Higher global interest rates and breakthroughs in Artificial Intelligence (AI) have had a profound impact on market returns in the first half of the year. In this report we discuss the opportunities and risks these developments present to investors, and why we think our portfolios are well positioned to continue delivering reliable income and more predictable capital growth in an investment landscape that has fundamentally changed.
The timing and steepness of potential interest rate cuts has been a key focus of global markets year to date. Although the European Central Bank and Bank of England have each implemented one 0.25% cut (in June and August respectively) monetary policy remains firmly in restrictive territory. Further, despite early expectations that interest rates in the US would fall by 1.75% in 2024, the Federal Open Market Committee (FOMC) is yet to act. As a result, global rates have remained at 15-year highs in all three regions.
Elevated interest rates in Europe, the UK and the US presents investors with an opportunity that has not been seen since the Global Financial Crisis – the ability to earn attractive hard-currency returns with far less risk. To help investors take advantage of this opportunity, and in the most tax- and cost-efficient way possible, Marriott has launched the Smart International Income Portfolio (SIIP) – a simple, low-cost investment for conservative investors looking to achieve hard-currency returns above bank deposits in either US Dollars or Sterling. Pleasingly, the two SIIP portfolios have produced gross annualised returns of approximately 5.9% and 5.1% in USD and GBP respectively since we launched the product in December 2023.
High global interest rates have also been beneficial to Marriott's local income portfolios. For example, 1-year negotiable deposits currently offer investors attractive yields along with capital stability, and form a core holding within our local income funds. The chart illustrates the attractive yields currently on offer from these low-risk investments.
High yields from investments offering greater capital stability allowed the Core Income Fund to adopt a cautious approach going into the SA elections, given the potentially binary outcome. Fortunately, the result was constructive for the economy, resulting in the Rand strengthening to below R18.00 against the US Dollar and bond yields declining by approximately 1%. Higher bond prices benefitted investors in the Fund due to an approximate 30% exposure to the R213 (a government bond maturing within 7 years) which boosted returns above 10% for the year.
However, it is important to highlight that should the election have gone the other way, there would have been limited capital downside, highlighting our commitment to creating greater peace of mind through more predictable investment outcomes. This undertaking to our clients ensures we only look to take advantage of perceived market opportunities in our income funds when it is either: 1) necessary to do so to achieve an acceptable level of income/return, or 2) the odds are clearly in the investors favour (as opposed to 50/50). As such, it is not necessarily the flexibility to take advantage of opportunities that differentiates our income funds, but rather how we use that flexibly – never losing sight of conservative investors' low tolerance for capital volatility.
Looking ahead, inflation is expected to continue moving downwards towards the Reserve Bank's target of 4.5% and markets are beginning to price in lower interest rates. Historically, this has been a good phase for conservative investors as bonds tend to perform relatively well. The Core Income Fund is well positioned for the next phase due to its exposure to the R213 bond. Additionally, the Fund only holds high quality, investment-grade corporate credit yielding approximately 10%, ensuring resilience in what is expected to be a challenging environment for companies.
Despite the continuation of restrictive monetary policy across the globe, the MSCI World Index was up 12% in USD in the first half of 2024. On closer inspection, however, more than half of the return came from the performance of just a handful of stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – a group of mega-cap tech companies now commonly referred to as the "magnificent 7". Importantly, the performance of the vast majority of stocks was far more subdued, reflecting the reality of a slowdown in consumer spending as opposed to hype around AI. Central banks are likely walking a tightrope between continuing to bring down inflation, and ensuring that their actions do not trigger a worldwide recession.
Source: Bloomberg
Recent economic data has hinted that the US economy – which to date has remained robust in the face of elevated interest rates – may be starting to creak. This "growth scare" flowed through to equity markets at the beginning of August, and impacted the tech-heavy NASDAQ index in particular – which was down by 8% in the first five days of August (and traded 13.1% below its 10 July peak). Thus, it should be noted that whilst optimism around the benefits of AI has driven markets higher in 2024, the valuations of likely AI winners, such as Nvidia (up over 540% in the last 2 years), are now stretched. As such, these stocks are particularly vulnerable to any escalation in concerns around growth.
