Achieving Investors’ Needs in Volatile Markets - You can’t time retirement

Marriott’s successful asset management style is based on an income focused approach to investing. Maximising income requires purchasing securities with reliable, growing dividends at above-average dividend yields.

The importance of purchasing a security at an above average dividend yield can best be explained by way of example:

1. In a hypothetical situation, if both the price and dividends of a security were to grow at a constant 15% p.a., and assuming a 3% yield at the start of the investment, a 3% yield would remain constant over the duration of the investment. In such a case, the timing of one’s investment would be irrelevant: over any ten-year period, the total return would be 211%.

2. However, using the actual market situation (JSE ALSI, in this example) prices and yields fluctuate over time. For example, in 1977 the yield on the ALSI was 6.6%, (i.e. R66,000 p.a. income earned on a R1 million investment) which translated into a 649% total return over the subsequent ten years. In contrast had an investor purchased an investment in the ALSI in 1997, on a yield of 1.7% (only R17,000 p.a. income earned for a R1 million investment) the total return over the subsequent ten years would have been 140%.

Not only is the income stream over time determined by the initial yield on the investment, but purchasing a security at an above average dividend yield creates the potential for a re-rating opportunity.

Timing an investment is often difficult (particularly in retirement), therefore by investing in securities that produce a consistent, growing dividend stream enables an investor to match the income produced with that which is withdrawn. In this way an investor will not ‘unwittingly’ erode the unit base, and therefore the long term earnings potential of his investment.. Equally important is that a growing dividend stream will provide an investor with income that is growing.

The importance of a consistent income stream in retirement – Taking a closer look at living annuities

Marriott conducted research on the experience of an investor over a 30 year period, purchasing an living annuityonce per year, every year for the period 1961 to 1980.

During this time the following investment assumptions were made:

• An investment of R1 million was made into the JSE ALSI
• An income of 10% p.a. was withdrawn
• The income grew at 2% p.a.
• All-in fees of 2.2% p.a. were levied against the investment

Based on the total return of the ALSI over each of these periods, Marriott’s findings were as follows:

• 6 investors had exceptional experiences. In the best case, the capital value grew to R71 million

· 2 investors had reasonable experiences. In these circumstances the capital value grew to above R5 million.

• 3 investors experienced income problems and had to reduce their income as capital was eroded during the investment
• 8 investors lost their entire capital (and therefore their entire income stream).

Results showed that investors who experienced poor or indifferent market performance in the early years of retirement experienced the worst outcomes, as the income withdrawn tended to exceed the total return of the portfolio in the early stages of the annuity. As a result the investor had to sell units to fund the income required, and despite good market performance in the latter years these losses were not made up.

But you can’t time retirement, therefore an alternative solution is to ensure that the income produced matches that which is withdrawn, in this way a client can avoid the downward spiral (as an increasing number of units are sold to fund income) of a declining market.

Income matching is critical in retirement

If an investor can:

• Match the income produced with the income required
• Purchase securities / investments which produce a consistent reliable income

The investor will achieve unit base stability as they will not have to sell units. As a result the unit balance, and therefore the earnings potential of the portfolio will remain intact, regardless of market value fluctuations.

In order to enable a client to match the income required with the income produced, Marriott manages its funds with the primary objective of producing a consistent, growing income over time. As a secondary objective all of the Marriott funds aim to produce long term capital growth. This is achieved by purchasing securities at above average yields coupled with good growth in earnings.

The driver to purchase securities at above average dividend yields has provided Marriott investors with relative capital stability in otherwise volatile markets as low yields in both the South African Equity and Property market caused Marriott to increase cash holdings and employ hedges as these asset classes were looking expensive. On a relative basis yields in the mega cap stocks of the US, UK and Europe were looking very attractive - quality international companies with strong brands and long track records of paying consistent and growing dividends such as General Electric, British American Tobacco and Pfizer presented an attractive buying opportunity. As a result many Marriott investors have enjoyed the benefits of international diversification (and the consequent rand hedge) as well as investments in some of the worlds most resilient brands, which are unlikely to let an investor down over a five year period.

In summary, purchasing a security at an above average dividend yield with a consistent, growing income is likely to produce a positive, predictable experience for investors over the long term. Furthermore by applying the methodology of spending only the income produced in retirement, and not the capital itself, a client can avoid the devastating consequences of investing during a period of poor market performance.