Investment Adviser:

Cogent Asset Management Ltd

(October 2014)

You recently took over the investment adviser role for the Fund. What changes have you made to the Fund’s investment strategy since then?

Many fund investment strategies are what we would term traditional and fundamentally based investment strategies. Investment analysts assess company accounts, interview company directors and make forecasts regarding the economic and political environment. The fund manager then positions the portfolio based on these assessments. In our opinion, this style of investment process can contribute to disappointing performance. At Cogent we believe that the most efficient way to invest is to utilise computer power to better understand the fundamentals of a company. The Cogent investment process, termed “Cognition” is a proprietary computer based expert system which sifts a huge data base of market and company information to determine the primary drivers of stock performance, and position the portfolio to best capture the highest returns available. Thousands of data points are assessed each month and risk is minimised with advanced statistical techniques. The new strategy for the Asian Pacific Fund is therefore based on “Cognition” a logical, well defined and repeatable process.

For over four years you have been investment advisor for the award-winning WSF Global Equity Fund. Are you expecting the same success with the WSF Asian Pacific Fund and will you be adopting a similar investment and stock selection process?

The investment philosophy will be the same: Cogent believes that the best process derives from an unemotional assessment of company data. When we use this approach to evaluate the drivers of stock performance in the Asian Pacific markets we find that investors in the region react to different variables as compared to investors in global developed equity markets. This is not surprising as the majority of Asian Pacific markets are emerging markets with higher growth prospects but higher volatility due to less mature economic and political systems. What is surprising is that by chasing high growth companies, investors embrace this risk rather than reduce it. Interestingly this focuses the portfolio on potentially high return stocks. We do, however, combine the favoured growth characteristics with certain criteria to insure that the portfolio does not get too highly valued.

Was the success of the WSF Global Equity Fund a major factor in your decision to take on the investment advisor role for the WSF Asian Pacific Fund and what other things made you think it would be a good move?

We were delighted to be offered the mandate to advise the Asian Pacific Fund. The team has been involved in managing various top performing funds, so we know that the Cognition process is transferable. This mandate allows us to offer investors a potentially higher return exposure. It fits very nicely beside the WSF Global Equity Fund strategy which allocates to developed equity markets. Investors need to diversify to spread risk across asset classes and across markets, and now supporters of the Cognition process have access to 11 Asian Pacific markets along with 25 global developed markets.

You have strict criteria governing what stocks you can and cannot invest in, including on levels of financial leverage and specific industries that companies are involved in. How does this affect your investment strategy?

The WSF family of funds is ethically based. However, over and above excluding alcohol, tobacco, gaming companies and banks, the funds have limits on acceptable borrowing levels. As such, the funds are by mandate investing in financially sound companies. We believe that this is a powerful, risk-reducing constraint. The problem for many emerging market economies is that due to both domestic and external influences, they tend to be subject to disruptive stop-go cycles. When interest rates are low, high leverage is fine, but when emerging market central banks raise rates, for example to limit capital flight, high levels of borrowing can be quite damaging.

What specifically do you think Asian Pacific markets offer in terms of investment opportunities? Is it simply typical emerging market characteristics, such as growth potential etc. or does the region offer investment opportunities other emerging market regions do not?

Of course, compared to developed economies, the expected growth is higher for Asian Pacific markets. The base level of GDP is lower, the populations are much younger and the political and economic systems are changing with positive effects on the efficiency of the economies. Wealth is being spread to create emerging professional classes and savings rates are high. Specifically, though, Asian Pacific markets are a proxy for China growth, and as India opens up, it too will provide great opportunities for its Asian neighbours.

You have previously described the Asian Pacific fund as an ethical fund. How does that affect the Fund’s sector allocation and its growth prospects?

A large differentiation between the WSF Asian Pacific Fund as compared to most other Asian Pacific Funds is the exclusion of the sectors mentioned above. As such, the benchmark investment universe and the portfolio is more highly exposed to technology, materials and telecom sectors than to financials. Most other Asian Pacific funds would allocate around 30% of their portfolios to financial stocks. We would argue that the technology, materials and telecom sectors include some of the best growth companies in the region. Additionally they should offer growth that is far less volatile than that of the financials sector, and far less prone to economic cycles.

Despite recent signs of improvement in the Chinese economy, some investors remain concerned about its health and some specific problems, such as in the country’s banking sector. Are you confident of Beijing’s ability to deal with the problems facing the Chinese economy?

Certainly the situation in China has to be watched carefully. The economies of the countries that the Asian Pacific Fund invests in depend very heavily on their economic connections with China. Over the last few years, investors have been rightly concerned about the health of the Chinese banking sector. However, much has been done by the Chinese authorities to stabilize the domestic banking system and property market, not least the injection of USD81bn into state-owned banks, which was announced on the 19th of September this year. It is important to understand that the Chinese economy is very different to those in the West. The authorities have immense power and huge financial resources at their disposal. So far GDP growth has remained at 7.5% per annum, something western governments would be very pleased with. As a further sign of health and strengthening investor confidence, the MSCI China Index has risen over 12% since its recent low on 16th March.

Are you considering any investments for the Fund in regional markets where it does not already invest, and if so, why?

After the required authorisations, we will be making selective investments in India. The recent election gave a clear mandate to the BJP and we believe that the Indian economy will continue to be liberated from bureaucracy and protectionism. The population of India is forecast to grow by 10% between 2015 and 2030, overtaking the population of China, and aggregate consumption will more than double by 2025 as more of the Indian population reach middle class status.


If an investor came to you and asked ‘why should I invest in the Asian Pacific region rather than another region?’ what would you say?

The Asian Pacific region has a total population of over 3 billion. The Asian Development bank forecasts that by 2030, Asian Pacific nations will account for 43% of global consumption. Between 2012 and 2050, this will lift the Asian Pacific nation’s share of global GDP from 29% to 49%. There will be volatility, but given these compelling growth factors, Cogent believes that the region should be represented in all equity portfolios.


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