Return to flip book view

THE AGE OF ENDOWMENT EXECUTIVE SUMMARY A GUIDE TO ENDOWMENT ST YLE INVESTING BY COOPER INVESTORS

INTRODUCTION AN IDEAL AGE In Douglas Adams comedic series A Hitchhiker s Guide to the Galaxy the answer to the Ultimate Question of Life the Universe and Everything is famously revealed to be the number 42 As professional investors both entering 2022 at the age of 42 contemplating the myriad of challenges markets and our clients face we nd ourselves longing for that nirvana of enlightenment promised in Adams classic satire We consider ourselves fortunate at 42 to have been alive and investing in markets long enough to see meaningful bouts of volatility and signi cant periods of change in the domestic and global stock market In writing this White Paper we have worked through three signi cant stock market crashes the 2001 02 Tech Crunch the 2008 09 Global Financial Crisis and the COVID 19 Crash of 2020 These three periods have provided a lifetime of lessons and in uenced the way we think about risk and volatility euphoria and disillusionment patience and of course dislocation Crises are the best learning experiences The current Russia Ukraine con ict combined with a commodity squeeze oil spike and rising interest rates is a case in point bringing to mind the classic Mark Twain quote history doesn t repeat itself but it often rhymes At Cooper Investors CI Endowment style investing means standing on the shoulders of giants We have borrowed from Nobel Laureate Harry Markowitz s 60 40 proposition as well the late David Swensen s legendary Yale model of Endowment portfolio construction It also means that as Portfolio Managers for CI s Endowment portfolios we aim to transcend in providing risk managed participation in rising markets and strong protection in falling markets There are a number of themes that we explore in The Age of Endowment including responsible investing downside protection maintaining relative volatility and growing income over the long term But most pertinent we have taken a step back and taken time to observe quantify and detail how our Domestic and Global Endowment Funds assess risk select stocks and analyse dividends and balance sheet strength in the portfolio construction Our Endowment style investing approach is all done through the prism of CI s values and investment philosophy which is detailed at the conclusion As we celebrate the 20th anniversary of CI and the Endowment and Global Endowment Funds recording their 8th and 5th year respectively we want to share with our new and existing clients the features of our Endowmentstyle strategies a re imagining of the 60 40 portfolio framework using entirely listed assets in a highly diversi ed Endowment style capital allocation that represents a more conservative risk adjusted equity exposure for suitable clients This White Paper aims to describe our discussions with clients and make some observations and conclusions around the Portfolio Construction and Stock Selection considerations we apply in managing our Endowment style funds We consider it to be a combination of Art and Science so while it is not intended to be an academic research paper the subject matter necessitates that we share some of the quantitative results of our research as well as qualitative observations We look forward to discussing the Endowment style of investing with you in the coming months our Client Relations Team at CI are on hand to assist with enquiries and can be contacted at CiClientRelationsteam cooperinvestors com 61 3 9660 2600 www cooperinvestors com Good investing Chris Dixon and Ryan Riedler 1

THE AGE OF ENDOWMENT Protect and Grow Our Endowment style portfolios could be the solution to a dilemma we see facing clients like charities educational or healthcare endowments trusts foundations or family o ces with a corpus where the focus is on Protect and Grow Protect is crucial where there are limited new in ows of capital that can make up for large market drawdowns and enable investing in the lows Similarly Grow is essential as the corpus should net of distributions grow its size faster than the prevailing rate of in ation Subsequently the focus on and objectives of Protect minimal risk taking and Grow higher risk for the seeking of return are fundamentally in con ict While this creates an issue we believe this can be resolved through considered portfolio construction and by using the CI Way of Investing Rocky Road Ahead Traditionally in a 60 40 framework the Protect component is directed towards xed income assets while the Grow component is invested in listed and private equity along with other risk assets infrastructure and alternative assets hedge funds and commodities In the current environment we consistently see signi cant challenges in asset markets The Protect component no longer plays its role to cushion the negative correlation between equities and bonds Worse still it may even be positively correlated In the Grow component it appears that quantity has superseded quality Paraphrasing Charlie Munger selling people things that are good for them seems to no longer be in practice Figure 6 Endowment Strategy 60 40 portfolio metrics Domestic Ratios1 60 40 Global Portfolio 60 40 Portfolio Downside capture 89 58 67 86 52 63 Upside capture 108 81 89 106 91 90 Volatility annualised 2 14 1 11 1 10 8 14 8 11 6 11 6 Beta3 1 00 0 72 0 76 1 00 0 68 0 77 Correlation4 0 95 0 87 0 95 0 93 0 81 0 91 1 Upside and downside capture measure the ratio between the portfolio s return and the benchmark return in months where the benchmark return is positive upside or negative downside 2 Volatility aka Standard Deviation is a measure of the variability of the portfolio s return over time often used to describe its level of risk 3 Beta is a measure of the portfolio s systemic risk relative to the benchmark e g a beta of 1 1 would indicate that the portfolio is exposed to 110 of the benchmark s systemic risk 4 Correlation describes the strength of the relationship between the portfolio and its benchmark on a scale from 1 0 always move in opposite directions to 1 0 always move in the same direction

