Marriott Half Year Report 2021   

Introduction

After one of the most volatile and uncertain years in recent memory, 2021 has so far been a much better year for investors with good returns being registered in most markets across the globe. Reports of strong efficacy results for COVID-19 vaccines late last year proved to be the catalyst. Ever since then investors have piled into investments that win in an improving economic cycle with higher inflation. Loose central bank monetary policies, promises of stimulus spending, and headlines announcing "boom times", all on the back of flattering economic data, provided even more fuel to what is now commonly referred to as the "reflation trade". The result: strong outperformance of cyclical companies like resource and other so-called "value" stocks – companies that do not pay reliable dividends and therefore do not feature in our portfolios. However, as we expected, the hype around the global economic bounce back is starting to fade, bringing into focus a more challenging longer-term outlook in which investors are increasingly questioning whether a portfolio geared for reflation still makes sense.

At Marriott we think the answer is no, and we expect that economic data in the months ahead will make this increasingly apparent. The picture that is likely to emerge is one supportive of quality companies that demonstrate resilience and which continue to pay regular dividends – the key attributes of our income focused investment style.

In this report we discuss current market conditions and also provide:

  1. a breakdown of the performance of our income, equity, property and multi-asset (flexible) portfolios; as well as,
  2. a summary of how these portfolios have been positioned to ensure robust, and more predictable, investment outcomes in the years ahead.

Current market conditions: Are things really as good as the headlines suggest?

Although the global economy is undoubtedly in much better shape than it was in 2020, favourable year-on-year economic data is currently exaggerated by comparisons with the deeply depressed levels of economic activity this time last year, as a result of the Coronavirus lockdowns. It is understandable that a "switched on" economy will perform much better than a "switched off" economy. However, one should not infer "boom times" from current data. To put things into perspective it is important to normalise the base, thus a comparison with the end of 2019 (just prior to the COVID-19 crisis) is far more useful. From this perspective, a very different picture emerges.

Using the end of 2019 as the base, the global economic recovery appears far less exciting. In fact, it shows that global GDP is only just returning to pre-pandemic levels. If you consider the following five points, the road ahead looks to be a challenging one:

1) 

Debt has increased to $281 trillion worldwide

2) 

A very uneven global recovery

3) 

Ageing demographics

4) 

Escalating social tensions

5) 

Rising COVID-19 infections and the risk of new variants

Marriott Fund and Portfolio Performance

Income Funds: Bonds best place to be invested

Slowing global economic growth means interest rates are unlikely to revert back to pre-pandemic levels ('normalise') anytime soon. As such our income funds have a high exposure to medium-term government bonds due to their attractive yields relative to money market rates which are at historic lows.

Funds as at 30 June 2021 Total Return Income Produced#
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs 5 yrs
Core Income Fund (A) 5.1% 8.1% 8.2% R56 200 R221 600 R382 200
Core Income Fund (C – LISPs only) 5.4% 8.4% 8.5% R59 000 R230 500 R396 400
High Income Fund (A) 5.0% 8.0% 8.1% R56 900 R212 600 R374 200
Income Fund (R) 4.8% 7.3% 7.5% R48 300 R198 300 R349 600
Sector Average (SA – Multi Asset – Income) 7.5% 7.0% 7.1% R52 300 R187 100 R325 400
*Annualised     #Assuming R1,000,000 invested     Profile Data

The investment case for South African medium-term government bonds

Yields are approximately double short-term cash rates

The average yield difference between SA Government Bonds (5yr) and short-term cash rates over the last 20 years has been approximately 1%, significantly less than the 3.7% yield differential currently on offer.

Yields are similar to riskier bank deposits

5-year bank deposit yields have on average (10yrs) been 1% higher than the equivalent term government bonds due to lower credit ratings/higher credit risk. Currently, medium-term government bond yields are slightly higher than deposit rates and present investors with a unique opportunity to reduce risk in their portfolio while maintaining a high yield.

