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INVESTOR LETTER 2022CI ENDOWMENT STRATEGIESINVESTING FOR THE SMOOTHER JOURNEY…
2This document has been prepared by Cooper Investors Pty Limited ACN 100 409 890 AFSL 221794, the trustee and investment manager of the Cooper Investors Endowment Fund and the Cooper Investors Global Endowment Fund (Funds). The opinions, advice, recommendations and other information contained in this document, whether express or implied, are made by Cooper Investors Pty Limited and by its ocers and employees (Cooper Investors) in good faith in relation to the facts known to it at the time of preparation. Cooper Investors has prepared this document 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 document alone. This document contains general nancial product advice only.This document does not constitute an oer of units in the Funds to investors. Oers of units in the Funds are made in the Information Memorandum (IM) for the Funds. You should obtain the IM and consider the important information about risks, costs and fees in the relevant IM before investing. Cooper Investors recommends investors seek independent, legal, nancial and taxation advice from appropriate professional advisers. This document is not intended for retail investors.
3DECEMBER 2022TO INVESTORS IN OUR ENDOWMENT STRATEGIES…We are pleased to provide the Investor Letter for the Cooper Investors Endowment Fund and the Cooper Investors Global Endowment Fund (together “the Funds” or the “Endowment Strategies”) for the nancial year ending 30 June 2022.In our inaugural letter we will discuss in detail the investment strategy and philosophy of our Endowment-style equities portfolios, which exist to protect and grow our client’s precious capital. We will also reect on the Funds’ performance over the last 12 months.The Funds aim to deliver what we refer to as ‘the Smoother Journey’. Put simply, our purpose is to generate steady, compounding returns over the long term, with an emphasis on downside protection and being less volatile than the market. These principles guide everything we do and remain unchanged since commencement of the strategy more than eight years ago.At Cooper Investors we try to keep things simple which reects a belief that we can only do a few things well. As such the Funds do just one thing – long-only specialist equities – no shorting, no leverage and no derivatives (other than FX hedging). We think this approach gives us the best chance of success over the long term.The capital we manage can often represent a lifetime of savings, or a signicant part of a xed corpus and therefore must be stewarded carefully and respectfully. We are only too aware that as hard as it is to make money, it is often even more dicult to keep it. We remind ourselves continually that our clients have a precious pool of capital that is irreplaceable, often with investment time horizons not measured in years but in decades and even generations. It is not an easy burden to bear, being the custodian of perpetual or long-term capital. We strongly believe the endowment strategies are aligned to the long term mission to protect and grow this wealth. We endeavour to help make this task easier by constructing a portfolio that is resilient to the pressures exerted by both time and the vicissitudes of markets. Thank you for entrusting your savings with us. We look forward to investing alongside you for the long term.Ryan Riedler Portfolio Manager – CI Endowment FundChris Dixon Portfolio Manager – Global Endowment Fund
4COOPER INVESTORS ENDOWMENT FUNDS PERFORMANCE
5Key objectives of the Funds are to protect and grow capital over the long term. To deliver this, we aim to provide greater downside protection, lower volatility than the market, participate in rising markets, and focus on growing income over the long term.Cooper Investors Endowment Fund PerformanceThe table below shows performance gures by nancial year, and the cumulative and annualised performance since inception.Financial Year Ending 30 June 2022 **Portfolio #Reference IndexSince Inception +9.9% +8.1%Since Inception^ +119.2% +91.95 Year* +9.9% +8.3%30 June 2022 +0.5% -5.1%30 June 2021 +23.0% +29.1%30 June 2020 -1.1% -6.6%30 June 2019 +12.3% +13.4%30 June 2018 +16.9% +14.6%30 June 2017 +7.7% +15.7%30 June 2016 +9.2% +2.2%30 June 2015 +13.4% +7.3%*Annualised ^Cumulative (3 March 2014) **Returns are gross of fees and expenses and adjusted for franking credits # S&P ASX 200 Accumulation Index (adjusted for franking credits)Past performance is not a reliable indicator for future performance.Source: CI data (gross returns adjusted for franking credits)Past performance is not a reliable indicator for future performance.Mar 2014$1000$1500$2000$2500Dec 2014 Sep 2015 Jun 2016 Mar 2017 Dec 2017 Sep 2018 Jun 2019Mar 2020 Dec 2020 Sep 2021 Jun 2022Chart 1: Value of $1,000 Invested – CI Endowment Fund
6Cooper Investors Global Endowment Strategy PerformanceThe table below shows performance gures by nancial year, and the cumulative and annualised performance since inception.Financial Year Ending 30 June 2022 **Portfolio #Reference IndexSince Inception* +10.6% +8.3%Since Inception^ +75.5% +56.2%5 Year* +8.8% +6.7%30 June 2022 -9.4% -13.6%30 June 2021 +27.8% +35.3%30 June 2020 +3.1% +0.8%30 June 2019 +14.3% +5.7%30 June 2018 +11.8% +11.2%*Annualised ^Since inception refers to the inception cumulative returns of the Strategy (5 December 2016). The inception of the Fund was 1 May 2017. **Returns are gross of fees and expenses. # MSCI AC World Index 100% Hedged to AUD Net DividendsPast performance is not a reliable indicator for future performance.Source: CI data (gross returns) Past performance is not a reliable indicator for future performance.Dec 2016$1000$1500$2000$2500Mar 2017Jun 2017Sep 2017Dec 2017Mar 2018Jun 2018Sep 2018Dec 2018Mar 2019Jun 2019Sep 2019Mar 2020Jun 2020Sep 2020Dec 2019Dec 2020Jun 2021Sep 2021Dec 2021Mar 2022Mar 2021Jun 2022Chart 2: Value of $1,000 Invested – CI Global Endowment Strategy
7Performance against the Endowment Objectives ‘Protect’ and ‘Grow’ Capital PoolsOur analysis shows that since inception the protect and grow capital pools have provided a good balance between downside protection, lowering volatility of returns and reasonable exposure to steadily rising markets. Table 1: ‘Protect’ and ‘Grow’ Capital Pool Metrics – Cooper Investors Endowment FundMetric ‘Grow’ ‘Protect’ Portfolio IndexReturn 10.6% 10.1% 9.9% 8.1%Volatility (annualised) 13.9% 11.1% 11.2% 13.9%Downside Capture 89% 55% 70% 100%Upside Capture 103% 79% 87% 100%Beta 0.95 0.66 0.76 1.00Correlation 0.95 0.82 0.95 1.00Source: CI dataPast performance is not a reliable indicator for future performance.Table 2: ‘Protect’ and ‘Grow’ Capital Pool Metrics – Cooper Investors Global Endowment StrategyMetric ‘Grow’ ‘Protect’ Portfolio IndexReturn 10.0% 12.8% 10.6% 8.3%Volatility (annualised) 15.0% 12.5% 12.3% 14.3%Downside Capture 95% 55% 71% 100%Upside Capture 104% 88% 89% 100%Beta 0.99 0.66 0.78 1.00Correlation 0.94 0.76 0.90 1.00Source: CI dataPast performance is not a reliable indicator for future performance.Both Endowment Strategies have outperformed their Reference Indexes since inception despite exhibiting a lower volatility prole. Collectively, the Funds have tended to deliver most of their outperformance in down markets. This is a result of portfolio construction that is focused on downside protection both from a bottom-up perspective (i.e. the Protect portion of the portfolio) and from a top-down perspective (i.e. diversication across a number of dimensions as illustrated in Appendix 1). The outcomes of this portfolio construction approach is evidenced in the Downside Capture metrics above.