Between a Rock and a Hard Place 3 Concerns from clients regarding the shape of risk and return in their portfolios were the genesis for the creation of Cooper Investors Endowment Funds and form part of our specialist suite of equities funds The funds are crafted through the application of the CI Way of investing through two main elements portfolio construction and stock selection We practice an extensive stock selection process with a set list of characteristics we look for in each stock This includes businesses that do well by doing good The Maths of Drawdowns Accepting that market drawdowns occur regularly as the magnitude of the drawdown increases the required recovery increases exponentially Losses are asymmetric a stock that halves needs to double to recover its losses see chart below Figure 3 The Maths of Drawdowns 900 The current challenges faced by charities family o ces and other non institutional clients are becoming more severe when equities markets are valued at all time high while interest rates and in ation continue to rise 400 233 For example the last couple of years of bush res and COVID 19 has impacted the charity sector signi cantly It is critical for this sector to have access to t for purpose investment support to protect and grow their precious capital and assets for Australia s future 11 25 43 10 20 30 Loss 67 40 100 50 150 60 70 80 90 Gain needed to recoup loss Doing Well By Doing Good Ethics should not be separated from investment decisions A whole of life approach to decision making is good business practice so we invest in companies that focus on long term Why Downside Protection Matters and sustainable value creation for shareholders and clearly stated operational and strategic goals We think downside protection is one of the most powerful arguments for Endowment style investing The relationship of downside versus upside becomes very important when compounding returns over long periods of time In simple This is re ected across our Endowment style Funds through the execution of our Responsible Investment strategy designed to do well by doing good sitting alongside our screening exclusions for stocks whose primary business is the production of alcohol tobacco gambling or controversial weapons terms the less you fall the less you will have to recover to get back to square one The chart below shows that market drawdowns occur regularly The red bars represent the largest declines from a peak high to a trough low that occurred each year The purple bars represent the calendar year total returns for the S P 500 Progressive Thinking for the Next Cycle Figure 2 S P 500 Lagest Intra year Drawdown vs Year End Total Returns 1 January 1980 to 31 December 2021 22 27 16 3 5 4 12 34 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 48 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1992 1993 1995 1994 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 This White Paper will provide you with further scenarios and insights from our recent interview series with clients and other market leaders regarding the Portfolio Construction 19 10 7 16 6 10 7 12 19 16 1 2 14 15 16 5 37 10 27 7 31 32 Annual Total Returns 26 29 11 22 5 7 7 14 33 29 21 9 12 34 29 17 11 19 12 33 23 10 8 1 3 5 6 8 3 6 8 19 7 27 15 12 2 8 1 8 9 13 30 26 26 17 15 10 7 17 17 18 38 Largest Drawdown At CI we believe Endowment style investing may be a suitable equities exposure for clients with a long term horizon that require capital and income growth with an eye towards responsible investing while having a lower appetite for downside risk and volatility Source Morningstar FactSet J P Morgan Asset Management Returns are based on price index only and do not include dividends Data are as of 20 November 2020 Drawdown refers to the largest market drops from a peak to trough during year and Stock Selection considerations we apply in managing our Endowment style funds

