have had a repeat performance with the COVID-19 generated market turmoil in the first quarter of 2020.

“Many investors, and this includes popular retail and industry superannuation funds, would have been shocked by just how much risk they held in their balanced funds, some experiencing drawdowns of between 15% and 20% in the first quarter. For many, the negative impact on their portfolios would have exceeded their risk appetite.

“It’s not difficult to understand why. Over the years, these portfolios have switched from low interest-bearing government bonds to infrastructure, credit and property in the belief these assets would act as defensive proxies for low yielding debt instruments.

“But when the market downturn hit in late February, these assets were far more closely correlated to growth assets than they believed. Airports, commercial property, and corporate credit are linked to GDP expectations as the global shutdown has graphically exposed.

“It means many traditional ‘balanced funds’ held between 60% and 80% exposure to growth assets, when their belief would have been that their exposure was much lower. It’s little wonder they were shocked in March at their portfolios’ growth risk exposures.”

Rachcoff says that most investors must accept that their portfolios do have risky exposures to assets that they once considered defensive, and that unless they address their asset allocation, they will continue to experience portfolio falls in times of economic weakness – falls that will be compounded when there is a systemic risk event such as COVID-19.

“At this junction, this is particularly concerning given the bleak global economic outlook and the fact that a sustained and deep recession is a real possibility. Portfolios tilting toward high levels of growth asset risk may be flying blind into a serious headwind.”

He says investors, whether institutional, wholesale or retail, must accept the fact they have no idea what markets will do, and, in fact, the only thing they can be certain of is that there will be surprises.

“A weakness of traditional asset allocation approaches is the reliance upon asset class return forecasting and varying correlations in the build of a relatively poor risk management framework.  The framework breakdowns in periods of surprise, notably within systemic events.  These breakdowns are particularly damaging to those in or near retirement, and avoided by those investors that seek more absolute returns with a focus upon protecting wealth.

“For these investors, it is more important to build ‘all-weather’ portfolios that are purposely designed to protect wealth so that they perform like a balanced fund in a rising market but like cash and gold in a falling market.

“The premise of such a strategy is built on the belief that it is extremely difficult to forecast asset class returns; and that the most robust portfolio possible will be diversified based upon fundamental economic drivers for all environments. It is the antithesis of what is usually considered ‘diversification’, especially in the superannuation industry.

“You see a lot of portfolios that are supposed to be ‘diversified,’ but they’re really 70 per cent growth – like ‘balanced’ super funds. Even if they’re rebalancing, they’re just rebalancing from growth to growth. Every time we have a major systemic event – it happened in the GFC, and it has happened again – we see the correlations of the assets in a balanced fund go to one, and there’s no defence for that,” he says.

“Investors should consider a more fundamentally-diversified managed fund not over-reliant upon growth risk, which can be used as an alternative asset within a broader strategic asset allocation or as a standalone medium-term absolute return investment,” says Rachcoff.

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