8Risk and Portfolio AttributesThere are many ways to think about risk. In our pragmatic view risk is the permanent impairment of capital without the ability to ever recover from a drawdown. This aligns with an equities portfolio that has key objectives of performing much better in down markets and being less volatile than the market. There are plenty of ways that investments in securities can suer a permanent loss of capital, including: · paying too much for investments, · investing in companies or industries that have fundamental underlying problems, · investing in companies that have too much debt, and · investing in companies whose Board and management allocate capital poorly.In our view, based on the below analysis in Table 4, the Funds have generated acceptable returns for the risks taken.Table 3: Portfolio Risk AttributesCooper Investors Endowment FundCooper Investors Global Endowment StrategyPortfolio* Reference Index # Portfolio* Reference Index#Total Return +119% +92% +75% +56%Max Drawdown -20.7% -26.4% -18.5% -20.9%Best Month +6.7% +10.3% +8.9% +11.0%Worst Month -15.0% -20.4% -11.4% -13.6%Positive Months 62 65 48 48Negative Months 35 35 19 19Beta 0.76 1.00 0.78 1.00Annualised Volatility 11.2% 13.9% 12.3% 14.3%Source: CI data* Cumulative since inception, before fees and taxes #S&P/ASX200 Accumulation Index (adjusted for franking credits, ACWI AC World 100% Hedged to AUD Net Dividends Max drawndown for the Funds occurred in February 2020 to April 2021 (Covid-19)Past performance is not a reliable indicator for future performance.
9Volatility metrics Since inception both Endowment Strategies have consistently exhibited lower volatility than their Reference Indexes, as illustrated in the rolling volatility measures in Charts 3 & 4 below. Source: CI dataPast performance is not a reliable indicator for future performance.Source: CI dataPast performance is not a reliable indicator for future performance.Chart 4: Rolling 12-Month Volatility – Cooper Investors Global Endowment StrategyChart 3: Rolling 12-Month Volatility – Cooper Investors Endowment FundMar 2015Dec 2017Jun 2015Sep 2015Dec 2015Mar 2016Jun 2016Sep 2016Dec 20160%0%10%10%15%15%5%5%20%20%25%30%25%Mar 2017Jun 2017Sep 2017Dec 2017Mar 2018Mar 2018Jun 2018Jun 2018Sep 2018Sep 2018Dec 2018Dec 2018Mar 2019Mar 2019Jun 2019Jun 2019Sep 2019Sep 2019Mar 2020Mar 2020Jun 2020Jun 2020Sep 2020Sep 2020Dec 2019Dec 2019Dec 2020Dec 2020Jun 2021Jun 2021Sep 2021Sep 2021Dec 2021Dec 2021Mar 2022Mar 2022Mar 2021Mar 2021Jun 2022Jun 2022CI Endowment FundCI Global Endowment StrategyASX200 Accumulation Index (adjusted for franking credits)MSCI AC World 100% Hedged to AUD Net Dividends
10“The reason we exist is to create outsized returns for our investors big and small – mums, dads, charities, churches, foundations, pension funds and family oces.”– Peter Cooper
11The Smoother JourneyCOOPER INVESTORS – BUILT TO LAST‘The CI Way’ is a term we often use at Cooper Investors. It describes the combination of our Investment Philosophy and Principles, our Values and Culture and the Business Model, the way we do business. We consider ourselves ‘structured to be lucky’. The alignment of these three pillars are well positioned for long-term, patient wealth preservation and enhancement. Permanence of people and capital is very much at the heart of CI and our Funds.We are investors, not asset gatherers. Performance is what counts and it is the best way to serve our clients. All CI funds have outperformed their Reference Indexes since inception.CI has a 21-year track record of investing and is backed by a team with nearly 400 years of investing and market experience. Behind that sits a research platform of over 200 highly researched domestic and global stocks that have been specically curated for our Endowment strategies.Importantly, we are an independent and 100% employee owner/operator rm, where self-determination and risk management are viewed as critically important. CI is unashamedly values-rst, we invest in values to uncover value. We do this by investing in our culture, based upon gratitude and humility, intentionality, curiosity, present and in the moment and authenticity. We also do this by investment in our philosophy and standardised investment process (you can read in more detail in the Appendix) and our people and capability. Our specialist Endowment teams have been intimately involved with these investment strategies since inception. People who eat, sleep and breathe endowment-style investing. This is reected in our small and focussed investment teams which are accountable and empowered within our culture of ‘freedom within boundaries’.In our view these strong foundational pillars provide CI with the credibility to run endowment-style strategies and we remain excited about partnering with like-minded investors.
12BACKGROUND TO THE ENDOWMENT STRATEGIES – A SOLUTION TO A PROBLEMThe CI Endowment Fund was launched on 3 March 2014 and the CI Global Endowment Strategy commenced on 5 December 2016. These strategies were established for two main reasons. Firstly, they were designed in collaboration with an existing, long term client interested in developing an approach that supports the specic needs of Australians in decumulation phase. Secondly, the concept was championed by one of our company founders, Stephen Thompson, who was looking for an investment solution for the charitable entities that he worked with. As people age they are less likely to be able to earn back any investment portfolio losses through salary and superannuation contributions. As such we felt that structurally an investment portfolio should change over a person’s lifetime and it follows that as people enter the later stages of their lives, they would want to move towards a lower risk portfolio. Based on the demographics of the Australian population, most superannuation funds have an increasing portion of their total assets representing people in the pension phase and they are progressively moving to managing the pension assets separately from the accumulation assets. So the endowment-style investment approach felt like an ideal solution.Secondly, as we continued to invest alongside our charitable clients and learned more about their specic needs, it became evident that an active, yet conservative long-term investment approach could provide an answer to the investment needs of a range of institutions such as charities, foundations, churches and other tax exempt for-purpose entities. We have also noticed over recent years that this investment strategy is appealing to family oces with multi-generational investment missions that are looking for an element of conservative equities exposure to complement their strategy. In essence, we are nding that endowment-style investing is an option to help meet the needs of investors with a largely xed corpus, reliant on delivering an important societal mission to contribute to a more comfortable retirement, whilst having limited ability to recover from market drawdowns or invest additional capital at market lows. Since its inception in 2014, our investment philosophy for the two Endowment Funds remains unchanged. During the peak of COVID in Australia during 2020/2021 we spent time reviewing and assessing our strategy with a range of existing clients, sector leaders and nancial advisors, the results of which have been published and shared with the market in a White Paper we released in March 2022, “The Age of Endowment, A Guide to Endowment-Style Investing by Cooper Investors”. If you would like a copy of this paper, please contact our oce.
