1. FUNDS 30 www.cpifinancial.netIslamic Business & Finance | ISSUE 76 T he WSF Reliance Global Shariah Growth Fund, managed by Reliance Asset Management Malaysia (RAMMy), was the worlds best performing Islamic global equity fund in 2011. Outperforming against a tough backdrop where many Islamic funds were suffering alongside their conventional peers, RAMMys systematic approach ensured investors could reap returns while complying with their faith. Here, Ian Lancaster explains how. How does RAMMys systematic approach differ fromtraditional fundamental analysis? We would describe our systematic approach as a fundamentally based proprietary expert system. That is, we observe most of the indicators that traditional fundamental investors observe, but we do this in a systematic, data-intensive way that seeks to eliminate negative and well documented human biases. Our investment process, called Cognition, has been designed to target stock selection as a source of excess return. Rather than over or under weighting geographic regions, or economic sectors, Cognition seeks to identify the appropriate blend of investment styles and select stocks that are best suited to the current market environment. Traditional fundamental analysis starts with the proposition that better than market returns can be made if an investor has a greater insight into a firms business than other investors. This is with respect to both the prospects for future profits and the price paid for those profits. In terms of prospects, this entails forecasting the future, which I think many would agree does not seem to be one of the financial services industries strong points. Over anything but the very short term, company profitability depends on such an interconnected and complex system that the forecasting error is way beyond any available price discrepancy that may be arbitraged. In addition, human biases inevitably result in a lack of rigor in decision making. For example, fund managers are oftenoverconfidentand believe that they know better than the crowd. This can lead them to irrationally hold on to stocks that have suffered downgrades to earnings estimates. In terms of the price paid, stocks that do perform well may be sold too early as it is human nature to not want to feel regret overa missed profit opportunity. Also fund managers often hold on to failed stocks hoping for a recovery in the share price, since realising losses by closing a position can beemotionally painful. In our Ian Lancaster, Chief Executive Officer of Reliance Asset Management Malaysia, talks about the worlds best performing Shariah-compliant global equity fund. Engineering top performance Our investment process is designed to be an all weather strategy Ian Lancaster, Chief Executive Officer of Reliance Asset Management Malaysia

2. FUNDS 31www.cpifinancial.net ISSUE 76 | Islamic Business & Finance view these simple and difficult to avoid basic human traits, along with the complexity of forecasting, explain why most fundamentally managed funds underperform. How do we implement a systematic approach? Simply put, we look for the stocks that best express the financial characteristics (factors) that the market is currently rewarding with outperformance. The Reliance Global Shariah Growth Fund utilises Cognition to invest in companies around the world that offer the most compelling combinations of favourable investment styles, such as Value, Growth or Momentum. Fund performance is therefore driven by our processes ability to identify these trends using quantitative analysis, in order to ensure that the portfolio offers the appropriate balance of style exposure. The quantitative analysis undertaken continuously examines howcertainfinancialcharacteristicsare correlated with market performance. It can be shown statistically that the current market environment tends to persist and hence we believe that if one spends time analysing the current market environment rather than forecasting the future there is a better chance of beating the markets. The portfolio itself is fairly large in terms of individual holdings (>100 positions) which both increases our ability to gain exposure to preferred styles, whilst at the same time minimising stock specific risk. The investment process does not target currencyoreconomicsectorasasource of outperformance. We therefore ensure that the portfolio is neutral with regard to these risk factors. What advantages does this offer the investor? A systematic approach as used by the Reliance Global Shariah Growth Fund draws upon fundamental principles but derives its main advantage from the rigor in the way that its analysis is implemented. There is no smiling CEO to divert attention away from deteriorating profitability and no broker analyst trying to convince investors that a poorly performing company is on the turn. I would argue that the overriding advantage of a systematic model is its inability to be distracted and the impossibility of veering away from the hard facts. How is this particularly relevant to Shariah-compliant investing? The biggest difference between Shariah-compliant investing and conventional investing is the absence of banks and insurance companies. The accounts of these companies are put together quite differently to other types of commercial enterprises and utilise accounting conventions such as fair value adjustments. These differences would require slightly different valuation models. In addition, Shariah indices can change rapidly due to the interaction between market capitalisation and accounting-based Shariah criteria. As the investment universe changes, a systematic model can maintain the same portfolio profile with different combinations of stocks, since a style analysis of any new potential position can be quickly calculated. Hence flexibility becomes an additional strength of a systematic approach. Traditionally lower risk means lower returns how do you achieve superior returns at a lower risk? The trade-off between risk and return is one that must be managed carefully for any investment decision, regardless of asset class. For this to