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
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
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.
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. Transcatheter Aortic Valve Replacement
(TAVR) sales came in at $792 million, a 7% increase.
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%.
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
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.
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.
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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