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14ENDOWMENT-STYLE INVESTING THROUGH THE LENS OF PUBLICLY LISTED EQUITIESGiven this is our inaugural Endowment Funds Annual Letter, we thought it might be useful for our investors to revisit some of the core principles behind our strategy. A clear understanding, a ‘like-mindedness’ if you will, between the Funds and investors is a critical factor in building a long-term partnership, in our view. It is also an important factor in doing the right things in the right way.By explaining why we launched the Funds, their objectives and how we intend to manage your precious capital, we hope investors will be absolutely clear on what we are trying to do and how we are going to do it and therefore how to properly assess performance.In our recent White Paper we noted a number of inection points we were seeing in global markets: · Central banks and governments normalising accommodative monetary and scal policy; · Interest rates starting to rise from historically low levels; · Ination spiking after being largely absent for the last decade; · Intensifying geopolitical tensions such as the Russia / Ukraine conict; and · High (and perhaps excessive in some cases) asset prices and top-of-cycle behaviour.This suggests there is the very real prospect of more frequent and severe market volatility going forward, at least in comparison to the period of incredibly low volatility since the Global Financial Crisis. We should also expect drawdowns to continue occuring regularly making downside protection one of the most powerful arguments for Endowment-stye investing. In simple terms, the less you fall the less you have to recover to get back to square one.This is important because compounding is a function of two things – downside protection and time. If you don’t get the downside protection part right, you won’t get the time for returns to compound.If there is a big setback early in the compounding period there is a lot of catching up to do because the corpus has shrunk. This pressure only becomes more acute when no longer in the wealth accumulation stage, e.g. a charity or foundation with a xed corpus, or an individual in the retirement phase.Unfortunately the behavioural aspects of volatility and drawdowns mean that investors become anxious and are prone to being their own worst enemy at the worst possible moment. Accepting that volatility and drawdowns are just part of investing is much easier to endure if those periods can be made less painful. The Smoother Journey can help. Having less downside participation and lower volatility gives investors the condence to remain steadfast in stormy waters.Investors should not be deterred from equities by the prospect of volatility, which should merely be viewed as the price of admission to the superior long term returns they can oer. Data from the Credit Suisse Global Returns
15The Smoother JourneyHandbook shows that since 1900 Australian equities returns are the highest in the developed world having compounded at nearly 7% pa in real terms, more than triple the rate of bonds.Indeed, volatility is a reason for investors to maintain a long-term perspective rather than a reason for pessimism or avoiding markets. Time horizon is a powerful tool for managing volatility and equities markets have typically rewarded those who have stayed invested over longer periods of time.Extending the investment holding period over years and decades has historically improved the risk-return prole of an investor’s portfolio. While in the very short-term stock returns are highly unpredictable, over longer holding periods there is greater likelihood that stocks have positive returns. The chart below shows that historically stocks have delivered positive returns on a daily basis 53% of the time – so little better than tossing a coin. Simply expanding the holding period improves the chance of a positive return – at one year it is 75%, at ve years it’s almost 90% and there are no negative returns over a 20-year period.Chart 5: The Historical Frequency of Positive S&P 500 Returns**Source: Fisher Investments. Global Financial Data, Inc. as at 31 December 2017.**Plots the percent of positive S&P 500 rolling periods (from 0-20 years) showing longer timeframes signicantly increase the frequency of positive stock market returns. Calculated using monthly rolling holding periods (from 0-20 years) from 31 January 1926 to 31 December 2017. This underscores why market timing usually fails since gains occur more often than losses. The volatile nature of daily returns are smoothed over during monthly and annual periods, therefore over-reacting to short-term volatility is likely to work against investors.At CI we fundamentally believe those with a genuine long term time horizon should have an equities component in their portfolio to provide growth in capital and income and preserve purchasing power. History suggests we shouldn’t let fear or panic conspire to rob us of the attractive long-term returns that equities can oer.100% ~16 years90% ~6 years80% ~2 years70% ~4 mo.0 7 141 8 152 9 163 10 174 11 185 12 196 13 20100%90%80%70%60%50%
16PORTFOLIO OBJECTIVES One of the key dierentiating features of the Funds is the shape of the return prole we aim to deliver, which we refer to as the Smoother Journey (illustrated below). This concept is important to understand our Endowment Strategies and underpins their key objectives.Chart 6: The Smoother JourneyEndowment Style Portfolio Traditional Equity PortfolioOur proposition is that a quality equities portfolio with a focus on downside protection and lower volatility will be valuable to those looking to Protect and Grow their wealth. Particularly for those with a long-term mindset thinking years and decades ahead, not just about the next month’s or quarter’s returns.Ultimately the Funds are targeting a consistent and stable return prole. We want our investors, as well as ourselves, to sleep well at night and feel less nancial and emotional stress on the investment journey.
17The Smoother JourneySo while returns will always be important, the Funds have four other explicit portfolio objectives:These objectives are our North Star and guide how we think about portfolio construction, stock selection, our risk framework, and Responsible Investing. Ultimately, if the Funds achieve these objectives we believe we can deliver the Smoother Journey – steady, compounding returns with less downside participation and lower volatility than the market. Perform better in down marketsBe less volatile than the marketParticipate in rising marketsGrow distributions over time
18PORTFOLIO STRATEGY - THE RULES OF ENGAGEMENTThe Funds are publicly listed equities portfolios which we expect would normally form part of an overall investment portfolio.The Funds are long-only, diversied portfolios of 30-50 stocks that are actively managed. Individual stock holdings will typically not be greater than 6% of the portfolio, with a maximum individual stock exposure of 10%.The guidelines for the portfolios provide some scope to use asset allocation to protect the portfolio via the ability to hold cash up to 20% of the portfolio. In addition, the CI Endowment Fund (domestic version) can also hold up to 20% of the portfolio in international securities.The inclusion of international stocks provides the CI Endowment Fund with exposure to businesses and industries that are not represented in the Australian market, as well as adding foreign currency exposure, both of which provide some diversication benets for the portfolio. We note that New Zealand stocks are not included in the 20% limit for international equities.We do not view cash as an attractive investment in the long term and high cash levels run the risk of trying to time the market. To-date the highest the cash weight has been for our portfolios was around 12% leading into the Covid-19 pandemic. The intention is for the Funds to have relatively low turnover where a substantial research eort is complemented by the aim of making a small number of good decisions. Nonetheless, we don’t want too little turnover or we will end up with yesterday’s portfolio.In addition, the CI Endowment Fund assumes that all unit holders have a zero tax rate for both income and capital gains. We also assume that investors will be able to claim Australian franking credits. As such this Fund reports and is measured on an after tax basis with our Reference Index being the S&P/ASX 200 Accumulation index (adjusted for franking credits).Portfolio Construction – Diversication and CorrelationThe main way we aim to achieve our four objectives is by constructing a portfolio that is well diversied by a number of measures and should have less downside in market drawdowns, although it is still an equities portfolio and therefore cannot be expected to avoid losses altogether in down markets.In practice, we are aiming to build a highly diversied portfolio with stocks that are, as far as possible, uncorrelated to each other and the Reference Index. This helps to mitigate the risk of hidden fault lines running through our portfolio which can be exposed during bouts of market volatility or drawdowns.Diversication goes beyond owning stocks in a few dierent countries or sectors, indeed there are many layers to diversication. This includes Size, Subset of Value, Ownership Structure, quality of the Register and even the Business Model of the company.