THE AGE OF ENDOWMENT Cooper Investors Endowment Team Chris Dixon Ryan Riedler Portfolio Manager Global Equities Funds BA Hons CA Deputy Portfolio Manager Endowment Fund B Comm Grad Dip App Finance and Investment A Fin Chris joined CI as joint portfolio manager in November 2011 As a member of the Global Equities team he focuses on European and Japanese companies Ryan joined CI in July 2010 as a research analyst in the Australian equities team and was appointed Deputy Portfolio Manager of the Endowment Fund in 2014 Having commenced his career in 2002 Chris has operated in a variety of roles in nancial markets and has travelled extensively living in four countries and investing across multiple asset classes Prior to joining CI Ryan worked at Ernst Young Chris joined Chandler Corp in 2007 and focused on equities in a role that covered a broad mandate of responsibilities including portfolio management investment strategy fundamental research risk management and dealing Prior to that he spent a number of years managing equity derivatives at Lehman Brothers Chris quali ed as a certi ed Chartered Accountant with Ernst Young in London in the corporate nance division Ryan has had exposure to a broad range of sectors including nancials healthcare infrastructure property trusts and retirement and aged care

THE CI WAY 5 At Cooper Investors we invest on behalf of over 4 million Australians from all walks of life and all manner of employment and industry This includes trustees and bene ciaries of superannuation and pension funds Australian state government agencies family o ces churches charities school endowments and foundations The sole reason we exist is to invest widely for them all Peter Cooper Our team at CI are passionate about investing in both Australian and Global markets How we do that we refer to as the CI Way The CI Way is a culture a way of doing business and a standardised and integrated investment philosophy At CI we call ourselves long term observational investors which means that we must accept that the future is uncertain and the past may repeat itself in unusual and unpredictable ways But from that observation we have developed an investment philosophy that drives our business Our long term investment philosophy is referred to as VoF standing for our unique analysis on Value latency Operating industry and strategic trends and Focused management behaviour This system is central to the success of all our portfolios and funds The VoF investment process has been built on 3 key investment tenets 1 CI is a values rst rm built on humility 2 Observation not prediction 3 Consilience happens through building relationships at the coal face of the industry With the world and markets at the precipice of another signi cant period of disruption and volatility it is serendipitous that we are releasing The Age of Endowment White Paper which details how CI s Endowment Funds operate and invest over the long term Finally at CI we are also passionately focused on supporting better outcomes both at home and in our global community We believe the best investment any of us can make is in the lives of others For that reason in 2008 we established our Philanthropy Fund A percentage of revenue from the Endowment Funds supports the CI Philanthropy Program which overseen by a CI sta committee Chris and Ryan are both members of the Cooper Investors Philanthropy Fund sta committee 3 5m 100 150 deliver initiatives that reduce the symptoms of poverty and the issues faced by the most vulnerable in society projects we support Copper Investors philanthropy is based on Overseen the distribution of 3 5 million of much needed capital into the charitable sector to support inspiring leaders to disadvantage Supported 100 worthy organisations that are on the ground in the community working to deeply understand Hosted 150 presentations in our board room from the inspirational founders and leaders of the organisations and relationships and we believe that where we can we should leverage our connections to amplify the impact of our donations

THE AGE OF ENDOWMENT COOPERINVESTORS COM Terms and Conditions Information contained in this publication Cooper Investors Pty Limited ABN 26 100 409 890 AFSL 221794 is the trustee and investment manager of the Fund The opinions advice recommendations and other information contained in this publication whether express or implied are published or made by Cooper Investors Pty Limited and by its o cers and employees collectively Cooper Investors in good faith in relation to the facts known to it at the time of preparation Cooper Investors has prepared this publication without consideration of the investment objectives nancial situation or particular needs of any individual investor and you should not rely on the opinions advice recommendations and other information contained in this publication alone This publication contains general nancial product advice only To whom this information is provided This publication is only made available to persons who are wholesale clients within the meaning of section 761G of the Corporations Act 2001 This publication is supplied on the condition that it is not passed on to any person who is a retail client within the meaning of section 761G of the Corporations Act 2001 Disclaimer and limitation of liability To the maximum extent permitted by law Cooper Investors will not be liable in any way for any loss or damage su ered by you through use or reliance on this information Cooper Investors liability for negligence breach of contract or contravention of any law which cannot be lawfully excluded is limited at Cooper Investors option and to the maximum extent permitted by law to resupplying this information or any part of it to you or to paying for the resupply of this information or any part of it to you Copyright Copyright in this publication is owned by Cooper Investors You may use the information in this publication for your own personal use but you must not without Cooper Investors consent alter reproduce or distribute any part of this publication transmit it to any other person or incorporate the information into any other document