As we move forward, the probability that restrictive monetary policies will have a material adverse impact on the global economy will continue to increase, in our opinion. Against this backdrop, high-quality, dependable, dividend-paying companies which are not caught up in the AI hype will likely serve investors well for two major reasons:
1. They have the brands and balance sheets required to grow profits and dividends when the going gets tough; and,
2. The valuations of these companies are underpinned by reasonable (as opposed to sky-high) profit and dividend growth expectations in the years ahead.
| Company | Valuations (PE Ratio) | ||
| 5 Year Average | Current | Discount | |
| L'Oreal | 38.4 | 30.2 | -21.3% |
| LVMH | 31.6 | 22.4 | -29.1% |
| McDonald's | 27.8 | 24.4 | -12.3% |
| Medtronic | 20.4 | 15.6 | -23.6% |
| Visa | 30.7 | 26.9 | -12.5% |
| Portfolio Average | 26.4 | 23.6 | -11.9% |
| Source: Bloomberg | |||
This should result in better relative performance from our international equity portfolios which have struggled to keep pace with a market increasingly driven by a handful of non-dividend paying, "AI stocks".
Our local equity fund, the Marriott Dividend Growth Fund, has returned 9.4% over the last 12 months, aided by strong performance of its South African equity holdings in the wake of the May general election outcome. In addition to its local equity holdings, the Fund maintains an offshore exposure of approximately 43% to the world's best dividend paying companies. As such, a favourable investment outcome coupled with reliable, inflation-beating income growth is not overly dependent on the success of SA's Government of National Unity – further evidence of our commitment to more predictable investment outcomes.
From a First World Hybrid Real Estate Fund perspective – given that UK inflation is now back at the 2% target level, and expected to stay at this level for the foreseeable future, the Bank of England has started the rate cutting cycle. Historically, this has been positive for real estate, and we therefore expect property valuations to firm over time. The graph below highlights the UK market outlook for both interest rates and inflation until 2026.
We continue to believe the longer term 4%-6.5% p.a. gross return* expectation for FWHRE remains reasonable.
*Source: Marriott (Annual Returns 4.5% to 6.5% = Dividend Yield 4.5% + Income Growth 0% to 2%). Note: Returns are longer term and not guaranteed. The return expectations have been formed by considering the expected rental income and escalations from our current portfolio
From a local perspective the SA property market surged following the formation of a government of national unity (GNU), which was well-received by investors as it indicated ongoing policy stability. Similarly lower bond yields and an anticipation of the rate cutting cycle starting have been positive for the sector. Looking ahead, as operational efficiencies improve and funding costs decline, we maintain a constructive outlook for the sector after a challenging period of restructuring and navigating high interest rates.
For more information on the real estate portfolios, please see the latest commentary on the factsheets, available on our website.
With an investment style biased towards high-quality securities that produce consistent and reliable income streams, Marriott's portfolios are ideally positioned to continue delivering more predictable capital growth irrespective of escalating economic concerns or the current hype around AI. The investment landscape might look fundamentally different but Marriott’s ability to provide greater financial peace of mind remains the same.
Please see the latest commentary on each fund in our factsheets, available on our website.