19The Smoother JourneyThe main way of protecting the portfolio is to avoid stocks that are: · over-valued; · over-geared; · facing industry head winds; · poorly managed; · too keen on acquisitions; · too highly correlated to other stocks in the portfolio · known to have demonstrably poor track records; or · paying unsustainable dividends.Stocks that exhibit some of the above features may look cheap and stocks that do not may appear expensive, so we are aiming to balance this trade-o between quality and price.When something does go wrong, as it inevitably does, diversication is an important tool for ensuring it doesn’t blow up your portfolio. It’s the opportunity to have no regrets and greater peace of mind.Stock Selection – VoF + ‘the Golden Rules’The Funds seek companies with resilient business models, good nancial quality (i.e. clean accounts and decent returns), strong balance sheets, and authentic and transparent management with a long track record of doing what they say they will.The rst point to be made is that we are leveraging the research eort of the whole CI platform and investment philosophy to analyse promising ideas within the Funds’ specically curated watchlist. To this we also overlay our Golden Rules (or ‘guidelines’ as the lawyers would prefer us to term it) reecting lessons learnt from 30-plus years of investing experience. The guidelines include both qualitative and quantitative factors to help us decide which stocks should be included in the portfolio. Ultimately these guidelines are intended to help us avoid companies that could suer from problems such as poor capital allocation, paying unsustainably high dividends, or lack a focused business strategy.Our objectives dictate that certain aspects or characteristics are over-emphasised in selecting stocks, such as a longer observable track record, ‘quality’ (e.g. management, clean accounts), balance sheet strength, dividends and Responsible Investing credentials.A bottom up / top down approach is essential to the stock selection process. CI has always considered the importance of fundamental business drivers equally to top-down factors such as environmental, social, political, regulatory and industry cycles. The 1,500+ annual company visits we perform are critical in factoring both bottom-up and top-down information into investment propositions.When we are considering whether to include a stock in the portfolio (having passed through the process discussed above) we would consider issues such as: · impact on the diversication of the portfolio, · correlation to the portfolio and broader stock market, · income or future growth of income from the portfolio, · the impact on the overall quality of the portfolio, and · margin of safety inherent in the portfolio (downside protection). In terms of future outcomes we examine whether the potential stock would lower the volatility of the portfolio and increase the possibility of the portfolio outperforming in a signicant drawdown.
20Risk Framework – Protect and Grow Capital PoolsThe portfolio allocates across two primary capital pools: ‘protect’ and ‘grow’. The appeal of this risk framework is its simplicity and it has proven to be an eective categorisation tool.We expect stocks in the protect portion of the portfolio do the heavy lifting in terms downside protection, reduced volatility and uncorrelated sources of return. Examples are royalty companies (Franco Nevada, Royalty Pharma), listed infrastructure (Transurban, American Water), specialist property (Waypoint REIT, Supermarket Income REIT), volatility hedges (ASX, CME Group), and niche Japanese businesses (Unicharm). The Protect portion targets idiosyncratic risk and proportionately fewer of its investments would be expected to be owned in other CI portfolios.Conversely, we expect stocks in the grow portion of the portfolios to drive returns in rising markets. There will be more growth businesses with the expectation that returns and volatility may be higher. We would also expect upside and downside capture to be skewed higher. The Grow portion will invest more in the Growth (CSL, Synopsys), Stalwarts (Macquarie, Rentokil) and Cyclicals (Mineral Resources, Ferguson) Subsets of Value and typically have higher co-ownership with other CI equities funds.The relationships of the stocks categorised in either the protect and grow capital pool do not always hold. Categorisation can change as the narrative behind the stocks and the market evolves – this is where careful and experienced judgment is required. These assessments are therefore very nuanced.For example, a stock classied in the Protect capital pool may no longer be defensive if it becomes too expensive (and vice versa for a stock in the Grow category). Alternatively, Bond-like Equities such as a utility or property trust can outperform in a slowing economy; however, in a down market driven by rising bond yields (higher discount rates) they can underperform along with other long duration assets.Responsible Investing – ‘Doing Well By Doing Good’We believe that 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 and sustainable value creation for shareholders and clearly stated operational and strategic goals.Sustainability, whether that be of the long term cash ows, industry trends or treatment of stakeholders has always been a signicant part of the CI Way of analysing industries and companies. In our view this is even more important when it comes to our Endowment portfolios – long term investing needs to be married to businesses and industries that are genuinely sustainable.The Funds apply negative screenings or exclusions to those companies whose primary business is the production of tobacco, controversial weapons or gambling. But this is really just table stakes today.Our investment thinking has been to look beyond simplistic negative screens and be more purposeful by investing with companies that will be sustainable over the long-term and engage constructively with investors on these important matters. In our view, the idea of delivering a societal good is not mutually exclusive from being an attractive investment opportunity. We want to nd that sweet spot.We seek to invest in companies we think can ‘do well by doing good’, and avoid businesses that have poor or deteriorating Responsible Investing credentials. In our view, this approach aligns with our values and those of our clients and is also an important part of delivering sustainable returns for years to come. A copy of our company-wide Responsible Investing Principles are included in Appendix 2.
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22YOUR PORTFOLIOSDiversication of HoldingsThe portfolios are highly diversied. The CI Endowment Fund owns 34 securities across 16 industry groups, including six global stocks (~14%) and four New Zealand stocks (~10%), and the cash weighting is around 6%. The CI Global Endowment Fund owns 35 securities across 15 industry groups, with cash of approximately 10%.The Reference Indexes we use to assess the performance of the Funds are the ASX200 Accumulation Index (adjusted for franking credits) for the domestic strategy, and the MSCI AC World Index 100% Hedged to AUD Net Dividends for the global strategy. Although it is an important hurdle for the Funds’ performance, the Reference Index does not signicantly inuence the way we manage the Funds and we don’t spend a lot of time thinking about how the Funds are positioned relative to the Reference Index.We also place more emphasis on longer-term returns such as rolling ve-year periods and since inception performance. Given the objectives of our Endowment Strategies we don’t place much weight on monthly or quarterly returns given the inherent volatility or ‘noise’ in such short time periods. In addition, the risk and return metrics discussed in the sections above are also considered important performance measures.The top 10 holdings in the Funds as of 30th June 2022, in alphabetical order, are as follows:CI Endowment Fund CI Global Endowment FundBHP Aon PlcCBA CME GroupChorus Danaher CorpComputershare FerrovialCSL Franco NevadaFranco Nevada RELX PlcMacquarie RentokilMainfreight Royalty PharmaNAB Supermarket Income REITTransurban UnicharmThe key portfolio structural characteristics we are looking for are individual stock diversication and to avoid the portfolio being bueted strongly by correlated macro or factor crosswinds.As far as individual stocks are concerned, we are seeking to build a portfolio of quality stocks that have idiosyncratic characteristics. In simpler English, this means we want each stock to have distinctive, individually distinguishing attributes.
