Comgest is an independent, international asset management group with a long-standing history backed by a strong track record. Since its establishment in 1985, the group has pursued a long-term ‘quality growth’ and responsible investment style. In this interview with IFN, the Comgest Europe Equities Investment Team expounds on its Shariah strategy and shares its insights on the Islamic investment space.
How did Comgest’s Shariah investment journey begin?
Comgest is an independent asset management group which, since its creation in Paris in 1985, has pursued a long-term ‘quality growth’ and responsible investment style. What makes Comgest different from most other asset managers is its ownership structure: the company is fully owned by its employees and founders. Our European equity strategy, launched over 30 years ago, laid the foundations for Comgest’s quality growth investment philosophy.
Although the early ingredients were not as precise as they are today, our key components were already there: unconstrained long-term investments in quality stocks and concentrated portfolios as proof of our investment convictions.
Comgest’s Pan-Europe Shariah Equities strategy launched in 2008. Our quality growth investment approach results in a significant overlap with the Shariah overlay such as typically not investing in banks and favoring sound balance sheets with low or no debt. Consequently, the majority of our Pan-European investment universe is Shariah compliant. Our Shariah strategy is managed by the same experienced team that manages our other European funds.
As of the 30th June 2020, Comgest has 10 offices globally with more than 180 employees, including 46 investment professionals. We manage more than US$35 billion-worth of clients’ assets in various equity strategies, of which over US$10 billion is invested in European equities.
Tell us more about the firm’s Islamic portfolio. What is the strategy? How is the takeup? How is it performing?
Our strategy relies on Comgest’s long-term, ‘quality growth’ philosophy. We seek to invest in companies with durable competitive advantages and aim to build portfolios that can deliver sustainable, double-digit aggregated earnings per share growth over a five-year investment horizon. Portfolio construction follows a selective investment process that integrates environmental, social and governance (ESG) criteria. Out of hundreds of equities listed in Europe, only a portion feature in Comgest’s investment universe, due to our strict selection process that requires unanimous team approval. Our assessment of stocks on non-financial criteria is the basis for our ESG ‘Quality Level’ scores, which reflect Comgest’s assessment of a company’s ESG quality. We are not constrained by countries or sectors, which allows us to purely focus on bottom-up stock selection, driven by fundamental research. As a result, we tend to manage concentrated portfolios of 30–40 names.
As of the 30th June 2020, around two-thirds of Comgest’s Pan-Europe Shariah Equities portfolio1 was invested in three sectors: information technology, healthcare and consumer staples. Importantly, we do not invest in trends or sectors, but in companies able to successfully monetize those. Our holding period is typically more than five years and several names have been held in the strategy for many more years.
We do not hedge currencies, but it is worth noting that multinational companies often have some form of ‘natural hedging’ by operating globally, thereby generating cash flows not only in euros, but also in the US dollar, Chinese yuan, etc. We like to say that the portfolios within our European strategy can be seen as “global portfolios whose companies are headquartered in Europe”.
For the period of the 31st December 2010 to the 30th September 2020, Comgest’s Pan-Europe Shariah Equities portfolio has delivered a compound annual growth rate of +9.4% (in US$, net of fees) versus +7.9% for the S&P Europe 350 Shariah Index and +3.9% for the MSCI Europe Index, both inclusive of dividends.2
Comparing Shariah compliant and conventional funds/strategies, are there meaningful distinctions as far as performance is concerned that investors should be aware of?
Performance divergence between Comgest’s European Shariah compliant and conventional strategies has been minimal over the past few years. Indeed, the portfolio overlap is significant, given that the majority of our conventional universe is Shariah compliant as of today.
The same team of investment professionals contributes to idea generation for both strategies. However, one cannot guarantee the absence of divergence. Some names in the conventional strategy are not Shariah compliant — for instance because they took on debt to make an acquisition — and simply cannot be held in the Islamic portfolio.
Do you integrate environmental, social and governance factors in your stock selection process?
