Investment Manager: Reliance Asset Management (Malaysia) Sdn. Bhd.

(January 2013)

The Fund has been one of the world’s best performing global equity funds – among not just Islamic, but all global equity funds - since its inception. What do you put this outstanding performance down to?

Since inception, the WSF Reliance Global Shariah Growth Fund has ranked top of the global Shariah equity universe and in the top 7th percentile of the conventional universe (Morningstar fund ratings agency as of 30 Nov 2012). This award-winning performance has been largely due to the robust forecasting ability of our proprietary stock selection model. Called ‘Cognition’, our model ranks and selects the best stocks within the benchmark universe on a sector-region basis. We also employ rigorous risk controls in our portfolio construction in order to achieve optimal portfolio diversification, currency and sector neutrality as well as strict limits on the liquidity of our positions. Managers often take on unnecessary risks that may not justify the expected return. We believe our approach has been vindicated by a fund average annualized Information Ratio of 1.34 since inception. The Fund’s quality was also recently recognised when it won the Best Islamic Fund (Global Equity) Award at the Islamic Business and Finance Awards 2012.


Shariah indices have outperformed their conventional counterparts by a significant margin in recent years. Has that been the case this year as well and why?

Following a very strong year for Shariah-compliant stocks in 2011, conventional stocks marginally outperformed their Shariah counterparts during 2012. This was largely due to the underperformance of the energy sector, which has faced significant headwinds in the form of lacklustre global economic growth and weakness in crude oil and natural gas prices. The energy sector accounts for a much larger proportion of the Shariah index due to Islamic financial screening criteria. Nevertheless, looking at returns over a longer period, such as two and three years, Shariah indices have outperformed their conventional counterparts.

Would you expect this trend to continue in the long-term?

Clearly in the short term we can expect to see substantial differences in the performance of the two investment universes due to varying sector composition and differences in financial leverage. For example, the technology-heavy Shariah indices outperformed during the dot-com bubble, but underperformed when the bubble burst. More recently, Shariah indices have outperformed thanks in part to a low weighting in financials. However, over the longer term, for periods of 20 years or more, our own research suggests that the performance differences even out. Indeed, we find that total returns are very close, whilst the Sharpe ratios of the two investment universes are in fact equal.


Are there any sectors/regions where the Fund has done particularly well recently and why?

Our investment approach seeks to beat each regional economic sector on an individual basis, rather than seeking to add value by over or underweighting a particular sector or geographic region. We have therefore been pleased that Cognition has managed to add consistent gross alpha across the GICS economic sectors during 2012, adding value in almost all sectors. This gives us confidence that the fund will be able to add value regardless of the prevailing economic environment.


The majority of the portfolio’s investments are in the USA. Is this simply a reflection of the current relatively more positive situation on the US market, as opposed to, for example, Europe, or are there any other reasons behind it?

The portfolio strives to maintain neutrality against the five major currencies of the benchmark, which are the US dollar, Euro, British Pound, Canadian Dollar and Japanese Yen. Since the US dollar represents the largest percentage of the benchmark, the portfolio is largely invested in USD denominated assets, of which the majority are listed in the USA.


This year has proved to be another difficult one for markets, largely, although not exclusively, because of the continuing problems in the Eurozone. Do you see global markets improving significantly any time in the future?

There are many signs of early economic stability, especially in the USA which constitutes the majority of our portfolio. Markets have been supported by encouraging data for the US housing market, employment and consumer confidence, which have all shown signs of improvement recently. This will hopefully drive global growth and bolster investor confidence in global markets. Although the Eurozone constitutes a relatively small proportion of our overall portfolio, we remain relatively optimistic on the longer-term outlook for the region. It is our belief that the Eurozone will eventually resolve its fiscal problems, though this may take a number of years.


In the course of the market turmoil over the last two years, have there been any specific sectors or stocks which the Fund has invested in which have consistently done well and if so, was their performance something you expected or was it more of a pleasant surprise?

The Cognition model ranks stocks by blending the preferred investment styles of the market at any given period. Thus, the Cognition model is dynamic and reflects the changing investment styles of the market. Its dynamic nature aims to constantly select the best stocks within each sector-region of the universe. Since launch in August 2010, the portfolio has added gross alpha across all sectors except telecoms, which itself accounts for a relatively small proportion (0.6%) of the overall Shariah benchmark.


For the last at least 18 months and possibly more, some investment managers have said stock performance in many markets has been based not on fundamentals or real values but on sentiment. Do you think this is still the case?