23The Smoother JourneyCorrelations are especially important in down markets. Our research shows that under stress correlations increase, which could be taken to mean that on bad days all stocks fall by a similar amount. In drawdowns correlations are usually higher amongst the largest stocks than mid and smaller stocks, so the inclusion of non-leader stocks helps to provide downside protection and lower the portfolio’s volatility.As discussed above we are also looking to build a portfolio where the individual stocks, as far as possible, do not have high correlations with other stocks in the portfolio or the Reference Index. Looking at the Australian market as an example, the four major Banks have very high correlations of returns with each other of approximately 80-90%. Put simply, they tend to go up and down together. Having a large weighting to these four stocks would reduce the diversication of the portfolio, and potentially increase both volatility and downside exposure. It is a similar story with Resources as it is with Banks in terms of correlations, which further adds to our portfolios positioning for these two sectors.The CI Endowment Fund owns CBA and NAB but has no exposure to the other Banks (note: we own Macquarie Group but classify it as a Diversied Financial rather than as a Bank). In Resources, the portfolio holds BHP, Franco Nevada, Mineral Resources and Woodside Energy. Together these are not immaterial portfolio holdings yet nonetheless the Fund is still well underweight Banks and Resources. In our view this is completely consistent with the Fund objectives, even if at times this results in short-term periods of underperformance.So even if we construct a very well diversied portfolio the reality is that the market does categorise stocks into varying groups and sometimes the correlations between stocks in these groupings are very tight. The simplest case in point is stocks that are aected by expectations for interest rates almost regardless of what business they are in . For example, property trusts (e.g. Arena REIT, Supermarket Income REIT) or toll road infrastructure (e.g. Transurban, Ferrovial).Market ContextThe most signicant event for global stock markets in the 2022 nancial year (FY22) was the substantial rise in ination across many economies around the world, including the US and Europe and many developing countries. Ination spiked initially from both the supply/demand shocks created by covid-19 and the government and central bank policy response and was particularly evident in the freight and logistics sector. Inationary forces accelerated post Russia’s invasion of Ukraine as both countries are signicant producers and exporters of energy, soft and hard commodities and other raw materials.Stocks directly exposed to this ination therefore benetted, while for most other companies/stocks, ination is a cost.The ination spike prompted a shift in Central Bank policy from “easing” to “tightening”, setting an expectation that interest rates will rise. As an example, the yield on 10-year Australian government bonds increased from around 1.6% 12 months ago to close to 4% today. The higher cost of capital or rate of return expectation had a large impact on the valuation of “long duration” companies, or companies where prots are expected well into the future. Long duration bonds also fell in value.With this backdrop it is an interesting time to reect on returns across various asset classes. Both stocks and bonds performed poorly over the last 12 months pulling back 10 year returns to single digit levels, while small cap stocks have produced returns at only a small premium to cash and bonds. Short rates (cash) have outperformed long rates over 1,3, 5 and 10 year periods.Only physical commodities oered respite, a function of the inationary forces driving their prices higher. It is also not surprising that in more volatile times, gold and the USD have been robust.
24In summary, over the last 12 months there have been very few places to hide which is another salient reminder of the benet of having a highly diversied investment portfolio.Table 4: Asset Returns% Return (p.a.)Total Return 1 YR 3 YR 5 YRASX200 -6.5% +3.3% +6.8%ASX300 Industrials -9.6% +2.2% +5.0%ASXS300 Resources +3.0% +7.7% +15.0%ASX Small Ordinaries -19.5% +0.4% +5.1%MSCI AC World 100% Hedged to AUD Net Dividends -13.6% +5.6% +6.7%CI Endowment Fund +0.5% +6.9% +9.9%CI Global Endowment Fund -9.4% +6.1% +8.8%Australian 10 yr Government bonds -14.4% -4.1% +0.5%CPI* +5.1% +2.8% +2.3%Commodities basket (RBA, AUD) +26.1% +16.3% +16.8%Rural commodities basket (RBA, AUD) +26.6% +11.6% +10.0%Gold (AUD) +11.2% +9.3% +9.0%US Dollar (vs AUD) +8.4% +0.7% +2.0%Cash (12-month deposit reinvested) +0.25% +0.95% +1.46%* to March 2022 ^ Since inceptionSource: Factset monthly returns, RBA, NAB Asset pricingPast performance is not a reliable indicator for future performance.
25The Smoother JourneyRESPONSIBLE INVESTING CASE STUDIES“BUSINESSES FOR PURPOSE”Lifestyle Communities is a foundation company of the CI Endowment Fund having been owned since the inception of the Portfolio and it has been one of the top performers over that time. Our history with Lifestyle Communities dates all the way back to 2012 when CI rst invested in the company as part of a recaptialisation event. It is one of our heroes. CASE STUDY 1 · Total assets for 2022 - $1.06B · Total equity for 2022 - $453M · Dividend (cents per share) for 2022 – 10.5 · 120 Employees · 26 community sites · 3,193 aordable homes under management
26Why we like the companyLifestyle Communities epitomises the philosophy of ‘doing well by doing good’. It is an exceptional company that has both a robust economic engine generating excellent long-term returns for investors, as well as delivering an undeniable societal good via creating aordable housing for people over 50. The company was kind enough to put their story down in words for us. We hope you enjoy reading it as much as we did. It’s a reminder there are great companies out there doing great things.From the beginning, Lifestyle Communities has been a business for purpose. At our heart is a value-based culture, developed to inspire our people to innovate and create memorable customer experiences. Lifestyle Communities was born with a purpose to be socially responsible in creating aordable, home owner-centric communities for Australians over 50. Our mission is to enable working, semi-retired and retired people over 50 to live an independent life at an aordable price. Our product and operating model have been deliberately designed to address inequality in housing options for Australia’s ageing population. For those members of society with limited superannuation and savings, creating a high quality, yet aordable housing option allows our homeowners to free up some of the equity in their home and help fund a comfortable standard of living in retirement. We will never deviate from this mission. Lifestyle Communities prides itself on our customer centric culture created from the ground up and nurtured through 18 years of organic growth. We have two adages that form the backbone of everything we do. They are:1) You never get a second chance at a rst impression; and 2) A customer may forget what you told them, but they will never forget how you made them feel. Our customer centric culture is evident from the very rst meeting with prospective customers. Our sales team are recruited from service based industries, not real estate, and we do not pay sales commissions. This ensures that the sales process is thoughtful, considered, and not pressured. Our customer information packs are transparent and this is reinforced through a comprehensive set of Q&A’s. We encourage all of our customers to engage with their families to talk through their options; we won’t take deposits at the rst meeting. To ensure our homeowners fully understand what they are committing to, we sit down with every customer to explain the agreements in detail and answer any questions before signing. We do not, however, exist in isolation. The Lifestyle Communities Foundation was set up in 2015. The Foundation supports fundraising activities across all communities, focused on raising funds for cancer based charities. Lifestyle Communities contributes $50 for each occupied home in our communities each year and matches dollar for dollar funds raised by our homeowners for cancer based charities. We are also always working towards achieving net zero emissions by 2035 as we develop new communities and embrace new technology, increase solar installations, and improve building design techniques.We feel it strikes the right balance between committing to improving our environmental impact and managing the associated costs of the transition. It allows us to take advantage of new technology being developed in this area over the next 10 – 15 years which will assist to further mitigate the costs of transition to a zero-carbon economy. We believe it is achievable and Lifestyle is already progressed on this path.At Lifestyle Communities, we are champions for facilitating a bigger, more enhanced life for our homeowners. We create communities because our homeowners haven’t given up on returning to a time when they built strong communities around where they live. It goes beyond delivering aordable downsizer homes – it’s about creating an environment where homeowners feel an overwhelming sense of belonging to their community.
