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ACTIVE INVESTMENT
MANAGEMENT AT ITS BEST
A quality business with a promising long-term growth runway doesn’t necessarily translate into a high-return investment. Equally important is whether the share is attractively priced relative to our estimation of fair value. We recently sold what we regard as an excellent business – Edwards Lifesciences – since we no longer view the company as a great investment from a valuation point of view. Our decision-making around Edwards clearly illustrates the benefits of active management for the overall performance of our clients’ portfolios.
When psychologists talk about ‘heuristics’, they are referring to mental shortcuts that enable us to make decisions quickly without having all the relevant information. In everyday life, heuristics generally work well. When deciding what to have for lunch, for example, we won’t compare all possible meals – we’ll immediately narrow down the choices based on preference, availability, price, and so on.
In the world of investments, a common heuristic is, ‘only invest in companies that you strongly believe in’, or, put another way, ‘only invest in companies that have goods and services that you yourself use’. This advice implies that one can tell whether a company is a good investment based on its quality.
For the Sanlam Global High Quality Fund, investing in high-quality companies is – as the name signifies – of paramount importance. Successful investing can’t rely solely on heuristics, however. In our view, this is only half the work required for effective investment decision-making. When we consider a stock for inclusion in the fund, we also need to understand how its price compares to the value we ascribe to the business. If the price of the stock is higher than its intrinsic value, it makes no difference how great a company appears to be – it will make for a poor investment.
A case in point is our investment in Edwards Lifesciences, currently the global medical technology leader in innovations for structural heart disease. We last invested in the business in September 2023, but we recently decided to sell our stake. Edwards primarily treats a disease called aortic stenosis (AS), which has a high prevalence and remains undertreated. As such, the company’s growth runway is very large, and we think it is a fantastic business. With its quality not in question, why are we then selling Edwards?
Quite simply, it comes down to price. The share price has moved beyond our estimation of fair value and future returns therefore look less rosy. So while we still see Edwards as a great company, we no longer view it as a great investment.
This isn’t the first time we’ve been invested in Edwards Lifesciences and sold the share based on valuation. We also initiated a position in October 2022, before exiting again in June 2023. You may well ask why we bothered to sell at that point, only to reinvest for a second time. Wouldn’t it have been easier to stay invested throughout?
The performance of Edwards over time – and our actions during this period – clearly illustrate the benefits of active investment management. From February 2022 to June 2024, the share declined by 14.8% in US dollars. However, over the same time frame, the MSCI World Index rose by 18.5%. So if you had simply held onto the stock, your performance would have lagged the market by a wide margin.
Through active management, however, we were able to enjoy total returns of 60% in Edwards since our initial investment in October 2022 until the recent sale – taking into account the sale in June last year and the second investment tranche in September 2023. This is an excellent performance compared to that of the wider market and indeed Edwards itself.
While we’ve now exited Edwards after a period of significant strength in US dollars since the start of 2024, the company remains on our watchlist.
In summary, our experience with Edwards Lifesciences exemplifies active management at its best. It illustrates two important points. First, valuation matters – we can’t just identify the best businesses and then remain invested in them ad infinitum. A good business doesn’t necessarily translate into a good investment. Second, as long as the companies invested in are well understood, and the valuation we ascribe to them is accurate, skilful active management can produce excellent returns for our clients.
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