Investors are locking in significant interest rate increases

The market is pricing in an increase of over 6% in interest rates over the next 5 years which is highly unlikely given subdued private sector credit extension, the absence of demand driven price pressures and well anchored inflation expectations.

South African real yields are amongst the highest globally

The graph shows the real yields (5-year government yields minus inflation, per country) on offer across the globe and highlights how attractive South African yields are.

Very low default risk

The Core Income Fund's preferred bond is the highly liquid R186 which matures in December 2026 and yields approximately 7.5%. With less than five and a half years to go until the bond matures we believe investors need not be concerned about a potential government default given South Africa's improving government finances (Government debt to GDP is now expected to be well below 100% in 2026) and long maturity profile (average term of approximately 12 years).

Global Yields

Despite bonds having a compelling investment case, we continue to observe periods of volatility in the bond market as investors attempt to price in the unwinding of ultra-accommodative monetary policy across the globe. Although many central banks (including the SARB) have indicated that this will be a very gradual process spread out over many years, the yields of South African medium-term bonds have already 'normalised' (reverted back to pre-pandemic levels) as outlined in the table.

SA and US Bonds

It is important to note that South African 5 and 10-year government bonds are currently trading on very similar yields to what was on offer two years ago (pre-pandemic) despite significantly lower interest rates locally, and in the US. It is also significant that in June 2019 the 5-year bond yield was just 0.20% higher than current yields despite the complete absence of QE in the world's biggest economy. This should give investors great comfort that the yields on offer are not only attractive from a South African and global perspective, but are also fair in the highly unlikely event of an abrupt normalisation of interest rates globally.

KEY TAKEAWAY: Medium-term South African government bonds currently offer excellent value to investors. As such, our income funds have maintained a high exposure to these investments and are therefore well-positioned to deliver attractive yields coupled with significantly higher returns than money market funds and inflation over the next 24 months. The funds’ unique flexible mandates also allow us to take advantage of market volatility to lock in even better yields for investors. These are key ingredients for an attractive and predictable investment outcome in the current low interest rate environment.

Equity Funds and Portfolios: Quality is key for the long-term

Up until recently equity markets have been all about 'reflation' – a belief that massive fiscal stimulus, historically low interest rates and the reopening of economies on the back of COVID-19 vaccinations will drive an economic boom, placing upward pressure on inflation. This scenario has been priced into markets as evidenced by:

  • Strong equity returns, most notably in stocks which are highly sensitive to economic conditions, such as cyclical companies with weak balance sheets;
  • The relative underperformance of high quality companies in more defensive industries, like consumer staples and healthcare; as well as,
  • Higher bond yields globally, reflecting an expectation of higher inflation and interest rates in the years ahead.
Fund as at 30 June 2021 Total Return Income Produced#
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs 5 yrs
Dividend Growth Fund (R) 14.3% 1.2% 1.5% R28 800 R76 900 R128 200
Sector Average (SA – Equity – General) 25.2% 5.2% 4.4% R22 700 R68 500 R102 700
 
First World Equity Feeder Fund (A) 2.4% 11.4% 5.9% R19 500 R86 000 R123 200
Sector Average (Global – Equity – General) 14.4% 13.8% 12.0% R2 700 R11 100 R14 100
*Annualised     #Assuming R1,000,000 invested     Profile Data
Portfolio as at 30 June 2021 GBP USD EUR
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs* 5 yrs* 1 yr 3 yrs* 5 yrs*
IIP – Income Growth Portfolio 15.3% 13.2% 8.7% 28.5% 14.9% 9.3% 21.9% 14.4% 8.0%
*Annualised Gross of Investment Management Fee     Source: Bloomberg & Marriott

Although these market conditions are not particularly suited to our investment style – income focused investing favours high-quality, reliable and consistent dividend payers over more cyclical and speculative investments – we are pleased that our equity funds have bounced back from the COVID-19 crisis and have provided investors with less volatility, downside protection and reliable income streams. Looking ahead, we expect the relative performance of these portfolios to improve due to the inevitable fading of the 'reflation trade' as the current high levels of economic growth and inflation prove unsustainable.