27The Smoother JourneyDoing Well by Doing Good focusBelow is a summary of some of Lifestyle Communities’ key ESG impact: · Carbon target introduced – Net Zero operational carbon emissions by no later than 2035 · 3.5% reduction in emissions intensity since baseline in 2019 · Construction commenced on our pilot 450kw solar + battery micro grid at Lifestyle Meridian – Initial electricity prices set at a 30% discount to comparable communities with a goal to get to 50% once construction is completed · Installed 643KWs of solar panels across Deanside and St Leonards · Delivered 401 new aordable homes welcoming 538 new homeowners to Lifestyle Communities · Donated $138,000 to cancer-based charities and continued our pledge to donate $50 per annum for all homes under management at the start of each year · Commissioned independent research focused on the costs of living in retirement with a specic focus on people living solely on the Aged Pension · Maintained 50% Board gender diversity targets · Achieved an employee engagement score of 8.7 out of 10 · Second Modern Slavery Statement released · Independent review of workplace health and safety framework completed · Independent Cyber review, penetration testing, and business impact assessment completed · Independent review of our data management practices, and privacy policy completed
28Equity LifeStyle Properties was added to the CI Global Endowment Fund in June 2020. Founded in 1969, ELS is a real estate investment trust traded on the New York Stock Exchange. The company owns and operates the highest quality portfolio of manufactured home communities, recreational vehicle resorts, campgrounds and marinas in North America. Their size, national scope and status as a publicly traded company aords them benets unavailable to smaller, private owners. They have access to capital for growth and to upgrade existing communities. · Enterprise value: $18.1B · Equity Market Value: $14.9B · Employees: 4,100+ · Total Return Since IPO: 7,423% · Ten Year Total Return: 457% · 446 properties in 35 states and one Canadian Province · 170,000+ sitesWhy we like the company · Portfolio Construction: high-quality properties located in retirement and vacation destinations. Over 110 properties with lake, river and ocean frontage. Over 120 properties within 10 miles of coastal US and over 70% of manufactured home properties are age-restricted or have a resident base with an average age 55+ · Business Model: own the land and lease developed sites to owners of manufactured homes, vacation cottages, RVs and boats. Consistent results throughout the real estate cycle. Strong customer demand with minimal new supply. Innovative strategy for external growth through new lines of business · Operating Platform: integrated operating platform focused on providing superior customer service to all residents and value creation for shareholders. Focus on generating stable, predictable revenue. Technology driven. Strong digital marketing strategy · Balance Sheet: long term strategy focused on access to a variety of capital sources. Well laddered maturities (11 years as average to maturity) and weighted average interest rate of 3.5%. Strong balance sheet with capacity to fund growth with debt and/or equity · Acquisitions/Development: robust acquisitions and development pipeline. Focus on accretive and/or value add transactions. History of entering new asset classes that t the portfolio strategy. · Management Team: experienced executive management team with a track record of delivering results CASE STUDY 2
29The Smoother JourneyDoing Well by Doing Good focus:Below is a summary of some of Equity Lifestyle Properties key ESG impact: · Annual Company Environmental Performance Report · 85+ LED retrot projects · 13,600+ smart metres · Loggerhead Marinelife Centre Partnership · 125+ energy star certied homes · 100,000+ KWH produced from on-site solar, avoiding 17 metric tons of Co2E (2020) · Commitment to planting 100,000 trees in collaboration with American Forests · Women represent more than 50% of workforce and more than 58% of management positions · Guest and resident base spans generations and workforce have an average team member age of 49 · COVID-19 vaccinations facilitated at 54 communities as of January 2022 · Team members volunteered for 4,148 community impact hours in 2021 · Sustainability embedded in all aspects of company, with a dedicated Sustainability team incorporating ESG principles in all business operations directly with department heads · ESG taskforce is comprised of a diverse cross-section of employees and reports directly to company COOSPOTLIGHTLake George Escape RV Resort Wetlands Restoration ProjectAt Lake George Escape RV Resort, a 576-site campground in upstate New York, ELS completed a $1 million wetland restoration project in September 2020.The wetland remediation project restored and enhanced the wetlands throughout the approximately 175-acre campground, restoring part of a large stream and wetland complex in and around the shores of the beautiful Schroon River. The restoration project included an overhaul of natural habitats, the replacement of bridges, a signicant number of plantings around the shoreline and a back-to-nature experience around the Schroon River for guests of Lake George Escape and visitors to the area.
30REFLECTIONS ON PERFORMANCE FOR THE YEAR“I’d rather have the best long-term record than the best one-year record. This is a long term game.” – the late David Swenseen, Yale Investments Oce
31The Smoother JourneyMarket PerformanceOver the last 6 months investors have had to endure extraordinary volatility. Ongoing Covid-19 challenges, supply chain disruptions, war, rapidly rising energy prices and soaring ination are just some of the challenges that have been roiling global markets. The ASX200 Accumulation Index fell 11.9% for the June quarter and ended the 12 months to 30 June 2022 down 6.5%. The June quarter saw the Australian share market fall in sympathy with global sharemarkets as concern moved from high ination and increasing interest rates to the increasing likelihood that recession will follow the central bank tightening that is now underway.Peak to trough a number of stock indexes such as the S&P 500 are down well over 25% in 2022 which places this period in the top 10 biggest drawdowns since World War 2, while the Nasdaq has fallen more than 35% from its highs (with more than half the stocks on the Nasdaq falling by signicantly more).The best performing sectors over the year tended to be relatively defensive or late cycle, most notably Utilities and Energy. Laggards were interest rate sensitive or Covid beneciaries, with Technology, Consumer Discretionary, Communication Services and REITs faring the worst. Portfolio PerformanceThe Endowment Strategies performed relatively well over the last 12 months, importantly outperforming in a down year which gives us some condence that the portfolio construction is working as intended. The Cooper Investors Endowment Fund returned +0.5% compared to the Reference Index falling -5.1%, and the Cooper Investors Global Endowment Strategy returned -9.4% compared to the Reference Index falling -13.6%.While the Funds are not immune to the turbulence roiling markets our highly diversied portfolios, designed to minimise correlation risk and generate returns from a wide range of sources, it was pleasing to have provided downside protection for our clients in FY22.Stocks that performed well over the year included:CI Endowment Fund CI Global Endowment FundArena REIT AonComputershare CostcoCostco IntuitEBOS Royalty PharmaRamsay Healthcare SynopsysPoorer performers over the last 12 months included:CI Endowment Fund CI Global Endowment FundARB Corp Admiral GroupCosmos Pharma Cosmos PharmaRyman Healthcare HalmaSeek MilbonYum China Yum ChinaThe international stocks owned in the CI Endowment Fund had a mixed year of performance. Although this was cushioned somewhat by the A$ falling 8% against the $US, highlighting the diversication benets of having some FX exposure in the portfolio.
32Chart 7: Protect and Grow Returns – CI Endowment FundChart 8: Protect and Grow Returns – CI Global Endowment FundSource: CI dataPast performance is not a reliable indicator for future performance.Source: CI dataPast performance is not a reliable indicator for future performance.Mar 2014Dec 2016Mar 2015Jun 2014Jun 2015Sep 2014Sep 2015Dec 2014Dec 2015Mar 2016Jun 2016Sep 2016Dec 20160%0%40%40%60%60%20%20%80%80%100%100%120%120%140%140%160%160%Mar 2017Mar 2017Jun 2017Jun 2017Sep 2017Sep 2017Dec 2017Dec 2017Mar 2018Mar 2018Jun 2018Jun 2018Sep 2018Sep 2018Dec 2018Dec 2018Mar 2019Mar 2019Jun 2019Jun 2019Sep 2019Sep 2019Mar 2020Mar 2020Jun 2020Jun 2020Sep 2020Sep 2020Dec 2019Dec 2019Dec 2020Dec 2020Jun 2021Jun 2021Sep 2021Sep 2021Dec 2021Dec 2021Mar 2022Mar 2022Mar 2021Mar 2021Jun 2022Jun 2022GrowGrowProtectProtectASX200 Accumulation Index (adjusted for franking credits)ACWI AC World 100% Hedged to AUD Net DividendsTaking a step back, international equities have been very good contributors from a risk and return perspective for the CI Endowment Fund, and serve a valuable role in improving the diversication of the portfolio. For example, stocks such as Danaher and Costco have been amongst the best performers since the Fund started.
