Expectations for 2021   

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 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.

Zoom vs boeing

The above highlights exactly why we invest the way we do at Marriott. Our income focused investment style is designed to help us identify companies whose prospects are largely unaffected (for better or worse) by abrupt changes in the external environment which, for the most part, are unpredictable. 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:

Generally, dividends are maintained or increased when companies are in good financial shape and boards are confident about the future. On average our offshore stocks managed to grow their dividends by approximately 6% demonstrating the resilience of these businesses. From a capital growth perspective, 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.

Dividend growth 2020

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

Returns as at 31 December 2020 GBP USD EUR
1 year 3 years* 5 years* 1 year 3 years* 5 years* 1 year 3 years* 5 years*
Income Growth Portfolio 10.9% 9.3% 11.3% 14.5% 9.7% 9.7% 5.2% 9.0% 7.1%
Balanced Portfolio 10.3% 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:

As at 31 December 2020 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
International Growth Feeder Fund 11.2% 12.0% 6.0% R23 552 R90 736 R137 174
Sector Average 13.2% 10.8% 5.3% R2 677 R10 948 R15 572
 
First World Equity Feeder Fund 12.2% 11.8% 4.8% R24 146 R90 604 R126 324
Sector Average 20.3% 14.0% 8.4% R3 214 R10 770 R14 556
 
International Real Estate Feeder Fund -6.2% 6.1% 2.3% R25 500 R117 800 R167 105
Sector Average -3.0% 6.8% 1.1% R11 416 R37 308 R41 960
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

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

As at 31 December 2020 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Worldwide Fund 7.5% 8.0% 3.8% R25 957 R77 017 R112 315
Sector Average 10.7% 7.3% 5.0% R13 520 R43 015 R61 900
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

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 length of 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.

As at 31 December 2020 (GBP) 1 year 3 years* 5 year*
Income Return Price Return Total Return Income Return Price Return Total Return Income Return Price Return Total Return
First World Hybrid Real Estate plc (A) 4.8% 1.2% 6.0% 4.9% 1.8% 6.7% 5.1% 2.1% 7.2%
*Annualised Gross of Investment Management Fee   Source: Marriott

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 the world, 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.

As at 31 December 2020 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Property Income Fund -34.9% -14.2% -5.8% R55 433 R168 112 R309 276
Sector Average -33.1% -19.7% -8.9% R48 290 R131 212 R249 531
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

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.

 
As at 31 December 2020 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
S&P SA Dividend Aristocratic Index -14.3% -7.6% 0.7%
 
Dividend Growth Fund -6.6% -2.9% 1.1% R27 052 R75 804 R139 616
Sector Average 1.1% -0.2% 2.9% R25 341 R66 043 R109 856
 
Balanced Fund (C) 1.5% 3.0% 4.1% R42 441 R126 018 R216 481
Sector Average 5.1% 3.5% 4.3% R26 173 R78 005 R129 616
 
Essential Income Fund -14.6% R49 777
Sector Average na
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData and S&P Global

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 was guaranteeing 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:

As at 31 December 2020 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Core Income Fund (A) 9.8% 9.0% 8.8% R66 350 R233 495 R394 706
Core Income Fund (C – LISPs only) 10.1% 9.3% 9.2% R69 219 R242 289 R408 924
High Income Fund (C) 10.3% 9.3% 8.9% R69 393 R232 851 R399 938
Income Fund 7.6% 8.1% 8.0% R59 326 R211 671 R366 766
Sector Average 5.8% 7.1% 7.4% R57 688 R197 564 R340 267
*Annualised     #Assuming R1,000,000 invested    Source: ProfileData

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 months of 2020 (according to the Institute of International Finance). Total global debt was expected to reach 365% of GDP by the end of 2020, surging from 320% 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 preferred equity 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 very attractive when compared to bond and cash yields which further enhance their relative attractiveness. While perhaps not as exciting as tech stocks, their valuations are certainly a lot more sensible.

PE Ratio

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. Our government's balance sheet may be stretched, but in a world where approximately 25% of the global bond market is offering negative yields, we believe investors 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.


Disclosures

Collective investment schemes are generally medium to long-term investments. The value of participatory interests or the investment may go down as well as up. Past performance is not necessarily a guide to future performance. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. If required, the manager may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. Forward pricing is used. The ruling price of the day is calculated at approximately 15h00 SA time each day. Purchase and repurchase requests must be received by the manager by 15h00 SA time each business day. Prices are published on a daily basis on the Marriott website, www.marriott.co.za. Unit trusts are calculated on a net asset value basis. Net asset value is the value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Marriott does not provide any guarantees with respect to the capital or the return of the portfolio. A schedule of fees and charges and maximum commissions is available on request from Marriott. Where initial fees are applicable, these fees are deducted from the investment consideration and the balance invested in units at the net asset value. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the fund and are subject to different fees and charges. Declaration of income accruals are monthly. Performance figures are based on lump sum investment. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Past performance is not indicative of future performance. This portfolio may be closed to new investors in order to manage it more efficiently in accordance with its mandate. The TER shows the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees relating to the management of the portfolio. A higher TER ratio does not necessarily imply poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. Transaction Costs are a necessary cost in administering the Financial Product and impacts Financial Product returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of Financial Product, the investment decisions of the investment manager and the TER. Marriott Unit Trust Management Company (RF)(Pty) Ltd is a member of the Old Mutual Investment Group. Old Mutual is a member of the Association for Savings and Investment South Africa (ASISA).

Please note that where the term ‘yield/yields’ is used, these are historic yields