Intrepid duo ride COVID storm with focus on tangible assets

Chance meeting led to founding of Proof Capital and a shared belief they have the right alternative strategy for current environment

Intrepid duo ride COVID storm with focus on tangible assets
Jeremy Kaliel and Cameron Reid

The two men behind Proof Capital – styled Pr%f – describe their coming together as a Harry-met-Sally moment. Who’s Tom Hanks and who’s Meg Ryan is not clear but it’s obvious that Jeremy Kaliel, president and CEO, and Cameron Reid, CIO, complement each other well.

They launched their Alternative Income Fund and Alternative Growth Fund this January and have ridden the COVID-19 storm. However, despite the challenging market they have now reached $38 million in AUM and project reaching $100 million by year-end.

While alternatives are a big asset class, Proof focuses on tangible assets like real estate, private credit, direct investments and private equity. “We are not a hedge fund in disguise,” Kaliel told WP. “In fact, we model ourselves after endowments and leading pension funds such as CPP.”

Prior to Proof, Reid enjoyed success at his previous private wealth firm using tangible alternative assets in his model portfolios. Kaliel, meanwhile, was a ”pure institutional guy” and sell-side analyst at CIBC and Scotia. The two met serendipitously through a mutual acquaintance. While helping Reid find an assistant portfolio manager, Kaliel got to know Reid’s business and was very impressed by his Alternative Income Fund’s performance of 9.9% annually over the previous five years. He knew there was institutional demand for that kind of return, and the idea for Proof Capital began to take shape.

“Cameron was at about half a billion AUM when I finally figured out what he was doing,” Kaliel said. “I said, that's it. I'm joining you and we’re going to grow your AUM to $10 billion.

“We worked on a distribution model for about six months before realizing that to do it right we were going to have to do it on our own.”

Kaliel joked that starting again from zero was either the smartest thing or the stupidest thing that Reid ever did, but the duo’s rationale was clear. Proof puts forward that the traditional 60-40 mix of stocks and bonds is now outdated, and that near-zero interest rates and robust alternatives in private investments have given investors both the motivation and the opportunity to change their approach to portfolio management. In addition, the increased correlation between traditional markets has nullified the benefits of traditional diversification, and public listings have declined at the same time as the private markets have expanded.

Pension funds have led the shift to private investments from the public markets, outperforming the latter in the process. Proof aims to provide private wealth the same institutional-quality private investment approach that has been exploited so well by pensions and private equity over the last 10 years.

Proof’s funds target 8-15% net annual returns, while insulating investors from market volatility. The funds also offer genuine diversification with low correlation to public capital markets, and enhance liquidity through their open-ended structure and cash dividends.

For Reid - COVID-19 notwithstanding – the timing of the partnership with Kaliel felt right.

“I really believed in the opportunity. Through my decades in the private wealth business, I've never seen such a discrepancy between the way that pension funds and institutions are managing their portfolios versus what's available to affluent Canadian families.

“There is a really compelling business case and I really liked the skill set that Jeremy brought from his 12 years on the sell-side combined with the experienced I gained with my previous firm. I just said, ‘let's buckle down, work hard, and take the synergies from what we can both bring to the table’.”

Two months after they launched their funds, the pandemic hit, meaning the funds’ ability to attract assets was initially dealt a body blow. Rather than flail wildly through the volatility, though, Proof adapted and put forward dynamic investment strategies to combat the ‘evolving coronavirus reality’. These included strategies for three scenarios: Rapid Recovery (3-6 months), Moderate Recovery (12-18 months) and Protracted Recovery (+2 years).

Proof currently recommends the “moderate recovery” model portfolio – alternative income (30%), public equities 30%, alternative growth (20%), fixed income (15%) and cash (5%). It also put forward its favoured sectors and sectors to avoid.

Favoured: consumer staples / essential goods / technology / online retail / telecom / healthcare / pharmaceuticals / defensive utilities / precious metals / media (entertainment) / online communication services / delivery services / select fast food / wine and spirits / select marijuana.

Avoid: airlines / hotels and tourism / traditional “bricks and mortar” retail / oil and gas services / real estate and construction / insurance and financial services / transportation manufacturing / business services / consumer credit (i.e. auto loans) / luxury goods and face-to-face luxury services.

“The future is inherently uncertain,” Reid said. “So, waking up as a portfolio manager and saying, ‘I've got a plan, this is exactly what we're going to do’, isn't always the best mindset. What we set out to do is say, broadly speaking, that there are three possible future paths for the economy. We have to pick a default expectation, but let’s set up some markers and milestones so that we can check ourselves against what the market is telling us and pivot accordingly.”

He added: “It’s pretty obvious to us that we're not in the ‘rapid recovery’ scenario; things are not turning around as quickly as the optimists had originally thought. On the balance of probabilities, we believe we are in our ‘moderate recovery’ scenario, but that doesn't mean that we can’t slip into a more protracted recovery. So let’s play defense and protect client wealth.”

Proof’s funds have weathered the volatility well. Year-to-date its alternative income fund is up 10.1% and its alternative growth fund is up 3.6% (versus negative 1.3% for the TSX). Kaliel believes the fund’s stability and tangible alternative approach is hitting a chord with investors, and that the ability of fund performance to hold up during this time of crisis bodes well for the future.

He said: “Our concern is that not all alternative strategies are the same, and that investors may be fooled by other funds pretending to do what we do. We're on the tangible end of the alternative asset spectrum. We're not a hedge fund dressed up in sheep's clothing. We are following the right type of alternative strategy for the current environment.”