33The Smoother JourneyThe downside capture for the Funds as a whole since inception has been around 70%. However, importantly, the protect component has a much lower downside capture in the mid-to-high 50% range, reecting the less-correlated and lower-beta characteristics of these exposures. This means the protect capital pool is much more defensive than the grow component and delivers a lot of outperformance in down markets. In the large June drawdown the protect component provided strong downside protection, which helped the overall portfolios outperform. There were a number of stocks within the Protect exposure that delivered positive absolute returns for the month, highlighting the importance of diversication and portfolio construction. Examples of these were Chorus, Transurban, Royalty Pharma and Unicharm. In comparison, the grow capital pool has captured a good amount of the upside in rising markets with upside capture of over 100%. This reects a higher correlation to markets and a much higher beta component. However, the beta component typically remains high in down markets resulting in much higher downside capture. Examples of these are Lifestyle Communities, CSL, Synopsys and Ferguson.Overall we consider the the protect and grow capital pool allocations have been eective in helping the Fund to achieve its objectives and largely behaved as desired.Broader Thoughts on Performance It seems to be the lot of your manager to never really be content with performance. When we look back over FY22 and, for that matter, the last 8 years of running our Endowment strategies, the best results have come from the disciplined adherence to our VoF investment process and Golden Rules (or guidelines). Periods of poorer performance are almost always due to failures in these attitudes and behaviours. We have to be humble enough to accept that mistakes will happen, and that unfortunately we won’t get everything right. Focus is so important – the pain of discipline is always preferable to the pain of regret. Outperforming in rising markets is pleasing but we must always ask ourselves when this occurs that we haven’t unwittingly structured the portfolio too aggressively or failed to identied fault lines creeping in. This could come from having too many expensive stocks after a good run, individual stocks weights becoming too large and therefore riskier, or stocks that have fallen outside our aforementioned criteria. This could compromise the portfolio’s downside protection and ability to exhibit lower volatility. Not keeping up in every rising market is not to be unexpected given our objectives (although we endeavour to keep up as much as possible!) and we have always said that this portfolio will likely nd it dicult to outperform in really bullish markets. For example, in the nancial year ending 30 June 2021 the Reference Indexes for the Endowment Strategies rose 29% (domestic) and 35% (international), whereas the Funds ‘only’ returned 23% and 28% respectively. For a conservative equities portfolio a total return in the 20%+ range is a respectable result, so we tried not to be too disconsolate given our clients corpus’ had just increased substantially. While a period of underperformance is never welcome it is nonetheless inevitable – it is bound to happen from time-to-time in investing. If we have adhered to our principles then if the portfolios lag a bit in an up market we should be able to make up for this in the next large drawdown.We are mindful of not purporting that we can outperform in all markets. It is very dicult to construct an equities portfolio that is both resilient and durable in a drawdown but can also fully participate in the subsequent recovery. The main aim is to do much better in down markets, and provide reasonable returns in other markets, in accordance with our objectives.
34LOOKING AHEADMarkets have been unquestionably volatile year-to-date which can be unsettling after a long period of stable returns, particularly when markets correct as forcibly as they have recently. While macro challenges appear to be everywhere we look, history shows us that the best option for long-term investors is to stay the course.Many of our client’s prize safety of capital above all else. In our view, the right prescription is owning quality companies, backed by excellent track records, for long periods of time. Real businesses with proprietorial management teams oer the best prospect for riding out capricious markets – companies designed to endure rather than just grow.We recognise that the tools with which you protect wealth are dierent from the tools used to create it. We have tried to reect this thinking in the strategy and objectives of the Fund, and the means by which we try to achieve those objectives.Our mission in life as investors is to diligently apply the CI Way to identify the best sources of risk-adjusted value latency, with the aim of uncovering compelling companies oering uncorrelated sources of risk and return.The single overarching organising principle for our Endowment Strategies is to provide downside protection and lower relative volatility in order to generate steady long-term compounding returns. If we can do this we believe we will be well on the way to providing the Smoother Journey.
35The Smoother JourneyPORTFOLIO DIVERSIFICATIONOne way to demonstrate the diversication of the Fund is a pie chart divided into sectors (see below).Chart 9: CI Endowment Fund by SectorChart 10: CI Global Endowment Fund by SectorAPPENDIX 1Materials 13.4%Transportation 8.9%Healthcare Equip & Services 8.8%Real Estate 8.7%Banks 8.0%Pharma Biotech & Life Sciences 7.3%Diversied Financials 7.1%Food & Staples Retailing 6.7%Software & Services 5.7%Telecommunication Services 5.5%Retailing 4.0%Energy 3.2%Insurance 2.3%Media & Entertainment 1.7%Household & Personal Products 1.5%Automobiles & Components 1.4%Cash 5.8%Diversied Financials 15%Capital Goods 12.6%Real Estate 9.6%Pharma Biotech & Life Sciences 7.7%Commercial & Professional Services 6.4%Insurance 6.2%Household & Personal Products 6.1%Materials 5.6%Healthcare Equip & Services 4.3%Tech Hardware & Equip 3.8%Software & Services 3.1%Semiconductors 3.0%Media & Entertainment 2.5%Food & Staples Retailing 2.1%Utilities 1.5%Cash 10.4%Source: CI dataSource: CI data
36These characteristics are wide ranging and include things such as location of operations, type of business, regulation, market structure, size, balance sheet structure and so on.There are many other ways to demonstrate aspects of diversication such as company size, where revenues are sourced, ranges of dividend yields and other easily measurable characteristics. However, it is dicult to demonstrate more subjective characteristics such as track records, quality of management, risk characteristics, business models. These need to be dealt with on a stock by stock basis.We consider the Funds to be far more diversied than their Reference Indexes. For example, the Australian market is highly concentrated with almost half of the ASX200 is represented by a few Banks and a handful of large commodity/resource companies, which are all highly correlated to each other and therefore anathema to our mantra of diversication.Compared to the Australian stock market the CI Endowment Fund has much less exposure to the 20 largest Australian companies, more exposure to mid-cap companies, more exposure to international companies and industries than are not represented on the ASX. The portfolio also has relatively low exposure to the Banks and Resources sector. We also aim to have a good representation of non-leader stocks in our portfolios as correlations amongst the large cap stocks, particularly in the Australian market, tend to be higher than correlations amongst mid-and-small cap stocks. Lower correlations between stocks means greater diversication which should lead to a less volatile portfolio. Accordingly, the portfolios own companies with a wide range of market capitalisations. Chart 11: Diversication by Subset of Value, Country and Size – CI Endowment FundStalwarts 41%Growth 22%Cyclicals 16%BLEs 13%Asset Plays 3%Cash 6%Australia 70%USA 10%NZ 10%Canada 3%Japan 2%Cash 6%Top 20 41%21–50 16%51–100 3%101–300 12%A/NZ ex Index 7%International 14%Cash 6%Subset of Value Country of Listing SizeSource: CI data