As such, our key focus is to ensure we are invested in companies that are well-suited to a subdued longer-term outlook, but which can effectively deal with the shorter-term inflationary pressures we are currently facing.

Colgate: A resilient, inflation hedge

One of Colgate's great underlying qualities is its pricing power, as evidenced by an average 4% price increase across its product range in the last 12 months while also growing organic volumes by 3%. This has been a key contributor to Colgate's high, stable margins through varying inflationary conditions.

The company also has an outstanding track record of growing dividends, even during recessions and market crises. They have increased dividends 57 years in a row, including a 2.3% increase earlier this year.

Colgate is a prime example of the type of company that underpins our equity portfolios.

Selection filter

The charts below highlight the dividend track records of two offshore and two South African companies that feature in our equity portfolios.

internationa and local companies.jpg

KEY TAKEAWAY: The companies that make it through our security filter process are well suited to a subdued longer-term economic outlook due to their resilient business models, but can also effectively deal with short-term inflationary pressures as they boast strong brands and pricing power.

Property Funds: On the right side of disruption

From a property perspective, we apply a very similar filtering process to help us identify high-quality, resilient real estate investments with good long-term fundamentals. The resultant portfolio positioning is discussed below.

International real estate
 
Fund as at 30 June 2021 Total Return Income Produced#
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs 5 yrs
International Real Estate Feeder Fund (A) 7.7% 5.8% 4.0% R28 300 R108 900 R159 700
Sector Average (Global – Real Estate – General) 7.3% 7.8% 3.9% R10 900 R40 400 R42 800
*Annualised     #Assuming R1,000,000 invested     Profile Data
 
Fund as at 30 June 2021 GBP
1 yr 3 yrs* 5 yrs*
First World Hybrid Real Estate plc (A) 16.2% 8.2% 8.6%
*Annualised Gross of Investment Management Fee     Source: Bloomberg & Marriott
 
 

The pandemic has shown that there have been winners and losers across the different property types and, furthermore, that as normality returns there will likely be lasting changes and structural shifts. For instance, online shopping trends have accelerated to new levels to the benefit of distribution warehousing but to the detriment of traditional retail property, especially the high street and shopping centres. Our offshore real estate funds have a strong emphasis to distribution warehousing and logistics type property, and are therefore well-placed given these structural shifts in the property market.

 
Quality UK warehouses added to the direct property portfolio in our First World Hybrid Real Estate Fund
Crown Promotional Packaging, Newcastle

On 30 April, the Fund completed the acquisition of a further warehouse situated in Newcastle and let to Crown, an existing tenant within the portfolio. The lease has a further 11 years' certain term remaining and expires in June 2032. The acquisition price was £7m, yielding 4.9%. The property was fully refurbished in 2018 and comprises a 72,388 sqft modern facility. Crown is the no. 1 producer of food and aerosol cans, and the no. 2 producer of beverage cans, in the world.

crown packaging
South African real estate
 
Fund as at 30 June 2021 Total Return Income Produced#
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs 5 yrs
Property Income Fund (A) 22.3% -9.5% -4.0% R63 200 R161 200 R283 900
Sector Average (SA – Real Estate – General) 24.3% -8.5% -6.6% R45 900 R145 800 R232 500
*Annualised     #Assuming R1,000,000 invested     Profile Data
 

We continue to favour high-quality, defensive counters. For local property exposure we favour industry heavyweight Growthpoint, which provides sectoral and geographical diversification, both locally and abroad. We also favour sector specialists Equites and Stor-Age, both of whom have emerged as respective winners of the pandemic – Equites benefiting from the acceleration of growth in ecommerce, and Stor-Age benefitting from the increased demand in flexible space solutions. Given the poor economic outlook for the South African economy relative to the global environment, we have also increased our global exposure in the portfolio through the addition of NEPI Rockcastle and Sirius Real Estate – two high quality REITs operating in Central/Eastern Europe and Germany respectively. Across the portfolio we favour counters with lower balance sheet leverage, as we believe that this approach provides a meaningful margin of safety to the income streams that are of utmost importance to retired investors.

