- 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 March the Shariah ETF's net asset
value increased by 3.6% in Dollar terms, outperforming the global equity market
by 0.5%.
Consumer staples were the
best performing sector globally and contributed 40% of the strategy’s overall
return with an exposure of 23% of the strategy’s net assets. Henkel, Mondelez and Procter and Gamble (a
new position in February) had double digit gains during March.
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 Henkel
(+13.8%). Taylor Wimpey (+13.0%)
continued its strong performance, and Assa Abloy (+10.8%) also performed
well.
Henkel
The Adhesives division is 50% of Henkel’s operating profit
and will see organic growth rebound sharply in the first half of this year,
namely by +5% in the first quarter and an estimated +22% in the second quarter.
The Adhesives division is an ultra-cyclical division for Henkel and will
benefit as industrial activity rebounds globally. Economists expect a V-shaped
recovery of industrial production with global industrial production expected to
grow +5.5% in 2021 from a contraction of 5% in 2020. This will put global industrial production
back to 2019 levels. We used earlier
weakness in the share price of Henkel to increase our position size in
anticipation of a strong recovery in the adhesives division.
Henkel will also benefit from a strong recovery in its
Beauty Care sales. The forced closure of salons pulled Beauty Care organic
growth down to -2.8% last year. As salons reopen, we expect a similar sharp
rebound in organic growth of 4% in quarter one and 16% in quarter 2. Whilst the household goods division has some
ongoing lingering concerns we expect management to beat low embedded
expectations as the company invest more in historically underinvested brands
and try to turn around a culture of share losses in the US in particular.
Taylor Wimpey continued to benefit from macro tailwind
described in detail in our February commentary.
Assa Abloy
Assa has performed well since we initiated a position at the
launch of the fund in September 2020. We remain optimistic on Assa Abloy’s
earnings near term due to the group’s business model which has proved itself
relatively resilient throughout macro-economic downturns. However the stock is
increasingly discounting a continuous benign economic environment which may not
be forthcoming. We are concerned that
near term, investors could be negatively surprised by the extent of the revenue
and earnings decline as the lock/door industry is not spared from the current
demand holiday. However, in the absence of structural factors affecting Assa
Abloy’s end markets, we see a relatively fast earnings recovery, with margins
being supported by savings and a positive net pricing. We will be patiently
waiting on the side-line for an opportunity to invest in this high quality
business.
Alibaba (-4.6%) and Qorvo (-2.2%) lagged
during the month. The Chinese regulator continues to talk tough on regulating
their large technology names and this is having a dampening effect on market
sentiment. Lending seems to be of particular interest to the regulator and this
would expose Alibaba.
Qorvo was exited during the month as the stock has fallen
out of Shariah compliance.
Source of all data: Sanlam Investments. Past performance is
no guarantee of future performance.
Portfolio Activity
During March we exited our position in Assa Abloy
(described above) and initiated a position in Skyworks.
Skyworks Solutions manufacture highly innovative
analog semiconductors connecting people, places, and things; and the forefront
of developing empowering wireless networks, such as 5G and Internet of Things
(IoT). Its flagship handset products handle amplification, filtering, tuning,
power management, and audio processing in phones used by Apple Inc., Samsung
Electronics, Huawei, HTC, ZTE, and many more. Other products include
attenuators, diodes, couplers, phase shifters, receivers, and switches used in
a broad array of industries. The company serve customers in the aerospace,
automotive, broadband, cellular infrastructure, connected home, entertainment
and gaming, industrial, medical, military, smartphone, tablet, and wearable
markets. About 60% of the company's sales comes from US customers.
We believe Skyworks continues to represent a compelling
opportunity with a clear path toward double-digit sales and earnings per share
growth over the next 3 years at least. 5G remains one of the most powerful
investment themes in the semiconductor industry and still has a long way to go
in terms of growth opportunities and market share shifts. Furthermore, we see a
growing opportunity in consumer electronics, IoT and automotive with a broad,
margin-rich WiFi 6 offering providing compelling long-term value enhancement.
Outlook
The global economic outlook is strengthening, and this view
has been reinforced by many companies reporting expectation beating earnings for
the last quarter of 2020. But while good business results go some way towards
explaining the confidence in equity markets, are they enough to justify
inflated prices? As always, it’s
important to dig beneath the rhetoric to understand what is really going on and
where investment opportunities lie.
Since the pandemic struck, the gulf between growth stocks-
whose perceived ability to outperform the market over time is due to their
future potential, and value stocks, which appear undervalued given their earnings
forecasts and which tend to be more dependent on a strong economy, has widened
considerably. This has been driven by expanding valuations in growth stocks,
rather than increased earnings expectations, which suggests investors are
getting carried away by the promise of a post-Covid boom buoyed by central bank
support.
We believe there will
be continued volatility in markets as the world emerges from the pandemic. Last
month, government bond yields on both UK gilts and US treasuries began to climb
rapidly, which spooked equity markets – a case in point. When globally, real yields remain negative, a
minor increase in real interest rates could have a detrimental impact on the
relative multiples of growth shares for example, whereby a higher discount rate
will reduce the value of profits over the next ten years. Current conditions make our approach to
careful stock-picking even more critical, and with lessons from history such as
the ‘dot-com bubble’ and the global financial crisis showing us that changes can unfold
dramatically, we continue to avoid areas of the market that look most
overvalued.
Energy stocks continued their strong performance in 2021,
after bottoming out toward the end of October last year. Year to date, the drag on the portfolio amounts
to 2.3%. We continue to avoid this
sector due to a combination of low return on equity, highly unpredictable
earnings as well as high capital intensity. Instead, we have deployed capital
to names like Procter and Gamble, and Skyworks this year. Procter and Gamble generates a normalised
return on equity of over 32%, operating margins of 22% and a robust free cash
flow stream.
Strong stock selection in health care and information
technology has helped the negative impact of not owning any energy names.