Fund Name: Marriott Dividend Growth
Co-Portfolio Manager: Duggan Matthews
Fund Description
The Marriott Dividend Growth Fund invests into acceptable dividend yield companies which provide long-term growth of income and capital. To achieve this objective, they seek out fundamentally sound listed companies that pay out dividends and possess the potential for consistent and sustainable dividend growth in the future.
The funds aims to achieve a dividend yield in excess of the Financial and Industrial indices and to grow distributions in excess of the these indices’ dividend growth over a two year rolling period.
Background and Performance
The fund’s intention has always been to invest solely in SA equities, however, over the last few years offshore equities have presented some attractive opportunities resulting in the fund now having a 22% direct offshore exposure.
Its investment methodology of investing in dividend growing companies is an investment style that has stood the “test of time” and is arguably the most fundamentally superior method of investing for the long-term. The objective is to provide income and capital growth.
The fund has a 16 year track record with an annualised return of 13.4. Its internal objective is to provide returns of 10% to 12% per annum over the long-term, which it has achieved.
Over the last 10 years it is ranked 5th out of 54 funds in the general equity category with an annualised return of 14.6%. Over the last year performance has slipped to 6% growth (much in line with the market) and to 36th out of 146 funds.
Investment Style and Process
Investments decisions are made on a committee basis comprising 3 portfolio managers and 4 investment analysts. The process is very disciplined and shy’s away from uncertainty. It begins with a top down view identifying investable sectors which provide visibility and certainty of earnings for at least up to five years. This generally provides around 50 shares to invest in that have a value above R5bn (a self imposed liquidity threshold).
They seek fundamentally sound companies where they forecast growing dividends over a five year period. They ideally are looking for a dividend yield plus growth of at least 12% per annum and the likely re-rating of the share to support the valuation.
Given these investment criteria it is highly unlikely the fund will invest in commodity shares due to their low visibility of future earnings and extreme cyclical nature of earnings.
Portfolio limits: Max industry exposure 40%, Max share exposure 10%, Min share exposure 2.5%, Min number of shares of 15.
Fund Managers Views
They have a fairly negative outlook for the SA economy and believe that a rating agency downgrade is inevitable. Taking this into account they believe the currency will continue to weaken into the future and hence they are maintaining the fund’s current 22% offshore exposure. Globally they see good prospects for the middle-class consumer in countries such as India and China. Overall markets are not expensive and a number of investment opportunities exist.
Fund Positioning
Financial 21.5%
Consumer goods 27.4%
Health Care 18.7%
Consumer Service 18.6%
Telecoms 4.4%
Industrials 6.0%
Money Market 3.4%
An international overall exposure of 22% mostly in consumer shares
Biggest Macro Risk
A Rating Agency downgrade, which would hurt the market. Or alternatively a run in commodity shares which would lead to the relative underperformance of the fund.
Food Retailers and Mr Price holdings.
Fund Flows
Over the last six months there has been an outflow of funds, but over the last year fund flows have been neutral.
Is the Fund Manager Invested in Fund?
30% to 45% of Fund Manager bonuses are invested in the Fund for a minimum of a 3 year period.
Investonline View on the Fund
The fund has been a top performer over the last 10 years, ranked 5th out of 54 funds in the general equity category with an annualised return of 14.6%. This is underpinned by a solid long-term investment methodology of focusing on certainty and dividend growth. Although this methodology is not unique, we believe Marriott is the only fund that applies this very specific style continuously and very rigidly. Simplistically the fund would not invest in commodity shares given their low visibility of future earnings and highly cyclical nature.
This methodology (focusing on certainty and dividend growth) has been well suited to the appetite of the market since the global financial crises in 2008. The market has mainly looked for defensive companies which provide more certainty and by nature pay consistent dividends. This has resulted in relative strong outperformances of these types of companies, which has lead to many of these shares having stretched valuations.
Our concern is the nature of the companies that the Fund invests into are now relatively expensive when compared to the rest of the market. Given the Fund’s rigid investment methodology, we believe its investable universe over the next three to five years is at a higher risk to underperform the market.