DEBORAH FRAME has an extensive background in managing invest-ments and has held executive positions over the past 25 years at a number of major Canadian life insurance and investment compa-nies. Deborah is not affiliated with S&P Dow Jones Indices or any of its affiliates. Opinions and statements offered by Deborah are her own or that of Cougar Global Investments and may not necessarily represent the views of S&P Dow Jones Indices or any of its affiliates.

S&P DJI: Can you explain how Cougar Global, a Canadian money management firm, began managing money in the U.S.?

Deborah: In the fall of 2009, we were approached by LPL Financial (LPL), the largest independent broker/dealer in the U.S. Following a chance meeting between Dr. James Breach, our President, and LPL, we were one of the firms that was being considered for LPL’s new ETF strategist platform. After an extensive due diligence process, we were one of the four firms selected to join their Model Wealth Platform, launched in July 2010. As an early mover in the very successful ETF-managed portfolio space that relationship has been a great benefit for us.

S&P DJI: You’re a supporter of market cap-weighted indices. Do they play a role in your investment approach?

Deborah: We use broad market indices to achieve exposure to an asset class whose investment performance is impacted by the economic environment during that time. We believe that a market cap-weighted index is a better reflection of the proportionate impact of the members (stocks) collective contributions to the underlying economy.

S&P DJI: Cougar Global seems to be drawn to both global and tactical approaches to asset allocation. Can you explain why?

Deborah: As an ETF strategist, we’re able to consider all asset classes regardless of their regional focus. We look for the most appropriate asset classes, that is, the ones that have demonstrated the most optimal risk/return behavior. We look at behavior across historic economic environments that are similar to the environment we expect to be in over the next 12 months. We use a top-down, macro-driven approach and focus on broad-based indices to gain access to global asset classes. We don’t apply any minimum or maximum thresholds to fixed income or equity asset classes. By applying a tactical allocation strategy, the asset mix may be up to 100% equities, 100% in fixed income or 100% in money market during periods where those extreme exposures are seen as appropriate.

S&P DJI: How much index data do you analyze to determine market environment and asset class performance across various scenarios? How do you implement your investment ideas?

Deborah: We are constantly considering additional asset classes as well as their historic patterns of behavior under our five macroeconomic scenarios – growth, stagnation, inflation, recession and chaos. Our index data goes back to the 1990s and each month additional return data is added once it becomes available. If an index demonstrates patterns across different economic environments, it can be included in the optimization process.

For the asset classes we model, we research and select ETFs that are the closest proxy to the asset class’ behavior. We are constantly investigating new ETFs to see if we can improve

FA TALKS IS AN INTERVIEW SERIES WHERE INDUSTRY THINKERS SHARE THEIR THOUGHTS AND PERSPECTIVES ON A VARIETY OF MARKET TRENDS AND THEMES IMPACTING INDEXING.

A MULTI-CAP LOOK AT U.S. EQUITIES with Deborah Frame, Vice President, Investments, Cougar Global Investments

FATALKS

on the tracking error between the ETF and the underlying asset class we are modeling. We also consider MERs, price and impact of creation/redemption units.

S&P DJI: How important is analyzing index data to Cougar Global?

Deborah: Our investment process is divided into three steps and during the second step we update expected return distributions and correlations. It is during step two that index data becomes critical to our process. The investment team considers new asset classes, by way of index data on an ongoing basis and conducts due diligence to determine whether they are suitable in the investment process. The expected return distributions for asset classes that make it into the optimization process, based on the updated outlook, are created using bootstrapping. In addition, the correlations among all of the asset classes under consideration are updated monthly. Both expected return distributions and correlations are the data inputs for step three.

S&P DJI: For multi-cap exposure, Cougar Global recently switched from using Russell’s indices to S&P Dow Jones indices. What influenced the switch?

Deborah: The index’s methodology was an important factor in the decision to switch as it included securities only if they meet certain quality requirements such as four consecutive quarters of positive earnings, as well as liquidity requirements such as a minimum of 250,000 shares trading in each of the previous months, a minimum public float of 50% at time of entry, index replication, etc. That type of methodology allows the index to better exhibit characteristics that drive the broader economy as it evolves. Also, the Russell Midcap has an overlap of about 800 securities with the Russell 1000 Index® while the S&P 500® avoids any overlap with the S&P Midcap 400® which makes sense in our optimization models.

S&P DJI: We’ve seen significant adoption of index-based approaches like ETFs from U.S. advisors. In your view, do U.S. and Canadian advisors vary in their approaches to investments and wealth management?

Deborah: Right now, ETF strategies are not as available on advisor-based platforms in Canada as they are in the U.S. There are a number of reasons for this and that includes the environment for financial products which is much more competitive in the U.S. than it is in Canada. This is primarily due to the fact that the five largest banks in Canada own the majority of wealth management services offered. In addition, the mutual fund platforms and the infrastructure that support mutual funds are very entrenched into the “system.” Canadian regulations do allow ETF strategies to be rolled up into a mutual fund format, but the cost structure for mutual funds is higher. Pricing for these strategies in a mutual fund structure have less of a cost advantage for the investor than those that can be accessed on a unified managed account, or a single managed account platform, which is the more dominant method of accessing them in the U.S.

S&P DJI: What’s your take on the future of innovation in the indexing landscape?

Deborah: I think we are still in the early stages of index innovation and new product development, not just in the U.S. but globally as well. For our purposes, we expect to see additional indices covering more countries as well as additional access to fixed income instruments through index innovation and creation. While we do not rely on managed strategies within the indices that we use, there is increased demand from other investment managers for this type of product. I expect that we will continue to see more of that in the future.

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FATALKS A MULTI-CAP LOOK AT U.S. EQUITIES