Global Equities Shariah Monthly Report | March

13 March 2021

  • The Shariah ETF will invest in companies of a high quality with wide economic moats       
  • The Shariah ETF 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 February the Shariah ETF’s net asset value decreased by 1.1% in Dollar terms.

With the UK leading the way with its successful rollout of the Covid-19 vaccine, reopening hopes have given a further lift to cyclicals, and stocks which benefit from growth and recovery in the economy. 

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 Inditex (11.4%).  Taylor Wimpey (9.6%) and Boston Scientific (9.4%), a new position in the fund this year, also performed well. 

Inditex reported results in March and the market rewarded the shares in February on anticipation of a good results outcome versus its more challenged peers. Even though the lockdown last year had a severe impact on the company, Inditex still managed to keep revenue down only 24.5% at constant currencies as store trading hours were reduced by 25.5%.[1] Online revenue was up 77% at constant currencies, now contributing 32% of revenue from 14% in 2019,[2] helping offset the severe instore sales drop. Online remains an important focus for Inditex as operating margins are nondilutive to group operating margins and less capital-intensive compared with stores. As the company continues to shift more of its sales online over time there will be a net benefit of more free cash flow for the firm.

The macro environment for Taylor Wimpey continues to improve as the company will reinstate a dividend in 2021.[3] Overall, management has a positive medium-term housing market outlook given the interest rate environment, supportive policies and good levels of unsatisfied demand. Following the company’s announced expectation for 2021 operating margins to be 18.5-19%,[4] management notably expects 2022 to be up a further 100bps year on year.  Management is confident that by 2023 operating margins could be back at a target range of 21-22%,[5] helped by incremental volumes from new land acquisitions.

Kao (-7.6%), and Nestle (-6.7%) lagged during the month.  Kao reported results during the month, missing its full-year guidance and announcing a wider shortfall in operating profits than expected.  Although demand for hygiene-related products (hand soap, hand sanitizer, home care products, etc.) increased due to the Covid-19 pandemic, performance of Cosmetics Business and Human Health Care Business was weak.  Whilst in the short term Kao is facing the realities of the wearing of facemasks affecting its makeup sales, and competition in baby diapers in China, Kao’s strength in its detergent and skin care brands remains entrenched. Kao continues to rationalise its cosmetics portfolio with a greater focus on higher margin prestige brands, and expansion in to China’s duty-free channel.  Whilst the effects of C-19 are evident, the gradual return to normality should have a positive impact on this part of the business as travel resumes, and consumers go back to normal social and working habits.  Kao is a defensive, high quality company with a strong balance sheet and a commendable track record of dividend growth. 

The consumer staples sector as a whole has lagged the market since the vaccine news back in November, with a clear divergence between stocks that are obvious beneficiaries such as L’oreal and Shiseido, and those who do not perhaps have an obvious short term benefit from the world normalising, such as Kao and Nestle.  This also includes consumer staples giant Procter and Gamble, whose recent weakness we have been able to use to initiate a new position at a more favourable valuation.  Our long term theses for these high quality companies remain well intact. 

Source of all data: Sanlam Investments. Past performance is no guarantee of future performance.


Portfolio Activity

We initiated a position in Procter and Gamble during February, We view P&G as a high quality business with a decent opportunity to unlock value from its exceptionally strong portfolio of brands, which serves approximately 4.8bn people worldwide. We are attracted by management putting greater emphasis on value creation to drive shareholder returns through productivity and efficiency initiatives. We believe management’s focus on driving productivity savings could add up to 200bps to gross margins over the next couple of years. We also see organic growth possibly picking up to the 3% level with a greater focus on core brands and new product initiatives. 

P&G has remarkable record of 62 consecutive years of dividend increases and we see no reason why this will not continue for the foreseeable future. This is a fundamentally robust business producing an excellent return on capital employed of at least 80% during recent years. 

We find P&G average free cash flow conversion ratio of 100% over the past seven years as a very appealing metric.  After a recent pullback in P&G, the stock is on the same level as 18 months ago whilst earnings have grown strongly over this period.  With a free cash flow yield of over 5% two years from now we regard the current share price as attractive for patient long term investors in a businesses with low debt, a strong market position and a return on equity of 28%.



The investment world continues to change, and the world is very different to a number of years ago.  There were large drawdowns during the last 7 years but every pullback was an opportunity to add equity exposure.  Global equity markets have reached new highs as Central Banks printed $7trillion to fight Covid-19.[6]


For illustrative purposes only. Past performance is no guarantee of future performance.

Today we are witnessing extraordinary gains from shares which generate low cash flows (relative to market value) or burn cash.  

Good stories often end with bad outcomes if they are not backed by sound fundamentals. During the 2000 technology bubble, the 2008 financial crisis and the 2020 Covid induced market meltdowns, investors suffered tremendously. Businesses not supported by sound fundamentals collapsed in the market corrections that followed; we aim to minimise the risk of being invested in businesses not backed by sound fundamentals.

We will not participate in good stories unless they are backed by measurable free cash flows, and are trading at or below intrinsic value. Every financial crisis is an opportunity to invest in sound businesses.  We used the opportunities presented to us by the Covid-related market drawdown, and the subsequent vaccine-induced volatility in the recent months to invest in superior businesses like Boston Scientific, Procter & Gamble, Inditex and Edwards Lifesciences. 

To remind our investors, our core investment principals have been unchanged for the 13 years since the strategy launched:

  • Identify businesses with durable high returns on capital with strong recurring free cash flows        
  • Stay invested whilst the business is trading at or below our assessment of fair value        
  • Don’t sell a great business only because it is temporarily over valued        
  • Repeat steps 1-3 over a full investment cycle  

Our high-quality strategy means we avoid businesses which constantly invest all their free cash flows in the hope of a better future outcome. These types of businesses are very popular with investors at the moment, however at Sanlam Investments we prefer businesses where we can identify how the cash is generated and reinvested.



Source: Seeking Alpha

The quote from Charlie Munger below is insightful:

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year.  The second earns 12%, but all the excess cash must be reinvested — there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’  We hate that kind of business.”


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