As systematic investors, we focus on assessing fundamentals and gauging the degree to which investors are responding to them. Whilst it is certainly true that we have seen a lot of market volatility over the past year or so, we would not go as far as to say that investors have stopped looking at fundamentals. Rather, they have increased the frequency with which they change their frame of analysis and thus focus on different types of fundamental criteria. Central banks have injected large amounts of liquidity across the world in response to the threat of global deflation, resulting in periods of ‘risk on’ and ‘risk off’ behaviour, as investors switch between cyclical and defensive assets.


Apart from the Eurozone’s problems, do you see any other potential risks for global markets’ performance in the coming six months or so?

There are two significant potential risks for global markets in 2013. The first being the Eurozone crisis and the second being a resolution to the imminent “fiscal cliff” in the United States. Failure to prevent the automatic tax increases and spending cuts, which would imply a fiscal tightening of more than 4% of GDP according to the International Monetary Fund (IMF), would push the US economy back into recession and have a significant detrimental impact on global growth. Although monetary policy in most advanced economies is likely to remain supportive, the global economy remains fragile and the onus now rests with politicians who must balance their efforts to enforce austerity measures whilst at the same time encouraging economic growth.


Would Shariah funds be in any way inherently less vulnerable than conventional funds to these risks?

We are certainly comfortable restricting our stock picks to the Shariah universe, which we regard as a financially conservative hunting ground. Shariah-compliant securities tend to have stronger balance sheets due to a lower gearing ratio. Given an uncertain macro-economic outlook Shariah stocks therefore look well positioned to outperform in the event that growth fails to materialise.


If you were asked by an investor why they should choose to invest in a Shariah fund, rather than a conventional fund, given the fact that by their nature Shariah funds cannot invest in as wide a range of companies as conventional funds, what would you say?

First and foremost we would point out that, over the longer term, there is no ‘opportunity cost’ involved with being a Shariah-compliant investor - the long-term ratio of risk to return is virtually identical for both types of investor. Second, there is a strong ethical dimension to a Shariah-compliant portfolio, which does not invest in activities such as tobacco, alcohol and gambling. Taken together, these two elements of Shariah investing represent a powerful combination, offering investors the ability to adopt an ethically sound portfolio without sacrificing their potential investment return. Add to this the advantages of investing in a financially conservative universe, given a macro environment where heavily-indebted companies are unlikely to find favour amongst investors, and you have a compelling recipe for investment success.


There have been recent moves to bring greater unity to interpretations of Shariah-compliance for investment purposes in different regions of the world. How will such moves benefit both the Fund specifically and the wider Shariah finance industry?

A standardisation of the interpretations of Shariah-compliance should instil greater confidence among investors in the concept of Islamic Asset Management. We would expect this to attract more fund flows into the sector, both from Islamic investors and from the broader conventional marketplace, where a greater appreciation of the merits of Shariah-compliant investing is already beginning to gain momentum.


IMPORTANT NOTE: This report has been prepared for information only, and it does not represent either an offer to purchase or subscribe to shares of any Cell, or an advertisement for countries where the Cells are not registered for sale. Argyll Investment Services Limited and World Shariah Funds PCC Ltd (the „WSF“) are licensed and regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. Company Registration Number: 51802. WSF believes that the information is correct at the date of production while obtained from carefully selected sources considered to be reliable. No warranty or representation is given to this effect and no liability can be assumed for the correctness or accuracy of the given information which may be subject to change at any time, without notice. Past performance provides neither a guarantee, nor an indication of future performance. Value of the shares and return they generate can fall as well as rise. Currency fluctuations, either up or down, may also affect value of the investment. Due to continuing market volatility and exchange rate fluctuations, the performance may be subject to significant changes over a short-term period. Investors should be aware that shares in the financial instruments entail investment risks, including the possible loss of the invested capital. Performance is usually calculated on the basis of the relevant NAV unless stated otherwise. Performance shown does not take account of any fees and costs associated with subscribing or redeeming shares. It is assumed that all dividends were reinvested. The full documentation required to make an investment, including the Scheme Particulars is available and may be obtained through Argyll Investment Services Limited or www.wsffunds.com. Before investing in any WSF Cells investors should contact their financial adviser / legal adviser / tax adviser and refer to all relevant documents relating to the WSF and its particular Cell(s), such as the latest annual report and Offering Memorandum and relevant Supplement that specify the particular risks associated with the Cell, together with any specific restrictions applying, and the basis of dealing. In the event investors choose not to seek advice from a financial adviser / legal adviser / tax adviser, they should consider whether the WSF is a suitable investment for them.