JOHCM Global Select Shariah Fund

Sustainable, Responsible &/or ESG Policy:

As stated earlier, the Fund is an equity fund investing in Global Shariah compliant securities. The Fund is benchmark agnostic and is managed through a combination of fundamental analysis and active trading to optimise returns for investors.

Nudgem and Christopher exploit multiple market anomalies/inefficiencies. Growth and value disciplines are combined to help avoid the volatility that can occur in a single-style strategy. This provides better risk-adjusted returns over the medium and long term. The anomalies include fundamental metrics that have been proven to add value historically, such as earnings revisions, valuation and return on capital. The team also exploits technical anomalies by seeking stocks displaying long-term mean reversion and shorter-term positive trends. In addition, the team is highly aware of exploitable behavioural inefficiencies; for example, by seeking to exploit over-confidence bias via equally weighted portfolio construction.

The team believe that markets are not efficient, and correlations/betas change over time. It has a distinctive “4-Dimensional” investment process, which is described in detail on the next page. The team understands that the investable world is not uniform or static.

Process:

Nudgem and Christopher combine bottom-up and top-down research using an innovative method that targets multiple sources of performance. They have their own disciplined and distinct “4-Dimensional” investment process (stocks, sectors, countries, time/change) with the factors weighted to what actually drives each share price. In a nutshell, they look at the behaviour of each share price to determine whether the most important driver of each prospective investment is stock specific (idiosyncratic), the sector effect (typical of many developed market stocks), or the country effect (typical of many emerging market stocks). The fourth dimension is forward looking and anticipates how these relationships and correlations will change or evolve over time. Portfolio construction and risk control involve equally weighting the stock positions (so every name is high conviction but they do not commit “over-confidence bias” and risk the portfolio on several big positions), then trimming the winners back to equally weighted while ruthlessly selling the losers to make room for new, higher conviction stocks.

Screening and Research

Nudgem and Christopher’s screening process uses similar metrics and tools to those used by them with their previous firm, Baring. They believe they can increase the probability of finding an attractive stock price by looking where traditional growth investors do not look, e.g., “early in the growth life-cycle” or “off the beaten track” or “out of favour areas that are recovering”. The team look for stock returns that are idiosyncratic but recognise that most stocks have varying degrees of correlation to their sector or country, so they also research sectors and countries.

Nudgem and Christopher do not believe in universal stock coverage. They have global quantitative screens that rank every stock in the world by fundamentals, valuation, and trend. They then do the fundamental research only on those stocks that rank/screen well, the “best ideas”. They also leverage the stock research carried out by JOHCM’s other regional investment professionals, by doing cross-border analysis on the regional team’s high conviction ideas that fit their own screens and “4-Dimensional” global process. The end goal is to “know a lot about a few things”. 

Sectors and Countries

Nudgem and Christopher look to either overweight or underweight a sector/country when the top-down factors that they look for are in fact improving or deteriorating for that particular sector/country.

In the case of sectors, they seek:

• Positive part of the competition and capital cycle. For example, sectors and industries with high returns tend to attract competition and capital, which reduces shareholder returns and vice versa.
• Positive earnings surprise, increasing ROCE, attractive valuation, positive mean reversion, and trend characteristics.

For countries, they seek the following characteristics:

• Positive monetary and liquidity conditions. For example, falling interest rates tend to increase the Net Present Value of most financial assets, and vice versa.
• Approximately 70% of research is conducted internally. In addition to this in-house research, the team use a number of high quality; sell side, strategies for external research to supplement its own views and ideas generated by other JOHCM fund managers.

Shariah Compliant Stocks

The Amanie Shariah Supervisory Board of Amanie Advisors SDN BHD (Amanie Advisors) have been appointed as Shariah Adviser for the Strategy. Amanie Advisors ensure that all investments of the Strategy are in accordance with Shariah regulations in all respects. The team adheres to the guidelines laid out by the Shariah Adviser in carrying out their investment strategy, including (but not limited to) the investment methodologies adopted in connection with the acquisition and disposal of investments.

