Investment Adviser:

Cogent Asset Management Ltd

(May 2015)

It’s been one year since you took over the Investment Adviser role for the Fund. What are the main changes you have made to the portfolio since you took over?


The WSF Asian-Pacific strategy has been changed to a variant of the strategy that Cogent has used to successfully manage the top performing WSF Global Equity Fund.  The new investment process is a well-defined and repeatable quantitative approach. Termed “Cognition”, it 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. We believe this approach to be a far better proposition than that of fundamental fund management. ‘Traditional’ investment managers are limited by the inability of humans to compute the vast amounts of available data, and less able to cope with the overall efficiency and capital mobility that we observe in modern markets.


Has the Fund’s performance been largely as you had hoped in the year since you took over the portfolio? Have there been any particular sectors or individual markets in the region which have performed much better, or worse, than you would have expected a year ago?


We extensively back test any new strategy. Whilst back tests are an essential tool for choosing a strategy, they only test that strategy over a particular economic environment. The future performance of a strategy after launch depends upon how similar the future environment is to the past and how similarly the fund investments react to the future environment. As such, back tests are a useful but not comprehensive guide to future performance. Since the launch of the i-class around a year ago the units have risen 4.8 per cent as compared to the benchmark index which fell 1.6 per cent. We have been impressed by the strategy’s ability to outperform a falling market. In essence this shows us that there are always winning stocks even in an unexciting market. We were pleased that the process was able to focus on these companies and provide investors with a positive return.


Before you took on the WSF Asian Pacific Fund you were already carrying out the same role for Cornhill’s WIOF China Performance Fund and its WSF Global Equity Fund. To what extent has your experience with those funds helped you with the WSF Asian Pacific Fund?


Each market reacts to data in a specific way. For example the strategy of the WSF Global Equity Fund is similar to an expert system. Fund managers search for stocks with good prospects and solid balance sheets which trade at lower than equilibrium valuations. The Global strategy looks at much the same stock criteria as a traditional Fund Manager, but analyses this in what we would argue is a more rigorous systematic way. Each month the process assesses 450,000 data points, far more than even a team of highly trained analysts could cope with. 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; the majority of Asian Pacific markets are emerging markets with higher growth prospects, but also 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 focusses the portfolio on potentially high return stocks. We do however combine the favoured growth characteristics with certain criteria to ensure that the portfolio does not get too highly valued


We have previously talked about the Fund’s specific investment criteria and its ethically-based nature. In your experience, what kind of an investor considers ethically-based funds?


One interesting characteristic of the WSF funds is that they do not invest in Conventional Financial Services, Tobacco, Gambling, Genetic Cloning and Pork Products. The fund is Shariah-compliant, and therefore suitable for Muslim investors, and all investors who believe that their capital should be put to use constructively. Ethics are not specific, investors will have their own criteria ranging from ‘I don’t care’ to ‘I care a lot’. We chose the Sharia-compliant ethical criteria as they reflect the beliefs of a large investor base and are clearly defined.


Do the Shariah-compliant criteria that the Fund follows go beyond those of a conventional ethical fund?


Yes, what is most interesting about this approach is that there are financial criteria that must also be satisfied - in essence, an ethical guideline for prudent financial management. Companies in the WSF Asian-Pacific portfolio must not have borrowings of more than 33 per cent of their Market Capitalisation and must not have money owed to them of more than 33 per cent of their Market Capitalisation. The Market Capitalisation used is the average of the last three years. As such, portfolio companies are not heavily leveraged and do not have debtors that could undermine their overall financial position. In practice this results in portfolios being less interest rate sensitive than conventional funds, and consequently less volatile. We believe that this is a powerful, risk-reducing constraint. A significant 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.


Obviously the Fund will appeal to people who invest in ethically-based funds. But why would the Fund, and similar ethically-based funds such as the WSF Global Equity Fund, be attractive to investors with portfolios of only conventional funds? What would it bring to their portfolios?


There are good reasons to consider the ethical approach even for those that do not start with an ethical basis for their investments. These reasons are based upon the portfolio characteristics that are a consequence of our style of ethical investment. As mentioned above, the volatility will tend to be lower due to the higher financial strength of suitable companies. In addition, a conventional Asian-Pacific portfolio invests around 34 per cent of the portfolio in the Financial Services sectors, whereas the benchmark for WSF Asian-Pacific Fund comprises 35 per cent of Technology stocks. We would argue that Technology companies have better growth prospects than heavily regulated Financial Services companies.


Looking at the Fund’s investment region, you have previously said that Asian Pacific markets are a proxy for China growth. To what extent is the prolonged slowdown in China’s economic growth affecting other Asian Pacific markets and, if at all, your strategy for the portfolio?


There are of course significant changes in the makeup of Chinese growth during this transition. For example, we have seen a significant slowdown in construction activity and a reduction of demand for materials, which has affected the Australian economy negatively. However, the main drivers of Chinese demand are moving away from capital projects and urbanization, and towards growth through domestic consumer demand. This is very beneficial in the long term. We can already see that the Chinese currency is less undervalued that it was, and that the current account surplus is shrinking. This is beneficial for the global economy and also Asian countries, which are not resource based. Whilst China’s growth is slowing, we should remember that the 7 per cent level that it is now stabilizing at is more than three times that of other major economies. In addition, whilst the 7.4 per cent growth rate is a quarter-century low for China, 25 years ago the base for calculating growth was much lower. Looking at the recent performance of Chinese equity markets, we can see that investors are now quite positive about the economic environment.


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