Half Year Report 2022   

Introduction

Following the euphoria of 2021 when the global economy staged its most robust post-recession recovery in 80 years, market volatility has increased considerably. Unfortunately, the fastest and biggest monetary and fiscal response to an economic crisis did not come without a cost – inflation.

2022 began with inflation in many of the world's biggest economies at decade highs. US inflation for instance registered 7% at the end of December 2021 – the highest level recorded since 1982. Many central bankers at the time hoped some inflationary pressures, such as supply bottlenecks, would prove transitory allowing for a measured response. However, this hope quickly faded when Russia (the world's 4th biggest oil producer) invaded Ukraine (the world's 2nd biggest wheat producer). As food and energy prices rocketed, central bankers were confronted with a new reality – hike rates aggressively, or risk losing credibility by allowing inflation to become entrenched for the long-term. Wisely, they chose the former, evidenced by the US Federal Reserve raising interest rates by 0.25% in March, 0.50% in May and 0.75% in June. Currently, the median expectation of Fed members is that US interest rates will be between 3.25% and 3.50% by the end of the year, up from their expectation of 0.75% to 1.00% just six months ago. This aggressive rate-hiking trend has been mirrored by other central banks around the world at a time when rising costs are hurting both consumer and business confidence. Thus, a significant economic slowdown appears all but inevitable, with markets (both bond and equity) now pricing in a high probability of a global recession in 2023.

Apart from commodity stocks (the prices of which have benefited from constrained supply as a result of the Russia/Ukraine war), high inflation and slowing economic growth has been bad news for just about every asset class year-to-date (31 July 2022):

  • Developed market equities and bonds have declined by 13.9% and 13.5% in US dollars respectively
  • Emerging market equities and bonds have declined by 17.7% and 19.2% in US dollars respectively

In anticipation of challenging market conditions, we have positioned our portfolios accordingly, as mentioned in our 2022 Expectations Report.

"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". Expectations Report 2022

Our income focused investment style tends to perform best from a relative perspective when the going gets tough and we expect our portfolios and funds to hold their own in the months ahead.

High Equity Funds & Portfolios: Resilience for Recessionary Times

As at 31 July 2022 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
First World Equity Feeder Fund (A) 4.8% 9.5% 8.6% R15 765 R63 625 R120 892
Sector Average (Global – Equity – General) -5.6% 9.9% 9.3% R2 158 R8 936 R13 848
International Growth Feeder Fund (A) 4.8% 10.0% 9.2% R16 277 R65 099 R121 703
Sector Average (Global – Multi Asset – Flexible) -2.3% 7.3% 7.0% R2 145 R8 756 R12 939
Worldwide Fund (A) 3.6% 7.2% 6.4% R21 697 R69 412 R118 518
Worldwide Fund (C) 4.2% 7.8% 7.0% R27 462 R88 160 R149 137
Sector Average (Worldwide – Multi Asset – Flexible) -2.0% 7.4% 6.2% R9 950 R36 085 R61 986
Dividend Growth Fund (R) 5.0% 3.5% 2.4% R24 737 R77 729 R128 569
Sector Average (SA – Equity – General) 6.5% 8.6% 5.5% R30 013 R82 656 R122 630
Balanced Fund (A) 2.6% 4.0% 3.9% R40 294 R115 286 R190 406
Balanced Fund (C) 3.2% 4.6% 4.5% R46 017 R132 403 R218 995
Balanced Fund (D – LISPs only) 3.5% 4.9% 4.8% R48 877 R140 956 R233 316
Sector Average (SA – Multi Asset – High Equity) 3.9% 8.0% 6.0% R25 395 R82 090 R134 454
Essential Income Fund (C) 3.6% -0.4% n/a R62 121 R157 794 n/a
Sector Average (SA – Multi Asset – Flexible) 5.6% 7.6% 5.2% R25 232 R83 275 R141 460
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData
As at 31 July 2022 Total Return GBP Total Return USD Total Return EUR
1 year 3 years* 5 years* 1 year 3 years* 5 years* 1 year 3 years* 5 years*
IIP – Income Growth Portfolio 8.7% 9.1% 9.2% -4.7% 8.8% 7.5% 10.5% 12.0% 10.6%
IIP – Balanced Portfolio 9.0% 9.5% 9.0% -4.4% 9.3% 7.3% 10.8% 12.5% 10.4%
*Annualised Gross of Investment Management Fee     Source: Bloomberg

