Losing money is bad. But while traditional portfolio managers measure gains and losses through standard deviation, 25-year investment-management veteran Deborah Frame and Cougar Global are using some less conventional methods that are raising eyebrows. The unique firm isolates downside risk from upside risk to focus on losses and protect clients’ assets in down markets. Take a look at the numbers here for a fuller explanation.
A chance meeting changed Deborah Frame’s life forever. She was working as a resort lifeguard and considering law school when the CIO of Manulife encouraged her to switch to investments. He hired her as a summer student, and she eventually earned an MBA and a CFA before working at Manulife and Empire Life.
In 1998, Frame started subadvising for a young company, Cougar Global, started by James Breech. She noticed right away that the firm took a unique approach. During and after the economic meltdown of 2008, Breech’s clients largely avoided the massive losses that hit others so hard, because Cougar Global had gone to 100 percent cash. Its accounts were safe, and its models were up. Frame, who had come to appreciate the type of global and tactical asset-management allocation demonstrated by Cougar Global, approached Breech to offer her expertise in attracting pension funds. He offered her a job, which Frame quickly accepted.
The firm’s novel approach doesn’t limit managers to a target asset allocation or range. Most companies build a portfolio of 60 percent stocks and 40 percent bonds—a framework that Frame calls dangerous in certain economic and market environments. “When you want to avoid losses, it’s critical that you have the ability to go to [100 percent] cash,” she says. “Being totally tactical is the key.” Cougar Global’s managers can go as high or as low as required in cash, equities, fixed income, or other asset classes at any time.
10% for the stock pickers
What is truly unique about Cougar Global is the way Breech, Frame, and their partners define risk. A traditional view, dating back to the 1950s, defines risk as gains and losses measured against standard deviation—but that method was developed without the benefit modern computing power. “We define risk as probability of loss,” Frame says. “Standard deviation assumes all investments are symmetrical and treats ups and downs the same. The problem isn’t with ups; it’s with the downs.”
Thus, Cougar’s method isolates downside risk from upside. Stock movement, Frame argues, only impacts 10 percent of a portfolio. Being in or out of the right asset class at the right time accounts for 50 percent, and the remaining 40 percent is driven by the economic environment. Cougar Global, then, focuses on the “meaningful” 90 percent and leaves the other 10 percent to the stock pickers. “We don’t compete with stock pickers; we coexist with them through a top-down strategy,” Frame says. “There are very few people who manage money the way we do.”
A 3.8% rise in all-cash returns
Frame confesses that she still had a foot in the 60/40 world until joining Cougar Global four years ago. “The world accepts that risk is volatility, but my previous teams were often limited by our investment-policy guidelines,” she says.
Rigid parameters force managers to sell assets in a strong market and buy weaker asset classes to maintain percentages even when there is probably no risk of loss. Cougar Global shows its performance returns against a 60/40 benchmark consisting of global equities and US or Canadian bonds. In 2008, when the company went to all cash, global portfolio returns were at 3.8 percent compared to a 60/40 benchmark, which was down by 22.5 percent. During the global growth between 2003 and 2007, when 60/40 companies were up 5.5 percent, Cougar enjoyed returns of 25.5 percent.
$1.5 billion in assets
Eighteen employees (16 of them women) manage or advise on $1.5 billion in assets at Cougar Global, $1.3 billion of which is on advisor platforms in the United States. And recently, Frame, who already had the required CFA designation, became her company’s chief compliance officer. Now two direct reports manage day-to-day compliance while she works with a third-party company to manage increasing regulations. She also sits with five colleagues on the investment team and is working with Breech on a 12-month forward view of models.
In 2007, Cougar Global switched from subadvisors to exchange-traded funds, and as of the end of 2013, 150 firms had $86 billion in assets in these strategies. Cougar Global continues to enjoy its status as a first mover and early adopter.
Moving forward, Frame is dedicated to supporting her advisor platform in the United States through live meetings and virtual sessions. “Our approach to investing is strange, but it’s logical,” she says. “It resonates with advisors, but it takes explanation.”
In its early stages of expansion, the company has already added $1 billion in assets over the course of 18 months, and it’s now on seven advisor platforms in North America. As the world starts to rethink the 60/40 split, Cougar Global’s philosophy is catching on, and in 2013, Frame even personally hosted 75 one-on-one meetings for advisors and clients. The success is not surprising to her. “It’s simple,” she says. “When you protect your clients from losses in bad times, they can grow really well in good times.”