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Global Equities Shariah Monthly Report | May

Learn more about our Shariah ETF

  • The fund 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 April the Shariah ETF’s net asset value increased by 3.89% in Dollar terms, outperforming the Islamic global equity market by 0.7%.

The fund’s large healthcare exposure relative to the index was the biggest contributor to returns from a sector perspective, driven by strong stock selection. Edwards Lifesciences, Boston Scientific, and Medtronic all posted double-digit returns during the month. 

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 SAP (+14.5%). Edwards Lifesciences (+14.2%) and Boston Scientific (+12.8%) also posted strong returns during April. Kao (-3.1%) and Philips (-1.3%) detracted from returns.

SAP returned +14.5% during April, after they delivered a strong set of Q1 results. The investment thesis for SAP is that they are embarking on a major shift to the cloud. Historically the company has delivered their enterprise resource planning (ERP) to companies on-premise. The transition of these workloads onto the cloud should drive both revenue growth and margin uplift going forward. Prior to the pandemic the company had been mostly focussing on new customers, and letting current customers shift to the cloud as and when they wanted to. The new focus is now on shifting these current clients as soon as possible and this change in strategy has reaped early rewards. We are still in the early stages of this transition.

 

Portfolio Activity

A number of our medical equipment companies saw strong returns during April, including Edwards Lifesciences, Boston Scientific and Medtronic. The deferment of elective surgeries during the pandemic impacted business for these companies, however with the containment of Covid-19 ever progressing, it is expected to see a sharp rebound in 2021. 

Edwards Lifesciences is a global medical technology leader in innovations for structural heart disease and critical care. They are the pioneers of heart valve therapies with their work encompassing both surgical and transcatheter solutions. Edwards Lifesciences is well placed to take advantage of one of the key growth areas in the med tech space, namely transcatheter heart valve replacement. Edwards Lifesciences reported a strong set of results during the month. Sales for the quarter were up 8%, an impressive result given a difficult comparison from Q1 2020 and the ongoing impact of covid-19. This result was 5% above consensus estimates.[1]  Transcatheter Aortic Valve Replacement (TAVR) sales came in at $792 million, a 7% increase.[2] Their SAPIEN 3 Ultra platform continues to drive sales as remains popular thanks to its low complication rates, its ease-of-use, and its reduction in patient length-of-stay at hospitals. Earlier in April, the company received approval to begin treating patients with low surgical risk in Japan with SAPIEN 3 valves, and expects reimbursement approval later this year. The company also received approval for a US trial for TAVR in moderate Aortic Stenosis patients. The global opportunity, according to Edwards Lifesciences, will exceed $7 billion by 2024. This implies a compound annual growth rate in the low double digits. Edwards also posted strong results in its other segments, including their surgical sales being up 10% for the quarter, and critical care sales up 7%, with growth coming from sales in both the operating room and critical care as hospital capital spending began to show signs of recovery from the pandemic.

Boston Scientific and Medtronic also operate in the structural heart technology space. Boston Scientific reported during April, with the results evidencing the benefit of improved of vaccine access and procedure volumes normalising.  A difficult 2020 for Boston Scientific allowed us to initiate a position in this high quality company at the start of 2021 at a compelling valuation; it is pleasing to note that as markets recover from Covid-19 induced disruption, Boston has performed well, now the fund’s top performer year to date returning 19% to the end of April.  Boston Scientific delivered a strong quarter with $2.752 billion of total revenue, reflecting organic growth of 5.9%, above the guided range of -3% to +3%.[3] Solid sequential recovery throughout the quarter as well as new product launches underpinned the relative outperformance. Upside across all segments contributed to 1Q results, with Interventional Cardiology delivering the largest beat, driven by continued strength in WATCHMAN (one of Boston’s three major structural heart franchises), which grew more than 30% in the quarter. 

Medtronic, the larger more-diversified rival, and a long-term holding in the core strategy also reaped the benefits of elective procedures resuming, returning 10.8% during the month. 

Conversely to the strong performance of our healthcare names mentioned above, Philips lagged the market during April with a negative return of -1.3%.  Philips did report strong results, also benefitting from the recovery in elective procedure volumes as seen in their Diagnostic and Treatment segment which posted strong growth of 9%.  The company saw double-digit growth in Diagnostic Imaging, high single-digit growth in Ultrasound, and mid-single-digit growth in Image-Guided Therapy. Philips also saw a strong recovery in China with the country achieving double-digit growth.  However, alongside the results, Philips announced it had identified a quality issue in a component that is used in certain sleep and respiratory care products for which the company has taken a €250 million provision. This has tempered the market reaction to the results resulting in weakness in the share price.  Philips is in a unique position to benefit from the increasing integration of electronic health records, data analytics (including artificial intelligence), patient monitoring and clinical decision-making. We think of this as digital health which is a structural shift that could shape healthcare over the coming decades.  Despite the recent weakness, Philips has performed robustly over the past year and contributed meaningfully to the returns of the fund; we continue to see this as an attractive business to own over the long term. Source of all data: Sanlam Investments.

Past performance is no guarantee of future performance.

 

Outlook

The story of the year – from an investment perspective – has been the US government bond yield. When Covid descended in the winter of 2020, the perceived safety of government bonds was highly sought after, and bond prices went up as investors bought in, driving yields down. As we approached 2021 and learned how to live with the virus – and discovered that vaccines were on their way – the safety of bonds became less paramount.

Government bonds began to sell off in January in favour of more volatile, but potentially more rewarding, assets. Fairly relentless selling ensued, which caused prices to fall, and yields to rise. While central banks have cushioned the fall with accommodative monetary policy and hefty bond purchases, the expectation of further stimulus contributed to a rotation into those parts of the market that are more economically sensitive.  The result being a divergence between ‘growth’ and ‘value’, with value outperforming growth by a substantial margin year to date.  As the US 10-year Government bond yield began to stabilise however in April, we were witness to a reversal in fortunes for growth stocks during the month, outperforming value by more than 3%. 

While the current spike in yields has garnered attention in the press, it is actually small compared with recoveries past (2002, 2009). Inflation and bond yields are indeed rising, but this should be viewed as a return to normality rather than a cause for panic. Around 1.5% is the standard shift that you would expect to see going into a recovery. There’s no reason to think this time will defy history. There’s a pointed difference between a reflating economy, in which demand rises as people return to work and their spending power rebounds, and an inflationary problem where prices are consistently rising because of excess money in circulation. Current market movements are consistent with a reflating economy.  We may see some ‘transitory inflation’ as expansion takes hold, but this will be due to positive growth factors such as people going back to work, earning better wages, and regaining purchasing power: all signs of an economy on the rise.  A company like Nestle, with its strong pricing power, and recognisable brands was able to pass on input cost inflation without impacting their volume growth, as evidenced in its excellent recent results with 7.7% organic growth for the first quarter.

We believe the fund is a healthy mix of ‘growth’ and ‘value’.  We are value investors – we buy high quality companies below intrinsic value; they might be ‘growth’ or ‘value’.  Looking at what has led our outperformance over the last two months, it is a healthy balance between these factors, with the likes of Sanofi, Henkel, Nestle, Edwards Lifesciences and L’Oreal to name just a few that have posted double-digit returns since the end of February.  The common factor here however, is the quality attributes we seek in these businesses; strong balance sheets, enduring competitive advantages and sustainable free cash flow generation.

 

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