A fund that focuses on earning a reliable income for investors produced the best returns with the lowest risk among all South African equity general funds over the past five years, resulting in it collecting a Raging Bull Award for the third year in a row this week.
The Marriott Dividend Growth Fund returned 20.3 percent a year over the five years to the end of December last year, and was ranked 16th among its peers in the South African equity sub-category, according to ProfileData. The fund achieved this return at relatively low risk, which resulted in it earning five PlexCrowns.
The sub-category benchmark, the FTSE/JSE All Share Index, returned 19.93 percent a year over the five years.
The fund’s PlexCrown rating was the highest among the funds in the South African equity general sub-category. 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 last annual dividend paid as a percentage of the share price) at any one time. Significant consideration is also given to the dividend growth prospects of the companies the fund invests in, because dividend growth is ultimately the biggest driver of capital value growth over the long term.
Duggan Matthews, a member of the team that manages the Dividend Growth Fund, says a consistent application of Marriott’s philosophy – seeking a reliable income steam for investors – has paid off for the fund.
Marriott’s investment approach tries to reduce much of the uncertainty when it comes to equity investing, he says. The fund typically invests in sectors such as banking, pharmaceuticals, food and clothing. Avoiding the shares of companies that are affected by economic cycles – known as cyclical shares – is a key aspect of Marriott’s approach. This has led to it shunning the likes of the resource sector, where it is impossible to predict the prices of resources or exchange rates, Matthews says.
Technology companies are also sidestepped, because it is difficult to predict when or if a technology company’s innovation will pay off, Matthews says.
Instead, Marriott has been well-served by sticking to the more “boring” shares in industries where earnings and dividend growth are likely to be more reliable. Investors tend to look for the next big opportunity, Matthews says, but Marriott’s well-established investment process keeps it from chasing more exciting, but less predictable, investments that can often produce disappointing outcomes for investors.
Matthews says this can lead to periods of underperformance. However, by remaining true to its income-focused philosophy, the fund has produced good results for investors over the longer term.
The Dividend Growth Fund’s average annual total return over the past five years is made up of about 16.7 percent from the appreciation of the price of the shares in which it invests and 3.8 percent from dividends. The current yield of the fund is about three percent (after fees).
An integral part of Marriott’s philosophy is not to pay too much for an income stream, and securities are either added or sold based on the current price of their dividend stream.
Matthews says the market is not cheap, but it is still possible to find shares in quality companies with acceptable dividend yields.
One switch that the fund made recently was to sell pharmaceutical company Adcock Ingram and replace it with bankers FirstRand and Nedgroup. The rationale behind this decision was mainly the higher dividend yields and expected dividend growth on offer in the banking sector.
At the end of December last year, the fund had an allocation of 39.8 percent in consumer goods and services, 18.4 percent in financials, 13.3 percent in telecommunications, 15.7 percent in industrials, 8.1 percent in healthcare, and the rest in cash.
Matthews says consumer confidence has fallen to its lowest level in 10 years, which does not bode well for the country’s economic growth, because South Africa is largely dependent on household consumption for growth in its gross domestic product.
However, the Dividend Growth Fund is exclusively invested in companies with the ability to grow their dividends in difficult economic circumstances, he says.
As a result, Marriott expects the Dividend Growth Fund to continue to enjoy inflation-beating growth in the dividends of the shares in which it invests.
More consistent dividend growth results in more consistent price appreciation, and ultimately a more predictable investment experience, Matthews says.
The total expense ratio of the fund at the end of September was 1.15 percent – among the lowest in the sector.