- Our Shariah ETF will
invest in companies of a high quality with wide economic moats
-
The fund will
take active positions against the index with typically 30 positions against the
index’s 400 constituents
- Historically, Sanlam Investments has managed to outperform
indices through a rigorous valuation process that selects high quality
businesses
Performance Review
In January the our Shariah ETF's net asset value decreased by 1.1% in
Dollar terms as news of new strains of the virus weighed on market
returns. We saw strong performances in a
number of our stocks however, including Abbott Laboratories, Alibaba, and
Johnson & Johnson.
The start of the year saw a swing from investors back in to
structural growth away from cyclical growth, with those companies which
previously saw strong returns due to being beneficiaries of the vaccine news
losing some of their steam. That said,
returns from the energy sector continue to be strong, and prove to be a
headwind to those that do not have exposure.
Source of all data: Sanlam Investments. Past performance is
no guarantee of future performance.
What Has Driven This Performance?
The best performing stock this month was Abbott Laboratories
(+13.3%). Abbott manufactures and
markets medical devices, blood glucose monitoring kits, nutritional healthcare
products, diagnostic products and equipment, and branded generic drugs. We
believe innovation is thriving in the med-tech industry, which supports
sustainable long-term organic revenue growth in the mid-single digits. There
are long-term structural tailwinds driving innovation such as rising prevalence
of chronic diseases, global ageing populations to emerging health care systems
maturing. Importantly, Abbott mostly operates in markets dominated by only a
few competitors who participate in rational oligopolies. Abbott has an
attractive range of new innovations and drivers (in structured heart,
diagnostics and diabetes) coming to the market that should support sustainable
organic growth.
Abbott reported strong results during the month, with
management’s guidance and tone positive for this year and beyond. Management is
confident Abbott can deliver double-digit earnings per share growth again in
2022. During the fourth quarter, Abbott
grew around 28% organically to reach $10.7 billion in sales beating
expectations. Operating income grew 53%, also ahead of consensus. Their
Diagnostics part of the business grew a massive 40% during 2020 driven by more
than 100% growth in its molecular and rapid diagnostics businesses on the back
of COVID testing demand. Abbott delivered over 400 million COVID tests in 2020,
including more than 300 million in Q4 alone. The company’s manufacturing
capacity could potential support $12-$14 billion in sales. [1] Management plans to reinvest much of the
extra cash being generated by the COVID testing business into research and
development, supplemented by more targeted investments in a handful of
businesses (e.g., Diabetes, Nutrition). We believe this sets Abbott up for
solid growth over the medium-term.
Alibaba (+9.1%) also performed well during the month, rising
on the back of the re-appearance of their founder, Jack Ma. He had not been
seen in public since criticising the Communist Party in October.
Taylor Wimpey (-11.3%) and Edwards Lifesciences (-9.5%)
struggled during the month. As new
strains of the virus emerged and lockdowns were imposed around the world, it
was no surprise to see these names come under pressure. The pandemic clearly had more of an impact on
the Edwards’ operations than was expected but confidence in the future remains
very high. With the surge in the spread of covid-19, there has been more
pandemic-based hospitalisations. This has meant less scope for other procedures
and Edwards has not been immune from this.
Source of all data: Sanlam Investments. Past performance is
no guarantee of future performance.
Portfolio Activity
Our Shariah ETF initiated a position in Boston Scientific during January.
Boston Scientific Corporation develops, manufactures, and markets minimally
invasive medical devices. The Company's products are used in cardiology,
electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary
medicine, radiology, urology, and vascular surgery. Boston Scientific has a
maturing pipeline in its core markets.
However, its product pipeline is augmented by merger and acquisition
activities to drive a sustainable high single-digits compound organic growth
profile. Furthermore, the company is
targeting incremental 50-100 bps of annual operating margin expansion which can
drive both free cash flow and earnings growth which could support a premium
valuation to its peers.
At current levels, Boston Scientific is trading at a
discount to peers even though organic revenue growth over the next few years
will be above that of the peer group.
Balance sheet flexibility will also improve as the company steadily pays
down debt this calendar year. In its
latest results announcement, the company guided 12-18% organic revenue growth
for 2021.[2] This is an impressive recovery from a low
base. Should the company continue to execute its business plan, we believe
there is upside to our intrinsic value over time.
We used weakness in the likes of Taylor Wimpey, L’oreal and
Inditex to top up our positions.
Emergence of new strains of the Covid-19 virus also affected these two
names, with Inditex (the owner of the Zara brand) relying on the reopening of
shops, and a portion L’oreal’s revenue linked not only to retail, but more
specifically travel retail. We believe
that both these high-quality companies will thrive once lockdowns are finally
over.
Outlook
As the global pandemic continues to exert its stranglehold
on the global economy, it seems absurd that equity and fixed-income markets are
still finding new highs. We’re unlikely to be wealthier given the devastating
economic impact of covid-19, so what is really going on, and how will it impact
investors? Thanks to emergency monetary stimulus, there are 30% more US dollars
in the world than a year ago, and a large proportion of those dollars have
helped to bid up the price of US equities and bonds. So rising equity prices
are not really a sign of a burgeoning economy. Rather, they are a product of
freshly printed money seeking a home that offers the best possible return. The
fact that interest rates are so low is also helping. Companies can borrow at
will, which helps to drive growth and future returns as well as prevent bad
companies from going under. At the same time, the US Federal Reserve has said
it will allow inflation to run above its 2% target before increasing interest
rates, and inflation is unlikely to rise significantly in the immediate future
since people are buying fewer and cheaper goods and services thanks to the
pandemic. As investors, we surely can’t complain about such positive
conditions. But as equity prices ride high and bond yields remain close to
zero, investors are forced to take more risk in search of return. We must also
ask whether businesses are able to live up to current valuations in terms of
future growth and earnings, and what risk that brings to portfolios.
The good news is that there are still pockets of
opportunity. Much of last year’s equity growth was driven by the US as
investors flocked to the relative safety of the American economy. Within that,
technology stocks soared since they were net benefactors of the covid-19 crisis.
As a result, the UK, Europe, and Japan struggled to rebound to pre-covid
levels. And while emerging markets fared better, that’s largely because their
valuations were low in the first place. For that reason, we will exercise
caution and consideration when investing in US-based companies while looking
for opportunities in other regions. A strengthening global economy will give
good companies around the world the opportunity to outperform their current
valuations. That said, we expect longer-term economic growth, and therefore
returns, to be muted. Government policy is likely to divert resources to
servicing debt and funding political programmes such as the green agenda,
rather than helping businesses prosper. And while economic conditions will
improve, there are significant wounds to heal, which won’t happen overnight.
Although current equity valuations could be sustainable in the absence of other
opportunities, we will remain cautious in our stock picking to avoid taking
unnecessary risk.
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