By: Robin Hartslief, Investment Professional at Marriott
The word ‘surprise’ has been described as representing “the difference between expectations and reality, the gap between our assumptions and expectations about worldly events and the way that those events actually turn out”.
In a highly uncertain global economic environment, where the world seems full of ‘surprises’, the likelihood and cost of making incorrect decisions increases significantly. As a result, investment outcomes become less predictable. In our opinion, the best way to increase the predictability of income and capital returns in volatile times is to invest in high-quality, robust companies whose prospects are largely unaffected by economic, political or technological disruptions.
Review of the year so far
2019 started off well for investors, with further interest rate hikes looking unlikely in first world and developing markets. Globally, both bonds and equities rallied strongly, erasing the losses investors experienced in 2018. Market volatility, however, made an unwelcome re-appearance in May. Shaken by a sudden breakdown in trade talks between the US and China the MSCI world index declined by 6.1% in the same month – a common market response to anything unexpected. Regrettably for investors, these market ‘surprises’ are occurring more and more frequently due to increasing geopolitical instability, more divergent economic prospects and rapidly advancing technology.
Given how difficult it is to forecast how the future will unfold (especially in the short term) at Marriott we use our Income Focused Investment Style to ensure more predictable income and capital returns irrespective of potential downgrades, trade wars, downturns and other unexpected events.
In our opinion, the key to more predictability is more quality – by investing exclusively in quality companies (those with superior brands, balance sheets, cash flows, management teams and track records) the likelihood of achieving an acceptable outcome over the long term increases significantly. This is due to their ability to grow profits and dividends (the long term driver of capital growth) in almost all circumstances.
Best quality found offshore
From a global perspective, the highest quality companies – those with the most reliable and consistent dividends, as illustrated in the table below – are typically listed on first world exchanges.
These dividend track records are even more impressive when one considers that they have been achieved despite numerous setbacks, such as the Asian financial crisis, the dot com bubble and the global financial crisis. The ability to effectively navigate these setbacks can be attributed to a combination of brand power, size, scale, and global reach that very few companies can match. In an unpredictable world, the increased certainty that these high quality businesses provide is likely to become increasingly sought-after by investors.
Attractive dividend yields
In addition to providing more predictable capital growth prospects, the attractive divided yields these companies offer makes them all the more appealing from an investment perspective. As a result of the wave of monetary easing that has gained momentum since the beginning of the year, negative-yielding debt is currently sitting at an all-time peak of approximately $12.5 trillion globally. Against this backdrop, the appeal of these alternative sources of reliable income is likely to increase substantially, especially if the income they produce is expected to grow in excess of inflation. The table below highlights the latest dividend growth produced by Coca-Cola, Colgate-Palmolive, Procter & Gamble, Johnson & Johnson, Medtronic & Unilever:
In a world full of ‘surprises’ and historically low interest rates, the attractive yields and increased certainty that the world’s best dividend paying companies offer, suggests they will likely serve investors best in the years ahead. As such, we continue to maximise our investor exposure to these companies across our portfolios. The table below outlines the good returns of our offshore share portfolios over 1, 3 and 5 year periods: