Expectations for 2022   

Introduction – squeezing the cycle

The coronavirus pandemic, as devastating as it has been, brought about a faster and bigger monetary and fiscal response than in any previous recession. This response limited the damage to the economic system and set the stage for one of the fastest economic recoveries in decades, coupled with double-digit equity returns globally. However, the downside of the unprecedented economic stimulus is that demand has bounced back much faster than supply, causing inflation to rise more quickly than in previous cycles. As a result, the global bond market suffered its worst year in more than twenty years.

To produce reliable income and more predictable investment outcomes, we invest exclusively in high-quality, dividend-paying companies whose prospects tend to be largely unaffected by broad political and economic decisions. Marriott portfolios tend to lag in the early stages of a recovery, catch-up when growth starts to slow, and perform best when the going gets tough. Even though the economic and market conditions of 2021 favoured cyclical stocks, our stock selection emphasising first world listed equities with pricing power, helped our equity based portfolios produce double-digit returns as well as above average income yields. Our income funds also produced better returns and higher yields than money market rates despite the bond market volatility.

Looking ahead to 2022, as the economic recovery from the Covid-19 crisis begins to burn itself out, due to reduced monetary and fiscal stimulus, market conditions are likely to become more challenging. Nevertheless, we remain optimistic that our portfolios will continue to produce good outcomes as the next phase of the economic cycle is one that will more likely favour income focused investing due to the emphasis placed on quality, resilience and dividends.

2021 – a red-hot market recovery

Since the onset of the Covid-19 pandemic, the global economy was poised to stage its most robust post-recession recovery in 80 years. The speed of the bounce-back can largely be attributed to: 1) the rapid rollout of vaccines, 2) ultra-accommodative monetary policy; and, 3) unprecedented fiscal stimulus. According to the International Monetary Fund (IMF), fiscal stimulus measures amounted to roughly $17 trillion globally in 2020 and 2021, or almost 20% of global GDP.

A faster and larger monetary and fiscal response than in any previous recession kept businesses afloat and ensured consumers were soon willing and able to spend again, driving a strong rebound in corporate profits and boosting markets. By the end of 2021 the FTSE All-World share index had rallied by over 16% in USD delivering a third consecutive year of double-digit returns. Interestingly, it took the US market just 354 days to increase by 100% from its Covid-19 trough – the fastest bull market doubling off a bottom since World War 2.

covid-19 response

It was a good year for local markets too with the JSE up 27% – the best year for SA stocks in over a decade. While South Africa's economy has been battered by Covid-19, our market is heavily skewed towards resource stocks (approximately 40%) whose prospects are largely determined by global demand as opposed to local. From a sectoral perspective, it is understandable that cyclical investments such as commodity producers fared best given the swiftness of the recovery. Conversely, typically defensive investments like government bonds performed relatively poorly.

Interestingly, South Africa was a standout performer relative to other emerging markets. The MSCI emerging market index was down 2% in USD, well below the 19% USD JSE return and the 22% USD return from the developed world.

The divergent performance between emerging and developed economies serves to highlight another important feature of the Covid-19 recovery: it's unevenness. It should be noted that around 75% of the approximate $17 trillion in fiscal support was deployed by the major economies of the G-7 (Canada, France, Germany, Italy, Japan, the UK, and the US). These countries were also amongst the first to have access to vaccines. Unsurprisingly, their recoveries have been far more robust and their future prospects brighter. The chart highlights the greater losses which emerging and developing countries are expected to incur as a result of the crisis.

GDP losses

2022 – a more challenging year for the global economy

Looking ahead to 2022, it is likely that the global economy will move into the next phase of the economic cycle as the red-hot recovery starts to cool down.

The major downside of the recent unparalleled monetary and fiscal stimulus is that demand bounced back faster than supply, triggering bottlenecks and pricing pressures that would normally emerge far later in the economic cycle. Inflation often falls in recessionary times, and also early on in recoveries, then it slowly picks up as the expansion ages. This time, however, it is rebounding far more rapidly piling pressure onto central banks to hike rates. This is particularly evident in the US where inflation registered 7% in 2021 – the highest since 1982.

In response to the surge in inflation the bond market is now pricing in the first US rate hike in March 2022 – approximately 24 months after the last interest rate was cut and many months earlier than was anticipated at the beginning of 2021. Significantly, it took approximately 7 years (3x longer) before interest rates started to rise after the 2008 Global Financial Crisis. Considering the huge amount of debt globally, it isn't likely to take many interest rate hikes before higher rates start to weigh on growth. The chart highlights how global debt surged to historic highs during the pandemic.

There will also likely be far less fiscal stimulus in 2022. As discussed previously, governments spent heavily to support consumers and businesses during the pandemic and now need to tighten their belts or risk defaulting down the line. The pull-back of public spending in 2022 is expected to amount to approximately 2.5% of global GDP, according to UBS estimates.

