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.