Cougar Global Investments utilizes a proprietary methodology for global asset allocation that combines advanced research in two areas: (1) modeling global capital market behavior using the Theory of Rational Beliefs, and (2) optimizing client portfolios for downside risk using specialized software. In response to the emerging financial crisis, Cougar adjusted its portfolios in January 2008 by selling most equity holdings and moving 80% of assets into money markets. While some regions will struggle, Cougar believes global growth will continue due to emerging markets, and it will keep portfolios defensive until signs of recovery in the U.S. economy emerge.

1. PORTFOLIO AND FUND MANAGEMENT
Cougar Takes on the Bear
Dr. James Breech, President and CEO, CIO
Cougar Global Investments LP
Bear markets arrive and depart colleagues. Kurz had demonstrated
by stealth. No one rings a bell the crucial role of investors' beliefs
as a bear market gets under way, nor (and mistakes) in capital market
when it has ended. Failure to adjust behaviour. (2) Once the global capital
one’s asset mix during a bear market outlook has been developed, Cougar
can have an enormously adverse Global Investments uses Downside
impact on the health of an invest- Risk Management software for
ment portfolio. Currently, investors optimizing asset allocation for
who stayed the course have lost the individual client portfolios. The
previous year and a half ’s gains. At research underpinning the superior-
Cougar Global Investments, we ity of downside risk management
cannot direct the winds, but we can over mean-variance optimization was
adjust our sails. conducted at the Pension Fund
The current crisis in financial Research Institute by Dr. Frank
markets originated in the summer of Sortino and his associates. The basic
2007, taking most investors by concept recognizes that investors
surprise. After all, the global We cannot direct the winds but we have asymmetric attitudes toward
can adjust our sails
economy for several years had been risk. That is, investors do not view
growing at a rate almost double its large positive returns as risky. Only
average for 1960-2000. Despite this Rather, the crisis originated returns that fail to meet their finan-
strong growth, global inflation had because investors collectively cial objectives are truly risky.
been trending downward for many realized that they had mis-priced the Downside Risk Management seeks to
years. true risk on various securities tied to control only the variance below a
mortgages. In other words, they had target rate of return, but does not put
Failure to adjust one’s made a mistake. The important a ceiling on the upside. In practice,
thing to learn from this experience is this approach involves “making hay
asset mix during a that endogenous risk (investors’ when the sun shines” and hunkering
bear market can have beliefs, particularly their mistaken
beliefs) is as important as exogenous
down when bad weather sets in.
an enormously risk (GDP, interest rates, inflation
rates, etc.) to the behaviour of global
adverse impact on capital markets. Make hay when the
the health of an For the past fifteen years, Cougar
Global Investments has utilized and
sun shines
investment portfolio perfected a proprietary methodology
for making global asset allocation
The U.S. mortgage-backed security decisions. This methodology Since 2004, the Fed had been
crisis seemed to come out of nowhere. combines the results of advanced raising the Fed funds rate, conduct-
There was no big news event. The research in two areas. (1) To model ing a “controlled burn” in order to
U.S. Fed had been gradually tighten- the behaviour of global capital eliminate excesses caused by finan-
ing, but there was no interest rate markets, Cougar Global Investments cial market developments that
shock, nor an inflation shock. War uses the Theory of Rational Beliefs depended on ever increasing U.S.
did not break out, and there were no developed at Stanford University by house prices. When strains began to
terrorist attacks. Dr. Mordecai Kurz and his appear last summer, the Fed did act,
54 WEALTH MANAGEMENT REVIEW

2. PORTFOLIO AND FUND MANAGEMENT
but acted slowly and started playing Japan is already in recession, and emerging markets ETFs) and moved
a game of chicken with financial the economy of the euro area is decel- 80% of our clients’ assets into the
markets. Unfortunately, the Fed got erating rapidly. However, China and money market. In February, our
behind the curve and now we have a the rest of the emerging world are models called for further reducing
full-blown financial crisis. And the growing strongly, albeit at a less emerging markets exposure to only
contagion has spread to Main Street. robust pace than in the past few 11%. Cougar Global’s models will
The U.S. economy is teetering on years. The global economy should almost certainly stay very defensive
the brink of its most severe recession stay afloat because of the growth until there is light at the end of the
in over 25 years. It will take time for contributed by the developing world. tunnel for the U.S. economy. ■
the crisis to resolve itself. The fiscal Cougar Global Investments is an
stimulus and further monetary expert in active global asset alloca-
easing (the Fed will probably need to tion. The emergence of Exchange
ease another 2% by August) will Traded Funds (ETFs) that precisely Contact Information:
eventually slow the slide in U.S. track the performance of major asset
house prices. Once the U.S. housing classes has provided us with tools Cougar Global Investments LP
market stops plummeting, some that we did not possess when the 357 Bay Street, Suite 1001
stability should return to financial company was founded in 1993. On Toronto, ON M5H 2T7
markets and eventually the January 14th, 2008, the last day that (416) 368-5255
extremely resilient U.S. economy markets held up, we sold all but 20% Fax: (416) 368-7738
should begin to grow again. of our equity ETFs (holding only Web: www.cougarglobal.com
WEALTH MANAGEMENT REVIEW 55