Furthermore, consideration still needs to be given to Covid-19 and a slowing China. The Omicron variant has highlighted that the risk of further new Covid variants should not be dismissed, while China's second largest property developer (Evergrande) is struggling for survival – a constant reminder that China's property-led slowdown may be far from over.

covid-19 response

Summary

In summary, 2022 looks set to be a more challenging year for the global economy as the recovery stage of the cycle starts to slow down. This trend will be magnified in weaker emerging markets like South Africa whose economies suffered greater losses as a result of the crisis. The ensuing market conditions should suit our income focused investment style due to the emphasis placed on quality, resilience and dividends. The performance of our portfolios is discussed in more detail in the following section.

Fund and Portfolio Overview

Equity Funds and Portfolios

Our equity based portfolios performed well over 2021, producing good returns and above-average income yields. Our investment process applies a stringent filter to ensure we hold only top-quality companies, local and offshore, that can reliably grow their dividends through all stages of interest rate, inflation, business and economic cycles.

Looking ahead to 2022, as we move into the next phase of the economic cycle with higher interest rates, we are optimistic that our selected equities emphasising quality, resilience and dividends will continue to serve investors well.

The equity based portfolio returns are highlighted to the right:

As at 31 December 2021 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
First World Equity Feeder Fund (A) 20.6% 16.8% 11.8% R16 930 R82 880 R138 520
Sector Average (Global – Equity – General) 21.7% 21.2% 14.6% R1 610 R10 240 R13 360
 
Dividend Growth Fund (R) 19.8% 5.1% 4.5% R24 600 R78 060 R134 540
Sector Average (SA – Equity – General) 27.0% 11.5% 7.3% R21 580 R74 800 R108 330
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData
As at 31 December 2021 GBP USD EUR
1 year 3 years* 5 years* 1 year 3 years* 5 years* 1 year 3 years* 5 years*
IIP – Income Growth Portfolio 16.8% 15.7% 10.2% 19.5% 23.4% 15.9% 26.3% 19.9% 11.4%
*Annualised Gross of Investment Management Fee     Source: Bloomberg

Property Funds

The global listed property market has enjoyed another good year despite everything being thrown at it from Omicron to higher inflation and, in the UK at least, rising interest rates. In the US, REITs were one of the strongest performing asset classes in an already buoyant market, as investors looked for income yield and some protection against rising inflation. The South African property market recovered from being the worst performing sector in 2020 to one of the best performers in 2021. Credit can be given to management teams who navigated their way through a perfect storm by focusing on supporting tenants and bolstering the balance sheet. This sector is now out of its deepest trough as rental collections have recovered to more than 100% in some instances while fears of covenant breaches have eased.

Although property has benefitted from the re-bound trade in 2021, we are aware of the challenges in the local environment and structural changes facing the sector. We continue to believe investing in the highest quality, most resilient property investments will serve investors well.

The property portfolio returns are highlighted right:

As at 31 December 2021 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
International Real Estate Feeder Fund (A) 40.3% 15.6% 11.6% R29 380 R109 310 R178 990
Sector Average (Global – Real Estate – General) 38.6% 16.5% 11.2% R10 780 R39 940 R55 570
 
Property Income Fund (A) 36.1% -3.8% -1.8% R72 860 R155 980 R268 740
Sector Average (SA – Real Estate – General) 37.3% -2.5% -3.9% R58 530 R144 410 R227 680
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

Our direct UK property Fund, First World Hybrid Real Estate Plc (FWHRE), continues to perform well due to the type of property selected (predominantly warehousing), the nature and length of the portfolio leases, and the financial standing of its tenants.

As usual, the longer-term expectation of the Fund should be centred on a robust and predictable income return in the order of 4.5% pa, with modest price appreciation. The Fund's total return is underpinned by rental growth, from a portfolio of well selected property investments let to substantial and financially sound tenants, on long leases. We remain confident that FWHRE will serve investors well over the longer term.

As at 31 December 2021 GBP
1 year 3 years* 5 years*
First World Hybrid Real Estate plc (A) 17.0% 11.3% 9.2%
First World Hybrid Real Estate plc (C - LISPs only) 16.5% 10.7% n/a
*Annualised Gross of Investment Management Fee     Source: Marriott

Income Funds

Surging inflation in the United States created the backdrop for the worst year for global bonds in the last 20 years. Very few bond markets (if any) were spared, irrespective of vastly different inflation and growth dynamics in some cases. South Africa is a prime example. Despite inflation remaining well within the Reserve Bank's target band (core inflation is currently only 3.1%) and persistently high levels of unemployment (currently 36%), our medium term government bonds were dumped by notoriously short term foreign investors, driving an approximate 1.5% increase in income yields and pushing bond prices down.

Marriott's Core and High Income Funds have a large exposure to SA medium term government bonds and as such, it was a difficult year for these two Funds. From a short term performance perspective, the Funds produced an approximate 4% total return and a 6% income yield. Although somewhat disappointing in the context of what the Funds have managed to produce historically, this outcome was better than money market returns and highlights why it makes sense to have a meaningful exposure to slightly more volatile investments, because even in a difficult year (such as the one we have just experienced) the chances of outperforming cash is still high.