A list of Shariah compliant stocks is provided by Ideal Ratings, acting as the Islamic finance data provider for the Strategy (the “Screening Provider”) and is based on the Shariah Investment Guidelines for the Strategy. From this list, Nudgem and Christopher determine those stocks which are acceptable to be included in their investment universe.

Portfolio Construction

Nudgem and Christopher believe in following investment opportunities, not benchmarks, because:

• Market cap weighted benchmarks are not necessarily the most efficient[1];
• Equal-weighted portfolios reduce risk and add value by systematically rebalancing over time[2];
• This allows high conviction stock picking and portfolio positioning. They do not want the “MSCI Index committee” deciding the stock universe, sector and country weights;
• They believe that there is always a bull market somewhere in the world, but they can be easily missed by investors who are driven by market capitalisation weighted indices.

They look at the behaviour of each share price to determine whether the most important driver of each prospective investment is stock specific (idiosyncratic), or whether it is the sector or the country that is the main driver. Stocks that are early in their growth cycle tend to be driven mostly by stock specific factors with sector and geographic influences having a minimal effect.

However, energy stocks for example, tend to be homogeneous, with their returns strongly influenced by sector rather than country or stock specific effects. On the other hand, many large cap stocks in Asia, Japan and Emerging Markets are driven more by country and regional effects than by global sector factors. For stocks that are clearly driven by either their sector or country effects, the team have to like those areas of the market as investments in themselves. They describe this as similar to successful real estate investing, i.e. “looking for good/improving houses in good/improving neighbourhoods, while avoiding good/improving houses in deteriorating neighbourhoods.”

As a result the portfolio is tilted towards the best scoring sectors and regions on their proprietary Top Down Scorecard which ranks sectors and regions by Fundamentals, Valuation and Trend.

The end result is a portfolio of high conviction stocks in high conviction sectors and countries. The portfolio is “benchmark agnostic”, with an active share of over 90% (i.e., less than 10% overlap with the benchmark) but seldom exceeds the benchmark’s sector or regional weights by +/- 25 percentage points. By equal weighting the stock positions, every stock is high conviction, but avoids over-confidence in a few stocks.

Buy and Sell Discipline

Nudgem and Christopher’s buy/sell discipline aims to maximise the returns but limit the downside when the investment case does not meet their expectations, by letting their winners run and weeding out their losers.

• They do not buy stocks in relative down-trends, so they do not try to “catch falling knives”. They then let the winners run, but trim them back to equal weight when prudent (i.e., when >40% bigger than the equal weight position).
• Nudgem and Christopher have a ruthless sell discipline. They immediately sell to zero when a stock’s fundamentals or technicals deteriorate, or when there is contagion from deteriorating fundamentals or technicals in its sector or country. They call this “weeding out the losers”. They also sell a stock completely when a stock’s price or valuation becomes statistically over-stretched.
• The team aim to avoid a common mental trait known as “loss aversion” where investors will hold onto a losing position for fear of crystallising the loss. This mentality can often end in dire consequences, since a small initial loss can compound into an enormous level of underperformance during the time the investor hesitates to cut their losses. The team’s strategy is also designed to mitigate the “endowment effect”. As human beings, we put greater value on what we hold than what it is actually worth. The adage “a bird in the hand is worth two in the bush” accurately reflects this psychological flaw. By adopting a “weeding out the losers” policy, the team judge the stock by its market value and not by their prejudice in valuing a stock higher than the market.
• Once a buy or sell decision has been made, it is implemented as soon as possible to mitigate adverse impact on price. Nudgem and Christopher passionately believe that an enemy of performance is not weeding out the losers soon enough, and tip-toeing into exciting new ideas.

They measure the success of buying and selling by comparing the performance of live portfolios with a static portfolio of holdings owned at the end of each year.

[1] (‘Whither Finance Theory?’ Financial Analysts Journal, Robert D. Arnott, January 2005).

[2] (‘Why does an equal-weighted portfolio outperform?’ S&P Indices award for excellence in research on index related topics, Yuliya Plyakha, Raman Uppal, Grigory Vilkov, January 2012).

SDR Labelling:

Not eligible to use label (out of scope)