| As at 31 July 2024 | Total Return | Income Produced# | ||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| Core Income Fund (A) | 10.9% | 7.9% | 7.8% | R87 476 | R225 872 | R361 355 |
| Core Income Fund (C – LISPs only) | 11.2% | 8.3% | 8.1% | R90 316 | R234 248 | R375 660 |
| High Income Fund (A) | 10.7% | 7.8% | 7.7% | R85 958 | R222 243 | R358 032 |
| Income Fund (R) | 10.5% | 7.6% | 7.2% | R88 552 | R215 870 | R336 634 |
| Sector Average (SA – Multi Asset – Income) | 9.0% | 7.5% | 7.0% | R80 010 | R200 585 | R311 563 |
| *Annualised #Assuming R1,000,000 invested Source: ProfileData | ||||||
| As at 31 July 2024 | Total Return | Income Produced# | ||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| Dividend Growth Fund (R) | 9.4% | 8.7% | 6.3% | R36 926 | R98 961 | R151 748 |
| Sector Average (SA – Equity – General) | 10.1% | 9.8 | 9.7% | R29 054 | R97 910 | R163 094 |
| First World Equity Feeder Fund (A) | 3.7% | 7.8% | 9.4% | R23 169 | R62 818 | R120 184 |
| Sector Average (Global – Equity – General) | 13.8% | 8.5% | 12.4% | R3 071 | R9 012 | R18 047 |
| *Annualised #Assuming R1,000,000 invested Source: ProfileData | ||||||
| As at 31 July 2024 | 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 | 2.2% | 4.7% | 6.5% | 2.1% | 2.1% | 7.5% | 3.9% | 5.2% | 8.1% |
| *Annualised Gross of Investment Management Fee Source: Bloomberg | |||||||||
| As at 31 July 2024 | Total Return | Income Produced# | ||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| International Real Estate Feeder Fund (A) | 11.1% | 3.3% | 5.3% | R39 148 | R90 853 | R162 589 |
| Sector Average (Global – Real Estate – General) | 9.5% | 2.5% | 5.2% | R15 136 | R37 183 | R68 420 |
| *Annualised #Assuming R1,000,000 invested Source: ProfileData | ||||||
| As at 31 July 2024 | GBP | ||||||||
| 1 year | 3 years* | 5 years* | |||||||
| First World Hybrid Real Estate plc (A) | -0.2% | 0.3% | 4.2% | ||||||
| *Annualised Gross of Investment Management Fee Source: Marriott | |||||||||
| As at 31 July 2024 | Total Return | Income Produced# | ||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| Property Income Fund (A) | 18.9% | 8.5% | -0.8% | R72 735 | R202 882 | R229 149 |
| Sector Average (SA – Real Estate – General) | 24.9% | 11.2% | 1.6% | R65 338 | R201 033 | R221 848 |
| *Annualised #Assuming R1,000,000 invested Source: ProfileData | ||||||
| As at 31 July 2024 | Total Return | Income Produced# | ||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| Balanced Fund (A) | 9.6% | 6.4% | 5.8% | R51 366 | R140 029 | R216 802 |
| Balanced Fund (C) | 10.3% | 7.0% | 6.4% | R57 090 | R157 153 | R245 524 |
| Sector Average (SA – Multi Asset – High Equity) | 11.5% | 9.2% | 9.5% | R30 831 | R91 239 | R155 952 |
| Essential Income Fund (C) | 17.8% | 8.5% | 4.0% | R76 635 | R201 852 | R275 034 |
| Sector Average (SA – Multi Asset – Flexible) | 12.4% | 9.5% | 9.2% | R36 648 | R103 989 | R174 461 |
| International Growth Feeder Fund (A) | 4.8% | 5.7% | 8.5% | R26 637 | R66 128 | R125 879 |
| Sector Average (Global – Multi Asset – Flexible) | 11.2% | 8.1% | 9.8% | R2 822 | R7 630 | R14 380 |
| Worldwide Fund (A) | 5.9% | 6.2% | 7.3% | R33 762 | R91 024 | R148 339 |
| Worldwide Fund (C) | 6.5% | 6.8% | 7.9% | R39 516 | R108 872 | R180 844 |
| Sector Average (Worldwide – Multi Asset – Flexible) | 11.4% | 7.9% | 9.7% | R14 588 | R36 288 | R58 841 |
| *Annualised #Assuming R1,000,000 invested Source: ProfileData | ||||||
| As at 31 July 2024 | GBP | USD | EUR | ||||||
| 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | 1 year | 3 years* | 5 years* | |
| IIP – Balanced Portfolio | 1.4% | 3.9% | 6.1% | 1.2% | 1.2% | 7.1% | 3.1% | 4.3% | 7.8% |
| *Annualised Gross of Investment Management Fee Source: Bloomberg | |||||||||
Please note that where the term ‘yield/yields’ is used, these are historic yields
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).
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