Henry Cobbe, CFA, Head of Copia Capital Management, takes a look at how Copia’s Select range is holding up against its original design principles
It seems like yesterday that Hoshang and I sat down in front of Copia’s investment committee to propose a range of portfolios for long-term investors. That was in July 2016: I was a month in to the new role and after a lot of scoping, simulation and design work, we finalised the investment process in October and launched the portfolios at the end of that month with seed capital from our parent’s (Novia Financial) Chief Executive, Bill Vasilieff. We called it the “Select range”, as advisers can select the appropriate risk profile. Not a very fancy name, but quite clear.
What we wanted to offer advisers
In designing the portfolios we wanted to:
- Combine robust portfolio theory with implementation best practice for a more institutional approach
- Create something that was different and yet ensure the approach was easily understood as “common sense” by advisers we work with and their clients.
- Ensure we offered something that did what it said on the tin and offered excellent value for money
Furthermore, we wanted something that was visibly different from other more “bog standard” DFMs that offered portfolios that looked all rather similar because they used similar (often third-party) asset allocation frameworks and similar-looking (again often third-party) fund buy lists.
Recap: what is the Select range?
The Select range is based on the traditional approach to “risk profiled” multi-asset portfolio management that is based on the Markowitz concept of an efficient portfolio.
But just as any cake is only as good as its recipe, ingredients and chef, we wanted to make sure that each aspect of portfolio design and management is robust, repeatable and transparent.
- Recipe: We create a strategic asset allocation for 5 different portfolio objectives with 5 different risk levels using robust capital market assumptions and an optimisation process
- Ingredients: We construct the portfolio using low-cost exchange traded funds (ETFs) for transparency, diversification, and liquidity.
- Chef: We dynamically manage that asset allocation within predefined tactical bands using Copia’s proprietary Risk Barometer for a systematic approach to active risk management
We can evaluate how each of these concepts have played out.
We use BlackRock’s capital market assumptions for this range of portfolios: they are intellectually robust, term-dependent and regularly updated. Bluntly, when it comes to asset level capital market assumptions, we are happy to concede that they have better insight than we do. Let’s harness that, rather than pretend otherwise.
What this did require was for us to update Copia’s defined universe of asset classes, which we did in 2016 in preparation for the Select launch. We also run a proprietary cross-asset correlation matrix which helps feed these assumptions into a proprietary Optimiser. We can optimise for any given objective – volatility, income, or returns. Select is a classic asset-based mean-variance risk/return optimisation for investors looking to have a long-term accumulation investment strategy.
Looking back, we can now compare the forward-looking (5 year capital market assumptions for each asset class and the portfolios in aggregate) to see how much of the 3 year historic performance was explained by that estimate (see Select 3 Year Performance Analysis)
When we launched the portfolios, a fair number of advisers were apprehensive about our decision to exclusively use physical ETFs for this range. Some advisers wanted more education about the difference between physical ETFs and swap-based products, others thought they built in leverage when they didn’t, and many were just unfamiliar with the concept of using ETFs to deliver a portfolio strategy. We ran CPD sessions for those that wanted to find out more, that sets out much of the core philosophy that informs the design of our Select range.
Interestingly, the reasons we advocated using ETFs (transparency, diversification, and liquidity) still ring true, and following some of the gating of property funds in 2016, a well-known bond fund in 2018 and a very well-known equity income fund in 2019, the rationale for using ETFs has rapidly moved from being unusual, to being topical, to being sensible.
Following the Woodford saga, we now have no push back from advisers for our insistence of wanting to know “what’s inside the tin” (transparency), limiting exposure to any single company stock that could turn sour (diversification), and having the ability to buy and sell fund units on an exchange (rather than be at the mercy of an issuer).
Also, just because it’s an ETF, it doesn’t mean you don’t need to monitor it. We monitor all the ETFs we use for size, flows, and efficiency using our ETF Screener.
The extent and timing of tactical asset allocation decisions of a DFM are key to portfolio performance. With traditional DFMs these can be committee-led and can be influenced by behavioural biases – such as group think for committees, or hubris from overconfident managers. Our preference (with no disrespect to either of us) is for process, over people. We use Copia’s proprietary Risk Barometer that has been used to risk manage Copia’s assets since 2013 to drive tactical asset allocation decisions for a systematic active risk management framework. This is a unique bit of kit.
The Risk Barometer is published every week in our weekly market update – the “Espresso”. It may not have perfect foresight each week or each month, but as time goes on, the aim of the game is to be more right than more wrong for most of the time. Having a systematic framework for adapting the portfolios for ever-changing market risk levels is a more consistent way of doing this than relying on human judgement, in our view. It relies on maths, not magic.
Just as technology, artificial intelligence and algorithms are permeating the everyday world (adaptive navigation aids such as Waze or Google Maps), so they are coming into portfolio risk management too. And in this respect, Copia has been genuinely different from traditional DFMs in the retail space.
A more systematic approach to portfolio risk management is not new – it’s used by large institutional managers that aim to identify different market risk regimes – but it is different to use this “tech” in the retail investment space.
So when it comes to the portfolios, we have no star managers. The portfolios are managed by Copia’s portfolio management team using a systematic investment process that uses technology overseen by us. It’s a different way of doing things, but an approach that enables us to have a more flexible approach to design, build and manage multi-asset strategies for a mandated set of investment objectives and constraints.
Proof of the pudding
Ultimately, this was all great in theory when we were launching the portfolios, but how have they fared in practice.
The good news, is that they meet our original design criteria of “doing what they say on the tin”.
- Returns are ahead of their respective CPI+ hurdles net of fees.
- Risk levels are consistent between each portfolio and relative to global equities
- Returns are ahead of ex-ante expected returns
- Risk Barometer has added value (on risk-adjusted basis) relative to a fixed-weight allocation
For more detailed performance, please refer to our 3 year anniversary performance analysis, or look us up on Financial Express.
What next for Select?
We are happy with the investment process we designed for the Select range. We present on it to our Investment Committee each quarter who oversee all our strategies and ensure they are being run to mandate. We are not planning to change it. We expect it to continue to do what it says on the tin.
So thank you to the advisers who have entrusted us to manage their clients’ assets in line with those stated objectives. We hope that you and they are satisfied with the performance to date.
We don’t aim to shoot the lights out. We do aim to deliver relative to expectations. And those expectations will evolve as capital markets evolve.
For advisers and their clients who like this common sense approach to investing, we look forward to celebrating the Select range’s 5 year anniversary in 2021.