MARRIOTT DIVIDEND GROWTH FUND
Raging Bull Award for the Best Domestic Equity General Fund on a risk-adjusted basis over five years to December 31, 2012
A fund focused on earning a reliable income for investors delivered the best returns with the lowest risk among all domestic equity general funds over the past five years, resulting in it collecting a Raging Bull Award at this year’s ceremony.
The Marriott Dividend Growth Fund returned 15.73 percent a year over the five years to the end of December, the highest returns among the domestic general equity funds over this period, according to ProfileData.
The fund achieved this return at relatively low risk, which resulted in it earning five PlexCrowns and the highest PlexCrown rating among its peers. For this achievement, it received a Raging Bull Award.
The Marriott Dividend Growth Fund confines itself to investing in shares that produce reliable dividends – but not necessarily the shares with the highest dividend yield (the dividends as a percentage of the share price) at any one time.
Marriott also focuses on paying the right price for a share’s dividend flow. The fund typically invests in sectors such as banking, pharmaceuticals, food and clothing, while avoiding shares with unpredictable revenues, such as commodity or construction stocks.
Duggan Matthews, a member of the team that manages the Dividend Growth Fund, says the fund typically holds shares for the long term. However, the portfolio’s holdings do change from time to time, he says, with securities either added or sold based on the current price of their dividend stream.
A sensible time to invest is when a share is trading on a dividend yield at or above its historic average, Matthews says.
The lowest annual total return the fund has produced in any one of the past five years was 15.7 percent in 2008, and the highest was 28.9 percent last year.
The total return is made up of the income return from the dividends earned and the return from the appreciation of the share price.
The fund’s annual income return has ranged from 3.4 percent to 3.9 percent. The fund achieved an income return of 3.9 percent in 2008, when the price return was 11.8 percent. Last year, the income return was 3.8 percent, while the price return was 25.1 percent.
Matthews says the value of a business is based on the income or earnings it can generate. “Only through increasing its income can the value of a business increase – a maxim well known by those running their own businesses. Over the long term, this principle also holds true for investments,” he says.
For the past five years, the global economic slowdown has made it very difficult for many South African companies consistently to increase their earnings and dividend payments to shareholders, Matthews says.
During this period, the fund’s investment universe has been restricted to companies that can produce reliable dividend growth regardless of the economic circumstances. As a result, the fund was able to grow its distributions to investors at an average rate of 10.4 percent a year, about four percentage points above inflation.
The shares that have contributed significantly to the fund’s good performance over the past five years include British American Tobacco, Bidvest, Mr Price, Clicks and SABMiller, Matthews says.
More recently, the addition of Vodacom, MTN and Nampak has also contributed to the fund’s good returns, he says.
At the end of December last year, the fund had an allocation of 47 percent to consumer goods and services, despite some asset managers warning against higher allocations to consumer goods and services. But Matthews says these stocks have been carefully selected and focus on producing and distributing basic necessities. This ensures they will be able to produce acceptable income growth in a tough economic climate, he says.
Some may argue that the resources and financial sectors are offering investors better value. However, macro-economic events will have a significant effect on the profitability of these companies, Matthews says. Consequently, their prospects for income growth cannot be forecast with any degree of certainty, he says.
The Dividend Growth Fund boasts the lowest volatility among all the general equity funds over the past five years. Matthews says this is a result of its investment strategy and the fact that share price appreciation is ultimately a function of dividend growth.
More consistent dividend growth results in more consistent price appreciation, he says. This outcome is in contrast to the accepted norm that higher returns necessitate taking on more risk, Matthews says.
Looking ahead, Matthews says despite demanding share valuations (prices relative to expected earnings), choosing companies with predictable dividends will serve investors best.
Widespread industrial action during the latter part of 2012 has worsened South Africa’s growth prospects, he says.
Consequently, the Dividend Growth Fund remains defensively positioned, with an emphasis on companies that produce consumer necessities and have predictable prospects for income growth.
Marriott expects the fund’s income distribution to grow by 10 percent this year, Matthews says.