37The Smoother JourneyChart 12: Diversication by Subset of Value, Country and Size – CI Global Endowment StrategyCorrelations are especially important in down markets. Our research shows that under stress correlations increase, which could be taken to mean that on bad days all stocks fall by a similar amount. In drawdowns correlations are usually higher amongst the largest stocks than mid and smaller stocks, so the inclusion of non-leader stocks helps to provide downside protection and lower the portfolio’s volatility.As discussed above we are also looking to build a portfolio where the individual stocks, as far as possible, do not have high correlations with other stocks in the portfolio or the Reference Index. Looking at the Australian market as an example, the four major Banks have very high correlations of returns with each other of approximately 80-90%. Put simply, they tend to go up and down together. Having a large weighting to these four stocks would reduce the diversication of the portfolio, and potentially increase both volatility and downside exposure. It is a similar story with Resources as it is with Banks in terms of correlations, which further adds to our portfolios positioning for these two sectors.The CI Endowment Fund owns CBA and NAB but has no exposure to the other Banks (note: we own Macquarie Group but classify it as a Diversied Financial rather than as a Bank). In Resources, the portfolio holds BHP, Franco Nevada, Mineral Resources and Woodside Energy. Together these are not immaterial portfolio holdings yet nonetheless the Fund is still well underweight Banks and Resources. In our view this is completely consistent with the Fund objectives, even if at times this results in short-term periods of underperformance.So even if we construct a very well diversied portfolio the reality is that the market does categorise stocks into varying groups and sometimes the correlations between stocks in these groupings are very tight. The simplest case in point is stocks that are aected by expectations for interest rates almost regardless of what business they are in. For example, property trusts (e.g. Arena REIT, Supermarket Income REIT) or toll road infrastructure (e.g. Transurban, Ferrovial).Stalwarts 43%Growth 15%BLEs 12%Cyclicals 11%Asset Plays 8%Turnarounds 1%Cash 10%<US$10b 3%US$10-25b 23%US$25-50b 17%US$50-100n 22%US$100b+ 25%Cash 10%USA 36%UK 22%Canada 9%Italy 5%Spain 3%Japan 3%Other 11%Cash 10%Subset of Value Country of Listing SizeSource: CI data
38CI INVESTMENT PHILOSOPHYThe twin pillars of the CI money management system are the VoF system and our cultural values, collectively what we refer to as the ‘Culture of Humility’.VoF is both a qualitative and quantitative methodology derived from the three parts of the system, being:The VoF process provides a useful framework to: a) assess companies for their value latency, i.e. investments that provide upside due to their ability to generate more cash back than they outlay, taking into account cash ow, growth options, assets, risks and the cost of money; b) identify and observe operational, industry and strategic trends. We are interested in indicators, themes, milestones, catalysts, events and corporate actions that either precede an improved outlook for the company/industry or conrm underlying sustainable trends; and c) appraise company management for focused management and industry behaviour. We are looking for focused leaders that demonstrate a clear focus, vision, authenticity, energy, passion and competency for the business/industryThe VoF system is central to the success of all our portfolios and funds.FOCUSED MANAGEMENT BEHAVIOURVALUE LATENCY OPERATING, INDUSTRY & STRATEGIC TRENDSAPPENDIX 2
39The Smoother JourneyRESPONSIBLE INVESTING PRINCIPLESAPPENDIX 3Cooper Investors is a member of the Responsible Investment Association Australasia (RIAA).IntroductionOur Responsible Investing Principles set out the way in which Cooper Investors (CI) approaches Responsible Investing in our investment strategy and the management of our company. Responsible Investing includes consideration of all things that are material to the long-term sustainability and hence valuation of a company and incorporates Environmental, Social and Governance (ESG) issues. We must eectively manage the nancial risks and opportunities that arise from Responsible Investing issues in order to maximise investment returns at an acceptable level of risk.Our goal is to invest in companies that can deliver the following: · Absolute returns for shareholders over the medium term · Outperformance of relevant equities market Reference Indexes · A focus on long-term and sustainable value creation for shareholders · Clearly stated goals with regard to operational and strategic intentions · Management of risks in a way that delivers sustainable outcomesResponsible Investing PrinciplesCI takes its role as a good corporate citizen seriously and thus it is important, both as an investor and a company, to take Responsible Investing issues, including ESG issues, into consideration in the conduct of our business. · With success comes responsibility; · A whole of life (long term) approach to decision making is good business practice; · Ethics should not be separated from investment decision making; and · We should obey the spirit as well as the letter of the law.CI is a long term investor. We value long term sustainable earnings, cash ows, assets and dividends of a company. We consider a company’s goals, strategy, structure and governance and focus on board decisions and capital allocations that directly aect the creation of shareholder value.Through the responsible application of our investment philosophy and VoF investment process we assess applicable Responsible Investing issues to determine whether they impact on a company’s revenue, costs, cash ow and long term value. The complete analysis of all available information (integrated into both our quantitative and qualitative systems) allows us to back companies with attractive VoF attributes and improve the sustainability of our Funds’ returns whilst reducing risk.We believe it is the responsibility of the board and management to judge the correct balance of interests between all stakeholders (shareholders, employees, customers, competitors, suppliers and the broader community) and we back leadership in this area. Companies must meet their legal obligations in a responsible manner. We do not judge societal values and norms, but we do observe that these values and norms can change over time and aect companies’ risks and opportunities and their ability to create shareholder value.We do not negatively screen out companies in our investment process i.e. refuse to invest in companies which engage in certain activities. Rather, we assess relevant and material considerations to assess nancial risks and opportunities, noting that companies that do not manage risks well can experience regulatory, reputational, operational and legal setbacks. (Note, the endowment funds do screen out selected industries)We believe that the ownership rights that accrue to us have value and therefore we take an active role in proxy voting and vote on all company resolutions within our portfolio. We engage with companies on material issues where we believe we can make a dierence and add value in the interest of shareholders.The full Responsible Investing Principles document is available on our website.
40COOPERINVESTORS.COMDisclaimersFinancial product advice contained in this document This document has been prepared by Cooper Investors Pty Limited ACN 100 409 890 AFSL 221794, the trustee and investment manager of the Cooper Investors Endowment Fund and the Cooper Investors Global Endowment Fund (Funds). The opinions, advice, recommendations and other information contained in this document, whether express or implied, are made by Cooper Investors Pty Limited and by its ocers and employees (Cooper Investors) in good faith in relation to the facts known to it at the time of preparation. Cooper Investors has prepared this document 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 document alone. This document contains general nancial product advice only.This document does not constitute an oer of units in the Funds to investors. Oers of units in the Funds are made in the Information Memorandum (IM) for the Funds. You should obtain the IM and consider the important information about risks, costs and fees in the relevant IM before investing. Cooper Investors recommends investors seek independent, legal, nancial and taxation advice from appropriate professional advisers before making any decision about investing in the Funds.Past performance warning Any information in respect of past performance is not a reliable indication as to future performance and any forecasts, prospects or forward-looking statements in this document (if any) are based upon Cooper Investors’ current views and assumptions and involve known and unknown risks and uncertainties, many of which are beyond Cooper Investors’ control and could cause actual results, performance or events to dier materially from those expressed or implied. These forward-looking statements are not guarantees or representations of future performance and should not be relied upon as such.To whom this document is provided This document is only made available to persons who are wholesale clients within the meaning of section 761G of the Corporations Act 2001 (Cth). This document is made available on the condition that it is not passed on to any person who is a retail client within the meaning of section 761G of that Act.Limitation of liability and copyright To the maximum extent permitted by law, Cooper Investors disclaims all liability and responsibility for any direct or indirect or consequential loss, damage, cost, expense, outgoing, interest, loss of prots or loss of any kind which may be suered by any person through relying on anything contained in or omitted from this document. This document may not be reproduced or used for any other purpose without the express permission of Cooper Investors.