At Comgest, we believe a responsible approach to ESG issues has a positive impact on a company’s long-term sustainable growth. Hence, ESG criteria are integrated into our bottom-up analysis and our investment process.
Our work in that field is based on three pillars: 1) we integrate ESG into our research and portfolio building process, 2) we engage with companies to influence responsible and conscientious action, and 3) we promote best practice in ESG policy. We believe that being long-term makes us more credible when engaging with companies or promoting some of those best practices.
We see investing responsibly as an opportunity. That is because the sustained success of any company depends on the health of the economic and environmental systems around it. In the long term, we believe that a business run responsibly will outperform one that is not.
Comgest has been a signatory to the UN Principles for Responsible Investment since 2010 and is rated ‘A+’ on three pillars: strategy and governance, listed equity — incorporation and listed equity — active ownership.
What is your market outlook for the rest of 2020?
2020 has so far been another favorable year for quality growth stocks, as demonstrated by our portfolio’s outperformance year-to-date. Already in 2019, growth companies performed strongly in the context of an economy that, even pre-COVID-19, was showing signs of stress. This year, it is the notion of quality that has helped many of the companies in the portfolio stand out. That quality comes in many forms: top-line resilience, which was particularly visible in the healthcare sector; accelerated share gains through innovation or digitalization; quality in terms of the balance sheet; or the simply quality of execution.
What can we discern heading into 2021 after this favorable period for our style? The portfolio balances a healthy mix of companies with ingredients that we believe can continue to prosper even in the event of a recovery. The first ingredient is one we are not generally accustomed to given our selection criteria: companies that may bounce back stronger in a recovery. We are referring specifically here to our travel companies which have suffered more than most as passenger traffic globally collapsed. The same is true, to a lesser extent, for those companies which were directly impacted by store closures for a period of time.
For these businesses, a return to normal should see their profits rebound strongly. The second group of companies consists of those in unloved sectors despite solid and visible growth prospects, trading on very reasonable multiples. Finally, the third ingredient involves very high-growth companies where we are patiently awaiting buying opportunities to increase our exposure.
What the rebound will look like and when it will happen remain highly uncertain. Increasingly, some commentators refer to a K-shaped recovery, with the downturn essentially accentuating pre-crisis trends whether that be technological disruption, environmental concerns or healthier lifestyles. We believe our portfolio companies sit firmly on the upper arm of the K. We are convinced that the years of investments made by these companies to future-proof their businesses should allow them to stand out as changes in consumption patterns accelerate.
Important information:
For professional investors only. Investing involves risk including possible loss of principal. Past performance is not a reliable guide to future performance. Indices are presented for comparative purposes only. This material is for information purposes only. The opinions and estimates expressed in this document are valid at the time of publication only, do not constitute independent investment research and should not be interpreted as investment advice. This advertisement has not been reviewed by the Securities and Futures Commission (‘SFC’) of Hong Kong nor by the Monetary Authority of Singapore (‘MAS’). Comgest S.A. (17, Square Edouard VII, 75009 Paris, France) is regulated by the Autorité des Marchés Financiers. Comgest Far East Ltd (Hong Kong) is regulated by the SFC. Comgest Singapore Pte. Ltd. (Singapore) is regulated by the MAS.
For further information on the Comgest Shariah strategy, please contact Robert James, the managing director of business development and client services based in the Comgest Hong Kong office, at [email protected].
1 Representative account managed in accordance with the Pan-Europe Shariah Equities GIPS Composite (the Composite) since the composite’s inception. The representative account is the open-ended investment vehicle with the longest track record within the Composite. The performance results discussed reflect the performance achieved by the representative account. The results are not indicative of the future performance of the representative account or other products within the same strategy. Account performance will vary based upon the inception date of the account, restrictions on the account, and other factors, and may not equal the performance of the representative account presented herein.
2 Source: Comgest/FactSet, unless otherwise stated. Past performance is not a reliable guide to future performance. The index is used for comparative purposes only and the strategy does not seek to replicate the index. The calculation of performance data is based on the net asset value which does not include any sales charges. If taken into account, sales charges would have a negative impact on performance.