Our Rand-denominated International Funds, (the First World Equity and International Growth Feeder Funds) as well as the Worldwide Fund have held up well, as evidenced by top quartile performance for the year ending 31 July 2022. Our International Investment Portfolios have also shown good relative performance year-to-date highlighted in the table below.

  Year-to-date performance
(Total Return, £)
31 July 2022
IIP – Income Growth Portfolio 1.8%
IIP – Balanced Portfolio 2.0%
S&P 500 -2.8%
Nasdaq -11.4%
MSCI World Index -4.3%
Source: IRESS & Bloomberg
Johnson and Johnson graph

The resilient performance can primarily be attributed to a high exposure to quality, offshore companies in non-cyclical industries or sub-sectors which have robust growth prospects (like Johnson & Johnson) – ideal investments for an economic slowdown.

Our stringent investment filter ensures we only invest in quality companies with strong balance sheets, first-class management teams, market-leading brands, resilient business models and which pay reliable dividends. These are qualities that are often under-appreciated when times are good but become increasingly valued in adverse market conditions. As evident from the chart below, all the companies in our offshore portfolios have investment grade (BBB and above) credit ratings from Standard & Poor's. Interestingly, more than 50% of S&P rated companies have lower ratings than this.

Global Ratings table

From a local equity perspective, the lagging performance of the Dividend Growth and Balanced Funds is largely attributable to the exclusion of resources (which performed well) from Marriott's investable universe due to their unpredictable dividend track records. This could change quickly, however, if commodity prices continue to buckle under the weight of a global recession. Regardless, we remain steadfast in the application of our tried and tested security filter process to continue delivering reliable, growing income to investors.

Income Funds: A One in Twenty Years Opportunity

As at 31 July 2022 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Core Income Fund (A) 3.7% 6.3% 7.4% R61 241 R193 928 R355 513
Core Income Fund (C – LISPs only) 4.0% 6.6% 7.7% R64 058 R202 565 R369 932
High Income Fund (A) 3.5% 6.3% 7.3% R60 733 R193 966 R355 537
High Income Fund (C) 3.8% 6.6% 7.6% R63 557 R202 613 R370 204
High Income Fund (D – LISPs only) 4.0% 6.6% 7.6% R64 686 R204 272 R373 262
Income Fund (R) 4.1% 5.7% 6.7% R55 213 R174 680 R327 513
Sector Average (SA – Multi Asset – Income) 5.4% 6.0% 6.7% R52 047 R165 002 R307 003
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData

From an income fund perspective, the worst emerging bond market on record has placed downward pressure on price returns. However, the income streams from the portfolios have not only remained consistent, but have increased through incrementally up-weighting bonds at higher yields.

The chart highlights the recent volatility in the South African Bond market. The R2030 (a South African Government Bond that matures in approximately 7.5 years) closed out the first half of 2022 yielding 10.4% – a level only observed twice in the last 18 years (during the 2008 Global Financial Crisis and the COVID-19 crisis in March 2020):

SA Government Bonds

Yields at these elevated levels typically do not last for long. The table below highlights this by looking at catalysts that caused yields to spike above 10% since 2004, the corresponding number of weeks yields remained above the 10% level, and the subsequent 12-month return as yields normalised from the peak.

