IN TIMES OF CHAOS CHOOSE TO INNOVATE 3. Watching China’s quest for technology 5. Embracing machine learning for the art independence of discovery • A trip to China revealed a major initiative with • While the prospect of machine learning support from the Chinese government, as innovation might frighten some fundamental discovered by WFAM’s SF Global Emerging analysts in our industry, WFAM’s Stageline Markets Equity team. The initiative focuses Value Equity team embraces it. on mastering advanced semiconductor technologies and establishing a fully integrated • The team has learned firsthand that this domestic technology supply chain. technology doesn’t replace any portion of their investment process—they believe it can make • There’s still a long path to what we call Silicon them even better investors. Independence, but Chinese companies are • Stageline has been using a computer-aided TM increasing production capacity, narrowing stock selection process called CASPR to sort technology gaps, and recruiting engineering through a universe of ~12,000 stocks in search talent. of companies that align with their investment process. • With the advancement of 5G technology as • M achine learning has served as a valuable a catalyst, the SF Global Emerging Markets complement to the Stageline team’s approach Equity team believes that China’s desire to establish a world-class integrated circuit of finding value stocks that are “away from industry value chain is a dream that could the crowd” (are typically underfollowed) and eventually come true. have current stock prices the team believes inaccurately reflect the companies’ true market • To identify companies that will likely play a key values. role in China’s quest, the SF Global Emerging Markets Equity team applies its rich local 6. Challenging assumptions in portfolio knowledge, true grasp of Chinese policymaking, construction and diligent bottom-up research approach. • Capital market assumptions have had a central 4. Bu ilding a new playing field with position in the design of asset allocation smaller issuers strategies. WFAM’s Multi-Asset Solutions (MAS) team believes it’s time to update how • Credit indices are concentrated in “mega” they’re used. issuers, which might seem like a safer bet • In large part, this means downplaying the role because of their size and liquidity. However, of longer-term return estimates in day-to-day size does not necessarily equal safety. portfolio management and elevating the role • For a pension plan that is striving to match of expected risks. its assets to its liabilities, such concentration • In the MAS team’s view, a risk-based introduces undesirable idiosyncratic risk. framework can produce more reasonable capital allocations early in the portfolio • WFAM’s Multi Sector – Plus Fixed Income construction process—these are crucial for team built a new index—SILC (Small Issuer Long Credit)—that removes the largest 10% building more resilient portfolios, especially in the face of market chaos. of issuers from a well-known long credit index and keeps the remaining 90%, with an eye on • MAS uses this risk-based approach for its companies that issue smaller amounts of debt. institutional clients, driven by the belief that the • Our index and its related institutional strategy most important measure of risk to the investor is draw upon the team’s niche as a credit-focused, the probability of not meeting their objectives. bottom-up investment manager—and its modest asset size, which allows it to access enough of the small issuers’ bonds to provide a 26 meaningful weighting in portfolios.