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.