On October 3, 2016, Cognios Capital launched Cognios Large Cap Value Fund, which represents the “long” sleeve of its long-short flagship fund, Cognios Market Neutral Large Cap Fund (COGMX/COGIX). They launched the fund in response to requests from existing clients, mostly investment advisors, who wanted easy access to the long-only option. Cognios waited until mid-December to publicize the fund’s launch.
They target high-quality value stocks, rather than growth ones. They use a quantitative screen called ROTA/ROME. ROTA (Return on Tangible Assets) is a way of identifying high-quality businesses. At base, it measures a sort of capital efficiency: a company that generates $300 million in returns on a $1 billion in assets is doing better than a company that generates $150 million in returns on those same assets. Cognios research shows ROTA to be a stable identifier of high quality firms; that is, firms that use capital well in one period tend to continue doing so in the future. As Mr. Buffett has said, “A good business is one that earns high return on tangible assets. That’s pretty simple. The very best businesses are the ones that earn a high return on tangible assets and grow.” ROMA (Return on Market Value of Equity) is a valuation screen that divides a company’s profits by its current stock price to calculate a “profit yield.” It looks a lot like the inverse of the stock’s p/e, so that a high profit yield signals a low valuation for the stock .The combined quality and value screens skew the portfolio toward value.
In general and over time, the strategy works. The Market Neutral fund, which incorporates the large cap value strategy, has earned five stars from Morningstar and its returns since inception (through December 30, 2016) have more than tripled those of its market-neutral peers. Close observers will note that Market Neutral posted a small loss for 2016, which was largely attributable to losses in the fund’s short book. And, too, the market seemed intent on rewarding bad companies. Mr. Angrist commented in November that
… the worst quality businesses …that were trading at the highest prices and have the highest amount of debt significantly outperformed companies that have much better business models that are trading at cheaper prices and have far less debt. Over time we make money by the market doing just the opposite, essentially, and this is one of those unusual periods of time when the market rewarded essentially everything that we were short and penalized everything that we were long.
And, indeed, over time the strategy has made money. The Large Cap Value separate account composite has returned 18.13% annually over the past five years, far ahead of the Russell 1000 Value’s 16.15%.
The fund is managed by a team led by Jonathan Angrist, Cognios’ president and chief investment officer, supported by Brian Machtley and Francisco Bido. The team also manages the Market Neutral Fund and all three managers have substantial personal investment in the fund. In addition the new funds received $40 million in seed capital from Cognios.
Investor shares of the Value Fund carry 1.10% expense ratio, after waivers. Institutional shares are 25 basis points lower.
The Value Fund offers two share classes; the Investor Class (COGLX) has a $1,000 minimum initial investment and the Institutional Class (COGVX) has a $100,000 mininum. At the same time they launched Cognios Large Cap Growth Fund (COGGX/COGEX) which parallels a successful strategy which had been offered only through separate accounts. Over the past five years, Cognios LCG has outperformed the Russell 1000 Growth by 359 basis points a year.
The fund’s website is http://www.cogniosfunds.com/; you might be tempted to visit the advisor’s own site, but the information on the two sites is largely the same.