happen, managers must not only be very clear about the sources of excess return, or Alpha, they are targeting, but they must also ensure that risk management forms an integral part of their overall investment process. This is certainly the case for our managed equity funds. At Reliance Asset Management Malaysia, we seek to generatesuperiorreturnsbyinvestingin stocks that reflect the most appropriate investment style at any given point in time. However, we also take care to implement this methodology via a well diversified portfolio that does not undertake unintended investment positions; for example, we use risk models to avoid any concentration of risk in sectors or currencies. This is a powerful combination, offering the potential for high relative returns at lower levels of risk. Howisfundperformanceascompared toyourinitial expectations? We have run top performing funds in the past so we have a reasonable degree of confidence in our investment process. As at 30 October 2012 the Reliance Global Shariah Growth Fund is the best performing Shariah-compliant global equity fund since launch with a total return of 35 per cent. It was also the best performing Shariah-compliant fund in 2011*, so the fund has fulfilled our expectations. Fund managers are oftenoverconfident and believe that they know better than the crowd *Source: Bloomberg, TrustnetMiddleEast, Reliance Asset Management Malaysia (comparable funds) cont. overleaf 3. FUNDS 32 www.cpifinancial.netIslamic Business & Finance | ISSUE 76 What are the main lessons from the success of this strategy that you would like to build on in the future? After more than twoyearsof successful implementation of the Cognition process, we have gained a number of valuable insights, ranging from improving and expanding the range of fundamental factors that we monitor, through to clearly defining how we make sure that the data analysed is current and correct. An interesting area of research for us involves developing the forward-looking aspects of our style selection. Arguably the most important lesson is that the learning process is never complete continual evolution is a critical aspect of any investment process. What are the current trends in the market? Our investment process is designed to be an all weather strategy. That is to say, regardless of the investment climate, the process systematically adapts stock selection criteria to suit the prevailing economic conditions. It should come as no surprise that during the first half of 2012 investors focused on financially strong stocks with relatively low price volatility. In the third quarter, however, we observed a significant shift towards Value stocks, particularly in the US and Europe, reflecting the liquidity boosting impact of central bank intervention. Risk appetite has clearly increased, though we suspect style trends may remain volatile until recent positive macro-economic data begins to gain traction. What was the rationale behind the Reliance Global Shariah Growth Funds launch? This fund was the first to be managed by Reliance Asset Management Malaysia. RAMMy is a wholly owned subsidiary of Reliance Capital Asset Managementwhichisinthetoptwoof Indian asset management companies (AMFIINDIA, 30 June 2012). RAMMy is pleased to be part of the Malaysian Governments strategy to make Kuala Lumpur the global hub for Islamic asset management. The investment team has successfully managed mutual funds for large institutions in the past, for instance the Norwich Income Opportunities OEIC which achieved a rank of three out of 67 in the UK Equity Income sector over five and a half years utilised a similar systematic investment process. We chose to offer a global equity strategy based upon this proven expertise. As this fund was the first that we offered, we wished to provide investorswitha broad-based exposure toglobal equities as a solid foundation for their investment portfolios. At the time of the launch in August 2010, global equity markets were suffering from poor sentiment as investors questioned whether the economic recovery could be sustained. We felt that valuations discounted much of the risk and that the Fed would do all it could to keep momentum positive. How has the management of the fund evolved since its launch? Given that the investment process is systematic, the management style has not changed since inception. What does change is the shape of the portfolio as it shifts the balance of exposure between Momentum, Value and Growth characteristics and within sectors across the regions. What are the challenges of investing a Shariah fund globally when different jurisdictions have different Shariah standards? With respect to this fund there are no conflicting Shariah standards to deal with. Simply put, each company in the fund must be part of the S&P BMI Global Shariah Index. This index is overseen by Islamic scholars, so if a company is in the index we may invest in it. There are other challenges however, such as the ever- changing regulatory environment, underdeveloped distribution networks and a lack of understanding amongst the investment advisor community regarding the principles of Shariah-compliant investing. As the industry develops Reliance Asset Management Malaysia hopes to play a significant part in providing Shariah- compliant funds that provide world- class investment options to Shariah- compliant investors. Reliance Asset Management (Malaysia) Sdn Bhd (RAMMy) was set up in Feb 2009. RAMMy manages a series of innovative and differentiated Shariah-compliant funds in order to provide world- class investment options to Shariah-compliant investors. Its early success has already put it on the radar screen of large Middle East investors. I would argue that the overriding advantage of a systematic model is its inability to be distracted and impossibility of veering away from the hard facts The WSF Reliance Global Shariah Growth Fund invests worldwide into an actively managed portfolio of Shariah- compliant equities, which may be located in any jurisdiction or in any economic sector and quoted on a Recognised Stock Exchange. cont. from pg31