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Portfolio construction and methodology | AMAL

A rigorous approach to investment  

Sanlam’s Global Equity Team will employ the same disciplined investment strategy and approach to the Almalia Sanlam Active Shariah Global Equity UCITS ETF, our Shariah compliant ETF, as it does to their Global High Quality Fund.

Portfolio construction  

The approach flows through from generation of stock ideas to analysis and portfolio construction. They research and identify individual shares that creates a high conviction, concentrated global equity portfolio. Through a quantitative screening process and rigorous, fundamental bottom-up analysis, they identify businesses which contain many, if not all, of the following traits:

  • sustainable, durable franchises that are difficult to replicate 
  • strong market share in their principal product and/or service lines and competitive moats
  • a clear and sustainable growth profile ·
  • strong management teams and owner managed characteristics

The quantitative screening process looks at individual metrics to filter down the universe to a more manageable list of potential stock ideas. This is based on, but not limited, to the following:

  • historic and sustainable revenue and free cash flow growth profile 
  • attractive gross and operating margins 
  • a high free cash flow conversion rate
  • low financial leverage
  • relatively low capital expenditure requirements
  • ability to maintain attractive returns on capital

The strategy seeks businesses with shareholder friendly management teams that typically act with the following behaviours:

  • focus on disciplined capital allocation to generate appealing capital returns and profitability 
  • able to generate significant free cash flow enabling increasing distributions to shareholders through dividends and/or share repurchases 
  • making synergistic acquisitions that produce long-term growth

In-depth analysis calculates an intrinsic value for an individual business based on long-term fundamentals. An unconstrained, global universe means our Shariah compliant ETF can invest in the best opportunities worldwide whilst adhering to the principles of Shariah compliance. 

The strategy has a low turnover bias, meaning the fund manager will not be regularly buying and selling stocks, but the amount of each stock is actively managed according to the prevailing price and perceived intrinsic value placed on each share.

The benefits of active management ETFs  

That said, an active management approach allows the strategy to take advantage of volatility or periods of market stress to purchase shares in quality businesses at attractive entry points and exit them when valuations are too high and returns are deemed to be unsustainable.  However, great businesses will not be sold just because they are overvalued.  To sell a great business, the margin of safety needs to be very low.  A bottom-up, unconstrained approach to building the portfolio allows for positions to be held at weights deemed most appropriate in terms of risk-reward trade off.  For example, top positions may not necessarily reflect those companies that display the best absolute upside on a like-for-like basis versus other stocks in the portfolio.  Instead, top positions reflect a combination of upside and risk-reward characteristics, which are dynamically assessed, with changes made as and when deemed appropriate. 

Due to the relentless focus on quality and bottom-up stock selection, the strategy typically ends up with a differentiated composition in terms of both geographic and sector make-up versus the world market. The fund tends to favour industries that grow faster than the market over time such as the consumer sectors, technology and healthcare.  This also means avoiding parts of the market which typically have not performed well over time, such as financials and energy.  As long term investors, the focus remains on those companies which can deliver earnings growth at an attractive return of capital for many years, if not decades; qualities which are not typically exemplified by companies in either the energy or financial sectors for example.  There is a distinct alignment between this manner of quality investing and Shariah principles, namely the exclusion of companies with high levels of borrowing; one of the main indicators typically used to assess the quality of a company in a factor exposure sense.

As with all ETFs, when you invest in active ETFs your capital is at risk.

An ongoing investment process  

The team’s aim is to seek undervalued opportunities from the global markets that have long-term potential in line with their quality criteria. To this end a robust and repeatable investment process is employed:

Generate ideas 

  • Screen all companies based on a range of measures including compliance with the Principles of Shariah Investment 
  • Meet company managers and investor relations teams 
  • Explore additional sources of research

Analyse fundamentals

  • Rigorous and detailed bottom-up company analysis 
  • Forecast and model key expectations 
  • Look for strong and sustainable competitive advantages 
  • Focus on the long-term potential and value of the business

Manage investments

  • Active management by constantly reviewing the investment thesis 
  • Understand the balance between risk and reward 
  • Buy and sell discipline based on fundamental valuation 
  • View risk as the permanent loss of capital

 

To learn more about our Shariah compliant ETF, please visit the Fund page.

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