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Marriott Expectations Report

Introduction

For many of us, 2020 was a year that we would probably like to forget as the spread of COVID-19 forced us to change how we live our lives in order to protect ourselves and others. In a matter of weeks, office buildings and schools were closed, engrained daily routines set aside, and many interactions vital to our mental wellbeing were replaced by online applications. This global upheaval was not only unsettling, but also emotionally and physically draining. Human beings don’t like change but 2020 may well have proven to be the year the world changed, indefinitely.

From an investment perspective, our consumer lifestyles drive spending, spending drives business and business drives the economy. In 2019 alone consumers worldwide spent roughly $50 trillion to meet everyday needs (around 63% of global GDP). The dramatic and rapid shift in our day-to-day lives – and consequently spending patterns – have had profound implications for investing. In this report we discuss how these changes have affected markets locally and offshore. We also look at how our funds weathered the COVID-19 storm and our expectations for 2021.

2020 – a year of winners and losers

Being forced to change how and where we spent our money understandably resulted in investment “winners” and “losers”. Certain businesses and sectors benefitted from the COVID-19 induced redirection of spending (i.e. internet companies like Zoom and Amazon), whereas others have suffered, such as shopping mall owners and airlines. The chart below highlights how Zoom and Boeing’s performance diverged during 2020:

It is important to recognise that this outcome was unpredictable. No one expected COVID-19, just like very few forecast the global financial crisis of 2008, thus fund managers could not proactively position themselves for the pandemic. Had the virus been of a digital nature, investment outcomes would have been very different. Consequently, investors were at the mercy of an unpredictable event.

The above highlights exactly why we invest the way we do at Marriott. Our income focused investment style is designed to help us identify companieswhose prospects are largely unaffected (for better or worse) by abrupt changes in the external environment which, for the most part, areunpredictable. To achieve this, we use a security filtering process to narrow down the highest quality, most resilient companies in the world – companies that should weather any crisis, whether it be financial, political, economic or health-related. Instead of trying to pick short term winners, we do our best to identify companies that will consistently do well.

Predictable dividends offshore in the most uncertain times

It is estimated that dividends declined by approximately 20% globally in 2020 as many companies held on to their cash to endure lockdowns. We are pleased to report that none of the offshore companies we invest in cut their dividend as highlighted in the chart below:

Generally, dividends are maintained or increased when companies are in good financial shape and boards are confident about the future. On averageour offshore stocks managed to grow their dividends by approximately 6% demonstrating the resilience of these businesses. From a capital growthperspective, the end results were also solid. Most importantly, our process delivered what it was designed to deliver, when our investors needed it most: reliable income, low volatility and more predictable investment outcomes.

The Marriott Offshore Share Portfolios produced good results, as per the table below:

Returns as at
31 December 2020
GBPUSDEUR
1 year3 years*5 years*1 year3 years*5 years*1 year3 years*5 years*
Income Growth Portfolio10.9%9.3%11.3%14.5%9.7%9.7%5.2%9.0%7.1%
Balanced Portfolio10.3%8.5%10.9%13.9%8.9%9.3%4.7%8.3%6.7%

*Annualised Gross of Investment Management Fee                                                                                                                                                           Source: Bloomberg

Our local Feeder Funds (these invest directly into our offshore unit trusts which hold the same companies) provided equally decent results:

Our Worldwide Fund, which currently has a 75% exposure to the same international equities, has performed reasonably well:

First World Hybrid Real Estate plc – our direct UK property fund – has continued to perform well despite the wide-reaching impact of Covid-19 in the UK. This is mainly due to the type of property selected for inclusion in the portfolio (predominantly distribution warehousing), the nature and lengthof the portfolio leases, and the financial standing of its tenants. The income produced by the Fund also increased by 3%, underpinned by a high-quality and relevant direct commercial property in the UK.