KEY TAKEAWAY: We prefer high-quality real estate in sectors benefiting from structural shifts in the property market caused by the pandemic. Direct A-grade commercial real estate in the UK is offering investors highly attractive real yields with large multi-national tenants committed to long term leases.

Multi-asset Funds: Best of both worlds

Our multi-asset portfolios are managed to provide investors with an attractive level of income that grows in line with inflation over time.

Funds as at 30 June 2021 Total Return Income Produced#
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs 5 yrs
Balanced Fund (A) 7.7% 3.9% 3.5% R39 300 R110 900 R183 000
Balanced Fund (C) 8.3% 4.5% 4.1% R45 100 R128 100 R211 200
Sector Average (SA – Multi Asset – High Equity) 17.2% 6.7% 5.8% R24 000 R79 200 R128 800
 
Essential Income Fund (C) 17.1% n/a n/a R65 000 n/a n/a
Sector Average (SA – Multi Asset – Flexible) 19.6% n/a n/a R25 100 n/a n/a
 
International Growth Feeder Fund (A) 2.0% 11.4% 6.5% R19 100 R84 100 R123 400
Sector Average (Global – Multi Asset – Flexible) 3.7% 9.6% 7.5% R1 800 R10 300 R15 400
 
Worldwide Fund (A) 2.8% 8.1% 4.3% R22 500 R72 500 R110 100
Worldwide Fund (C) 3.4% 8.7% 4.9% R28 200 R91 000 R137 500
Sector Average (Worldwide – Multi Asset – Flexible) 12.2% 8.7% 7.2% R10 300 R40 500 R69 000
*Annualised     #Assuming R1,000,000 invested     Profile Data
Portfolio as at 30 June 2021 GBP USD EUR
1 yr 3 yrs* 5 yrs* 1 yr 3 yrs* 5 yrs* 1 yr 3 yrs* 5 yrs*
IIP – Balanced Portfolio 15.4% 12.4% 8.9% 28.6% 14.2% 9.6% 22.0% 13.6% 8.2%
*Annualised Gross of Investment Management Fee     Source: Bloomberg & Marriott

For yield, we see the most attractive investment opportunities in South Africa – more specifically, government bonds. Although bond yields have declined since the peak of the crisis, they continue to offer amongst the highest real yields in the world. The government's balance sheet may be stretched, but in a world where a large portion of the global bond market still offers negative yields, we believe investors are being more than adequately compensated for the risk.

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. Companies like Nestlé, L'Oréal, Johnson & Johnson and Colgate-Palmolive also offer significantly higher quality/lower risk than domestic alternatives. While perhaps not as exciting as resource stocks and other highly cyclical companies, businesses of this nature are less volatile and more resilient, making them far more predictable and less likely to come under pressure in the months and years ahead, especially if growth and inflation do not live up to the lofty expectations currently priced into the market.

The chart compares the yield of our Balanced Fund with money market rates.

published yields

KEY TAKEAWAY: Our multi-asset portfolios are offering highly attractive yields relative to money market rates considering their income streams will likely grow in-line with inflation over the long term. We prefer South African bonds for yield and offshore equities for growth.

Conclusion

As we get closer to the end of the year, economic data will begin providing a far more realistic gauge of the health of the global economy as the numbers will no longer be significantly distorted by the base effects of the "switched off" economies of 2020. We believe the picture that will emerge is one that is supportive of quality companies that demonstrate resilience and which pay regular dividends – the key attributes of our income focused investment style.

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.