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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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.

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[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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