SA Inc. under pressure

On the local front, South Africa was already grappling with low business and consumer confidence, weak public finances and high unemployment heading into the crisis. The impact of the hard lockdown was therefore severe. There were also limited resources available to get the economy back on track. Consequently, SA-centric stocks have failed to bounce back to the same extent as companies whose fortunes are linked to the rest of theworld, like Naspers and resource stocks (both excluded from our investable universe as a result of low yields or unpredictable dividends). Local property stocks were particularly hard hit due to already stretched balance sheets and an oversupply of office space.

Considering the struggles of SA Inc. stocks, our funds with SA equity exposure weathered the COVID-19 storm comparatively well from both an income and capital growth perspective. Through emphasising quality and defensiveness in our stock selection process, the buying of bonds at very attractive yields during the peak of the crisis; and, maximising offshore exposure, the portfolios were able to deliver a similar level of income as produced in 2019, whilst minimising volatility and protecting capital values. The table below contrasts the performance of the S&P Dividend Aristocrats Index against the Marriott Dividend Growth Fund, Balanced Fund and Essential Income Fund. The S&P SA Dividend Aristocratic Index represents companies that have increased or maintained stable dividends for the past seven years running.

SA Bonds offering value

Although volatile, it was not all doom and gloom for SA-centric investments. From a bond market perspective, the pandemic presented a great opportunity – the chance to invest in a relatively low risk investment at a very attractive yield.

Towards the end of March 2020 the R186 (a fixed-rate government bond maturing in 2026) touched 12%. In other words, the government wasguaranteeing investors a 12% return for the next 7 years. Compare that to the yield on money in the bank today, and one can comprehend the magnitude of the opportunity.

During that period of volatility, we invested approximately 40% of our Core and High Income Funds into the R186 which served investors exceptionally well, as outlined below:

2021 – the cost of the virus: debt

By this time next year, if not sooner, it is widely anticipated that we will be able to live our lives more freely as vaccines become widely available across the globe. From an investment perspective it is tempting to believe that this will spell the end of market volatility and uncertain times. Unfortunately, this is unlikely to be the case as beating the virus has come at a huge cost.

To mitigate the economic damage from containment efforts such as lockdowns, global debt increased by an unprecedented $15 trillion in the first 9 monthsof 2020 (according to the Institute of International Finance). Total global debt was expected to reach 365% of GDP by the end of 2020, surging from320% at the end of 2019.

In our opinion, this enormous debt burden has two unavoidable investment implications:

1.  After an expected recovery in 2021, global growth will likely be sluggish for years to come as more spending is redirected from investment and consumption towards servicing debt.

2.  Interest rates will have to remain at historically low levels for longer because the world simply cannot afford higher interest rates.

This environment should suit our income focused investment style. Our equity-based portfolios have emphasised offshore companies (our preferredequity exposure) like Nestle, L’Oréal, Johnson and Johnson and Colgate-Palmolive. These are amongst the best dividend payers in the world and provide goods and services that we can’t go without– ideal investments when growth is tough to come by. Their dividend yields are also veryattractive when compared to bond and cash yields which further enhance their relative attractiveness.   While perhaps not as exciting as tech stocks, their values are certainly a lot more sensible.

For investors looking for income, preference has been given to SA bonds over property, corporate debt and cash. Although South African bond yields have come down significantly since the peak of the crisis, they continue to offer amongst the highest real yields in the world. Ourgovernment’s balance sheet may be stretched, but in a world where approximately 25% of the global bond market is offering negative yields, we believeinvestors are being more than adequately compensated for the risk.

Summary

2020 was a year where our investment philosophy and process was put to the test. Once again it delivered what it is designed to deliver– reliable income, relatively low volatility and more predictable capital outcomes.

Looking ahead, an environment of sluggish global growth and historically low interest rates is likely to persist for many years to come as we pay back the debt accumulated during the crisis. This environment should suit our investment style and ensure we continue to deliver on our promise to you – more financial peace of mind.







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