Marriott Investor Update – COVID 19   

The current lockdown in South Africa, and similar movement restrictions in many other countries around the world, has affected all of us on a very real and personal level. The market impact and financial cost of containing the spread of COVID-19 has been widely covered in the media and tends to highlight those economic aspects which are out of our immediate control. So, in this update we are stepping away from that and have chosen rather to focus on the aspects which are within our control, which we can act on and which do make a difference for our investors – we want to highlight why our portfolios offer resilience and are well placed to bounce back strongly when things get back to normal, as they inevitably do.

Income Focused Investing

Marriott's purpose is to create financial peace of mind through offering more predictable investment outcomes. To achieve this, we adopt a unique income focused investment style, underpinned by two key disciplines:

  • The selection of securities that produce reliable dividends (income streams), ideally growing.
  • The purchase of these securities (and their income streams) at appropriate prices.

In our opinion, this style of investing is ideally suited to long-term investing with a strong focus on delivering on expected outcomes, rather than trying to outperform benchmarks and competitors. In the current economic conditions, income-focused investing has the advantage of being able to provide investors with more predictability due to the emphasis it places on high-quality investments which tend to hold up well in difficult times and bounce back strongly when circumstances improve.

Marriott's Positioning

Quality investments

To identify securities with the ability to produce secure income streams we use a security filter process designed to ensure our portfolios are able to withstand recessions and big market shocks. The diagram to the right outlines how the filter works.

filter

As such, our portfolios were well positioned for the COVID-19 crisis, as outlined in the table below:

Asset Class Current Average Income Yield Historic Average Income Yield Marriott's positioning
International Equities 3.4% 2.7%
  • No exposure to resource stocks, banks, or highly cyclical industries
  • No exposure to small/medium cap stocks
  • High exposure to companies with exceptionally strong balance sheets
  • High exposure to food, personal care, healthcare and other basic necessity providers
  • High exposure to companies that have never cut a dividend
International Real Estate 5.9% 5.2%
  • Emphasis placed on quality/strong balances sheets
  • Minimal exposure to hospitality, travel and leisure sector
  • High exposure to logistics
  • Relatively low exposure to retail
Local Equities 5.3% 3.4%
  • Very defensively positioned going into the crisis (a reflection of our pessimistic outlook for SA GDP growth)
  • Over 50% of SA stocks we own (approximately 70% based on current target weights) continue to operate during the lockdown as they have been defined as essential services by the SA government.
  • Core holdings include Shoprite, Spar, Pick n Pay, Netcare, Life Healthcare, Clicks, Sanlam & AVI.
Local Property 23.0% 9.8%
  • Emphasis placed on high quality portfolios, balance sheet strength & liquidity
  • No exposure to small cap counters
Credit & Cash 8.0% n/a
  • No exposure to sub-investment grade credit (national scale)
  • Banking exposure limit Standard Bank, FNB, Absa, Nedbank and Investec
  • Relatively high exposure to government bonds at attractive yields (in excess of 10%)
  • High exposure to medium term government bonds

Attractive Valuations

Looking ahead, our security filtering process gives us great confidence that all the businesses we invest in have the brands, balance sheets, and management teams to effectively navigate the current crisis. We also expect that their share prices will bounce back strongly, once the world gets back to work, as dividend yields are highly attractive. The businesses we invest in are also likely to take market share from smaller, more vulnerable businesses during this time of uncertainty and establish even more dominance in their particular industries.

The chart below highlights the yield differential between our international equities and the US 10-year government bond, and provides a further compelling reason to be invested in quality businesses.

filter

Equity-based Funds

The effectiveness of our positioning is evidenced in the resilient performance of our largest equity-based portfolios over the last 12 months, from both an income and capital growth perspective.

  Total Return   Income Produced
As at 31 March 2020 Marriott Fund Sector Average Sector Ranking   Marriott Fund # Sector Average # Sector Ranking
First World Equity Feeder Fund (A) 13.7% 7.8% 23/95   R27 788 R3 244 2/95
Worldwide Fund (C) 6.6% -1.7% 25/104   R25 452 R14 734 16/104
Balanced Fund (C) -4% -10.6% 30/245   R40 850 R28 121 21/245
Dividend Growth Fund (R) -12.4% -21.9% 21/223   R28 396 R26 297 87/223

#Assuming R1,000,000 invested   Source: ProfileData


At this stage, we expect the majority of the equities that we invest in to continue paying dividends, both internationally and locally, however some cuts are possible. For those companies that do decide to cut/postpone dividends in order to preserve cash in these unprecedented times, we anticipate that their dividend payments will bounce back within 6 – 12 months when normal economic activity resumes. Thus, the impact of potential dividend cuts will be short term in nature and will not put longer term outcomes at risk. It should also be noted that a substantially weaker local currency means our portfolios will receive significantly more income from their offshore holdings (which have been maximised wherever possible) – this will help to sustain the income produced during the crisis.


Income Funds

The Core and High Income Funds have fared well and have been a good place to be invested – see the 12-month figures below. From a long term perspective, market volatility is providing excellent investment opportunities which we are steadily taking advantage of. This will enable both Funds to continue delivering a high and reliable income stream and returns well in-excess of Money Market rates and inflation for many years to come.

  Total Return   Income Produced
As at 31 March 2020 Marriott Fund Sector Average Sector Ranking   Marriott Fund Income # Sector Average # Sector Ranking
Core Income Fund (C) 5.1% 3.8% 42/113   R79 642 R67 002 19/113
High Income Fund (C) 5.5% 3.8% 33/113   R79 727 R67 002 16/113

#Assuming R1,000,000 invested   Source: ProfileData


Income – distribution yield to remain at approximately 8%.

  • The opportunity to buy into 7-year Government Bonds at yields above 10% will enable the funds to continue producing a high and reliable income stream for investors for the foreseeable future.
  • Despite the recent interest rate cuts the portfolios' income yields remain unchanged at approximately 8%.
  • This is a highly attractive level of income considering Money Market rates are now approximately 5.5% and expected to decrease further.
  • Importantly, the interest rate cuts are unlikely to reduce the distributable income from the Core and High Income Funds due to locking in higher yields for the next 7 years.

Returns – 8% p.a. average return over the next 24 months.

  • Based on current valuations, the average return expectations of the funds are in excess of 8% p.a. for the next 2 years.
  • This return expectation should be in excess of Money Market and inflation.

Looking ahead, we are confident that these two Funds will weather the current economic conditions well.


Conclusion

Our investment approach is currently delivering what its designed to deliver – resilient performance and reliable income. Looking ahead, our security filtering process gives us great confidence that all the businesses we invest in have the brands, balance sheets, and management teams to effectively navigate the current crisis. We also expect that their share prices will bounce back when normal economic activity resumes, as investors are likely to turn to quality, resilient companies for income in a global landscape characterised by historically low cash and bond yields.