Period Number of weeks yields were above 10% 12 Month Return after "Peak Yield"
Global Financial Crisis 7 Weeks +21.8%
NeneGate 1 Week +14,7%
COVID-19 4 Weeks +21.8%
Russia/Ukraine War 3 Weeks so far ?

Looking ahead, and given the current high yields, we anticipate a similar recovery from SA bonds once markets settle – this should translate into capital gains for investors. Although it is difficult to predict the exact timing of the bounce back, the sharp drop in commodity prices and first world bond yields suggests we are close to "peak yields". The SA bond market is currently pricing in interest rates rising to 8.5% within the next two years, inflation to average above 7% for the next 10 years, and sovereign credit risk at "Nenegate" and Covid crisis levels – this is extreme given that consumer demand is weak, we have a credible Reserve Bank, and our fiscal position is much improved.

As such, we have continued to up-weight medium-term government bonds and lock in double-digit yields for investors. If yields continue rising, we have the liquidity available to continue buying. These yields won't last forever and may not be seen again for a very long time – from an income perspective the opportunity is clear.

The improved returns that we indicated at the beginning of 2022 remain on track, albeit deferred as a result of the spillovers from a protracted Russia/Ukraine war. From an income perspective, investors can now safely draw approximately 7.5% from the Core Income Fund and High Income Fund without capital erosion – a level of income which just 2 years ago appeared unobtainable.

Property Funds: Diverging prospects

As at 31 July 2022 Total Return Income Produced#
1 year 3 years* 5 years* 1 year 3 years* 5 years*
Property Income Fund (A) 7.2% -6.9% -3.8% R64 987 R138 232 R258 565
Sector Average (SA – Real Estate – General) 8.6% -5.1% -6.2% R77 182 R140 602 R220 036
International Real Estate Feeder Fund (A) 2.2% 6.3% 7.5% R24 100 R88 839 R169 047
Sector Average (Global – Real Estate – General) 1.6% 6.8% 7.4% R10 192 R35 849 R52 218
*Annualised     #Assuming R1,000,000 invested     Source: ProfileData
As at 31 July 2022 Total Return GBP Total Return USD Total Return EUR
1 year 3 years* 5 years* 1 year 3 years* 5 years* 1 year 3 years* 5 years*
First World Hybrid Real Estate plc (A) 11.5% 10.8% 9.4% -6.7% 7.3% 6.4% 5.5% 10.3% 8.3%
First World Hybrid Real Estate plc (C – LISPs only) 11.5% 10.8% n/a -6.0% 7.8% 6.6% 6.4% 10.8% 8.4%
*Annualised Gross of Investment Management Fee     Source: Marriott

Listed property was another asset class to come under pressure in the first half of 2022. Encouragingly, however, the resumption of more normal shopping patterns, re-basing of rentals, eradication of once-off earnings, and de-leveraging of balance sheets since the COVID crisis, all point to a more sustainable income stream from South African REITs going forward. The income yield of the Property Income Fund is now approximately 7% with expected income growth in the region of 6% for the next two years. This income stream is largely underpinned by the landlords of high-quality properties in resilient subsectors such as storage, logistics or retail in Eastern Europe.

Globally, our preference for distribution warehouses remains unchanged as demand continues to outstrip supply, given the rise of online shopping. This is evidenced by robust rental growth from the sector and no indications of price weakness when analysing recently concluded direct property transactions. Not many other asset classes currently offer greater inflation protection, resilience, stability and reliable income than relevant and quality direct commercial property (particularly distribution focused) in first world economies. As such, the Marriott First World Hybrid Real Estate Fund (direct UK property fund) is ideally positioned to continue serving investors well in the years ahead.

Conclusion

Our income focused investment style – which emphasizes quality, resilience and dividends – tends to perform best from a relative perspective when the going gets tough. With central banks around the world hiking rates aggressively to combat inflation, we feel that time has arrived, and we expect our portfolios and funds to hold their own in the months ahead.

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