Identifying predictable income

Blue Chip met up with Scott Cooper, Marriott Investment Managers, to find out what his take is on the inflation that is, and has been for some time, driving the markets.

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What is Marriott’s investment style?

At Marriott, our investment objective is to create financial peace of mind through more predictable investment outcomes by applying an income-focused investment style. This investment style requires the selection of securities that produce reliable dividends (income streams), ideally growing for the long term.

Please outline Marriott’s portfolio security selection process. How does it work?

A key discipline of Marriott’s income-focused investment philosophy is to only invest in companies that produce reliable and consistent income streams. To assist in this selection method, we apply a security filtering process:

  • Market Cap Filter. International companies need to be listed on S&P 500, FTSE 350, FTSE EuroFirst 300. This excludes smaller, more speculative investments.
  • Dividend Filter. Companies that have not paid dividends over the last three years are filtered out.
  • Economic Screen. We exclude companies vulnerable to changing economic conditions.
  • Industry Screen. Companies operating in unpredictable industries are filtered out, such as commodity producers.
  • Company Screen. We avoid companies with specific risks to dividends, for example, companies with too much debt or that have ESG concerns.
  • Yield Screen. Companies offering investors best value are selected from the remaining pool of securities (Marriott’s investable universe). A security/investment will only be included in a portfolio if it enhances the portfolio’s yield/growth trade-off.

Our selection process filters out any security where future dividends are hard to predict – a process which markedly reduces the risks typically associated with equity investing. These companies tend to share five characteristics which ensure predictable dividend growth:
1) fulfil a basic need; 2) strong brands; 3) pricing power; 4) growing markets and 5) diversification.

By the nature of their business, they will be largely unaffected by broad governmental, political and economic decisions. They tend to fare well in both recessionary and growth phases of the economic cycle as their products are generally everyday necessities, with market dominance a function of their brand. With a rapidly growing consuming class, these companies are well-positioned to take advantage of a growing demand for trusted brands – invest your money where you spend your money.

Please tell us about Marriott’s international equity portfolios.

At Marriott, we have two types of international equity portfolios. Firstly, our international funds. Excitingly, we have just reduced the minimum on these funds to £1 000 for the First World Equity Fund and $1 000 for the International Real Estate and International Growth Funds. These funds are listed in Dublin and invest in a range of high-quality, multinational companies.

Secondly, we offer investors UK Sterling denominated offshore share portfolios that enable investors to hold the shares directly. Investors can choose between an income growth and balanced option.

Why choose one of the international investment portfolios?

Investors can select one of two managed discretionary portfolios, the IIP Income Growth and IIP balanced portfolios, mentioned above.

Income Growth. This portfolio is fully invested in the shares of high-quality, multinational companies and is designed to produce inflation-beating income and capital growth due to its high equity exposure. Capital growth will primarily be a function of income growth as opposed to capital accumulation. A higher-risk option.

Balanced. This portfolio contains approximately 15% exposure to our First World Hybrid Real Estate (FWHRE) Fund (which invests in a combination of direct real estate in the UK and listed real estate investment trusts) and is designed to produce inflation-hedged income and capital growth through a balanced asset allocation including equities and real estate. Capital growth will be a function of both income growth and capital accumulation. A more moderate risk option.

Most IIP investors benefit from a reduction in US withholding tax from 30% to 15% on dividends earned from US equities.

The total investment management fee is just 0.75%, reducing to 0.45% on a sliding scale depending on the investment amount.

The overriding market theme for 2021 has been one of inflation. Currently, we are facing shorter-term inflationary pressures. What is your take on this? Will these pressures be sustained?

Inflation has been front-of-mind for investors and asset managers alike for some time now. There are certainly two schools of thought as to whether inflation will be sustained. We still believe that it will be transitory, driven by a range of factors including supply bottlenecks, base effects, rising energy prices, shipping delays and other costs associated with the reopening of economies. These factors are still very evident in recent data releases, for example:

  • Recently, we saw the UK’s CPI jump to 3.2% from 2%, its largest-ever increase in the 12-month CPI rate. However, a large part of this was driven by base effects – in August 2020, the UK government launched an Eat Out to Help Out scheme that offered customers half-price food and drink to eat or drink in, artificially lowering the 2020 baseline.
  • Estimated Eurozone inflation, as at the end of August, jumped to 3%. However, if you strip out the impact of rising energy prices, the inflation rate is just 1.7% over the last 12 months.
  • In the past few months, Consumer Price Index inflation in the US has reached its highest level in more than a decade. We have begun to see the headline inflation numbers trending downwards as base effects and other inflationary pressures begin to subside.

We also need to recognise that some inflationary pressures are stickier than others and will continue for several months. The shortage of long-distance truck drivers in the UK is a good example of this. The shortage is putting upward pressure on wages and these additional costs are flowing through to the cost of transporting goods. Although the shortages will dissipate over time, they will not disappear overnight.

At Marriott, our key focus remains to identify companies that are well-suited to the long-term but can effectively deal with the shorter-term inflationary pressures.

Overall, we feel inflation will still be transitory, but the transition may be slightly longer than some market commentators initially suggested. At Marriott, our key focus remains to identify companies that are well-suited to the long term but can effectively deal with the shorter-term inflationary pressures.

In 2020, global debt climbed to an all-time high and the pace of recovery has been uneven. Should investors be worried?

There is no doubt that the global economy faces a few challenges, including an increasing debt burden. In 2020, global debt climbed to an all-time high – approaching $300-trillion. Further, it has become evident that the pace of economic recovery is very uneven across the globe. China’s economy managed to surpass pre-pandemic levels during 2020 and the US has just passed that mark, but many other countries may not recover until 2023 or beyond. The elevated debt levels and uneven global recovery are likely to weigh on global growth.

Scott Cooper, Investment Professional, Marriott Investment Managers

Should investors be worried? I think that very much depends on what they are invested in. Take Proctor & Gamble, for example, a company held in our international equity portfolios, which has an excellent track record of growing dividends even through market and economic turmoil. It has increased dividends 65 years in a row, including a 10% increase earlier this year (compared to a double-digit decline globally).

Aside from an excellent track record, the company has a strong balance sheet, is diversified across countries and product lines, and holds market-leading positions resulting in powerful brand loyalty and pricing power. Last year, Proctor & Gamble was able to grow its organic revenue and core earnings per share by 6% and 11% respectively despite the pandemic and, looking forward, has already announced price increases for key product lines later in the 2021 calendar year.

At Marriott, we believe there are a range of companies that are well-suited to the long term and which can effectively deal with short-term inflationary pressures. Companies of this nature tend to be less volatile and more resilient, meaning that outcomes for investors are more predictable. Our international equity portfolios contain many such companies.