Looking ahead, having weathered a bond market storm in 2021, what should investors expect next? In our opinion, a significantly better outcome if history counts for anything. Looking back all the way to December 2000, the average return of 5-year government bonds (50% weighting in the fund) post a 1.5% yield increase over a rolling 12-month period is above 10% as illustrated in the table below:

Annual returns for 5 year government bonds after a 1.5% increase in yields
2001 2007 2013 2015 2021
22.5% 19.9% 13.0% 10.6% ?
*Annualised Gross of Investment Management Fee     Source: Bloomberg

Given the highly attractive real yields on offer, an aggressive interest rate hiking cycle priced in over the next 5 years (which we think is not likely), the highest yield differential between cash rates in 3 decades, and moderating inflation, we expect a similar recovery in 2022.

From a longer term perspective, the weighted average income yield of the government bonds (+70% weighting) in these Funds is approximately 8% with a weighted average term to maturity date of approximately 5 years. This is the minimum return investors will receive from the investment if held to maturity – a key cornerstone of the Funds' strategy.

As such, we are very encouraged with the outlook for the Funds and expect returns to be much closer to those achieved in the past. This conviction is a function of.

  • An attractive 6.5% income yield that is likely to increase going forward.
  • An increased exposure to medium-term government bonds having taken advantage of buying opportunities throughout the year, particularly in the latter stages where we increased the Funds’ exposure to the R186 and R2030 by more than 15% – a significant move that will meaningfully improve investor outcomes.
  • A unique flexible investment mandate that will allow us to take advantage of any further volatility.
  • Zero exposure to sub-investment grade corporate debt.

The income fund portfolio returns are highlighted below.

As at 31 December 2021 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Core Income Fund (A) 4.1% 7.7% 8.0% R55 920 R203 200 R372 130
Core Income Fund (C – LISPs only) 4.4% 8.0% 8.3% R58 720 R211 870 R386 510
High Income Fund (A) 3.9% 7.6% 7.8% R56 100 R203 760 R364 180
High Income Fund (C) 4.2% 8.0% 8.2% R58 910 R212 540 R378 790
High Income Fund (D - LISPs only) 4.3% 8.0% 8.2% R59 950 R213 540 R382 270
Income Fund (R) 4.1% 6.7% 7.2% R49 490 R185 750 R337 970
Sector Average (SA – Multi Asset – Income) 7.0% 7.0% 7.2% R48 610 R174 330 R315 770
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

Multi-Asset Funds

Our multi-asset based portfolios performed well over 2021 producing double-digit returns and above average income yields.

For income yield, we see the most attractive investment opportunities in South Africa – more specifically, government bonds. Currently our Balanced and Essential Income Funds have maximised their weighting to bonds. For growth, our preference is to invest offshore as the rest of the globe is expected to grow at a significantly faster rate than South Africa over the medium to longer term. Our international Feeder Funds, Worldwide Fund and Balanced Fund have an asset allocation reflective of our house view that offshore equities are the best place to be invested for long-term income and capital growth.

For more information on bonds and equities, please refer to the sections above.

The multi-asset funds' returns are highlighted below:

As at 31 December 2021 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
International Growth Feeder Fund (A) 24.3% 18.5% 12.7% R17 270 R84 610 R139 150
Sector Average (Global – Multi Asset – Flexible) 18.2% 15.6% 11.0% R1 630 R10 260 R15 480
 
Worldwide Fund (A) 18.2% 12.9% 9.4% R19 190 R75 530 R125 950
Worldwide Fund (C) 18.9% 13.5% 10.0% R25 090 R94 870 R157 380
Sector Average (Worldwide – Multi Asset – Flexible) 19.9% 14.5% 9.8% R8 030 R39 650 R66 230
 
Balanced Fund (A) 12.6% 6.7% 5.8% R39 760 R115 100 R194 410
Balanced Fund (C) 13.3% 7.4% 6.4% R45 590 R132 600 R224 020
Balanced Fund (D – LISPs only) 13.6% 7.7% 6.7% R48 500 R141 350 R238 860
Sector Average (SA – Multi Asset – High Equity) 20.3% 11.5% 8.0% R21 370 R80 020 R131 070
 
Essential Income Fund (C) 17.5% n/a n/a R69 000 n/a n/a
Sector Average (SA – Multi Asset – Flexible) 22.1% 10.3% 6.9% R20 690 R83 540 R131 590
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

As at 31 December 2021 GBP USD EUR
1 year 3 years* 5 years* 1 year 3 years* 5 years* 1 year 3 years* 5 years*
IIP – Balanced Portfolio 17.1% 15.5% 10.2% 19.6% 22.7% 15.7% 26.5% 19.6% 11.4%
*Annualised Gross of Investment Management Fee     Source: Bloomberg
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