Investment Process
Rather than trying to time markets, pick individual stocks or chase yields, Coburn Barrett seeks to profit from harnessing continued growth in global GDP, but does not believe that the specific source of that growth can be repeatedly predicted. It believes long term investing is best executed by exposure to a broadly-diversified portfolio of global assets designed to capture as much GDP growth as possible and from long-term compounding of returns. It targets downside risk levels equivalent to those of the S&P 500. This target makes GLI an appropriate equity replacement product even though it takes a multi asset approach. Its long-term risk profile could make it suitable for pension funds or endowments.
The structure of the portfolio is globally representative of the world’s investible liquid asset universe. Coburn Barrett uses leverage to generate a risk profile similar to leading equity indices, generally the S&P 500.
The portfolio generally comprises a broad range of assets in the bond, money market, equity and commodities sectors, with small allocations from others added from time to time. Coburn Barrett measures its returns in US dollars and manages its non-dollar exposure via an overlay programme covering roughly 60% of its non-dollar exposures.
Coburn Barrett avoids real estate because it is not sufficiently liquid. It does not include corporate bonds because it believes their key risk is captured via the equity and fixed income exposures already in place. Fixed income exposure comes from sovereign bonds and money market instruments.
It strictly avoids other securities that do not meet its proprietary standards. To provide adequate exposure to “emerging” markets such as Chinese or Brazilian equities, Coburn Barrett invests, for example, in Hong Kong’s Hang Seng rather than Shanghai’s CSI 300. Similarly, highly correlated proxies are used for other equity markets as appropriate. It uses carbon credits to supplement its commodities exposure, alongside energy, soft commodities and precious metals.
Coburn Barrett’s competitive advantage results from its ability to, in effect, reduce the global investible universe in to a representative portfolio of liquid instruments. This optimally diversified portfolio, theoretically, could then be levered or de-levered to provide a desired risk profile. Coburn Barrett also manages segregated accounts for clients at different risk levels to the GLI fund.
If necessary, Coburn Barrett stands ready to override its model and reduce leverage to contain risks. It can reduce its exposure to a sub-asset class or market to zero, when their price is excessive. For example, it actively avoided European sovereign bonds when their yields turned negative after the Eurozone crisis. With a very long-term investment horizon, negatively yielding assets would not add to long term returns. This year it ran an equity risk profile lower than their its model suggested, after taking the view that volatility was too low relative to the global risk outlook. The team is not blindly driven by its model and uses an experience-based qualitative overlay to adjust risk exposures to account for non-market inputs.
Coburn Barrett currently uses futures to express most of its investment positions, as they generally provide superb liquidity with minimal transaction costs. These are then regularly adjusted to achieve the right balance of risk and return consistent with its long-term view and its promise to maintain risk equal to or less than that of a long-term equity index. Coburn Barrett’s managers continually review their model-based conclusions for their ties to reality. Investment through the use of futures also minimises trading costs and makes it possible for Coburn Barrett to take on leverage to manage risks. Its access to sophisticated trading systems with analysis, research and trading are handled by its in-house team, limiting the need for third-party systems. There is no lock-up for new money and the fund provides monthly liquidity.
The asset management industry is renowned for damaging its performance by overtrading and capitulating when prices collapse. But, risk controls permitting, Coburn Barrett retains positions, and maintains its long-term strategy even when markets get dislocated.
Even a broadly diversified portfolio like GLI will from time to time underperform a single index benchmark, as was the case in 2015 when the portfolio was impacted due to a halving of the oil price and weakness in the euro. However, the strategy was maintained. In 2016 and 2017 performance has staged a more than solid recovery, beating global markets significantly.
In 2008, GLI fell in value with all markets when money market rates surged amid a global liquidity crisis, yet it still outperformed its benchmark very significantly (net -13.8% vs. – 37.6%). The GLI fund remained liquid throughout the crisis and there was never any need to consider “gating the fund”. Even during this period, no investor withdrew assets due to performance reasons, while two investors liquidated limited positions with GLI to plug liquidity shortages in other portfolios not related to GLI. At this time, Coburn Barrett was convinced central banks would flood the market with cash so it raised GLI’s exposure to falling interest rates. It used volatility futures to hedge its position, retrieving its losses, and more, during 2009.
Coburn Barrett estimates that the GLI Fund will outperform the S&P 500, the MSCI World, or similar indices in two out of three years over the long run. This is borne out in its long track record as well as by back testing with market data and simulations prior to inception.
"Developing the portfolio. Deciding the risk." - Thomas Wehlen
