Big bucks from bread and butter brands

The best ways to maximise your client’s investment returns is to encourage them to invest in trusted brands that provide goods or services that are an integral part of daily life, and to remain loyal to these brands for as long as it takes. “Compounding is a timeless investment principle that often gets lost in the market noise,” said Duggan Matthews, Chief Investment Officer at Marriott, during the 2022 Virtual Meet the Managers event, hosted by The Collaborative Exchange.

Latest thinking on financial markets

The event, billed as an opportunity for 35 investment managers from 33 asset management companies to share their latest thinking on financial markets, offered investors the opportunity to brush up on their portfolio construction and share selection basics. Matthews advocated for buying quality international shares with stand-out dividend track records as the best way for retail investors to outperform. Companies such as US-listed Coca Cola, Colgate-Palmolive, Johnson & Johnson and Procter & Gamble received special mention for achieving a combined 200-years of consecutive dividend increases. 

“These four businesses can be considered dividend-compounding machines,” said Matthews, before placing Coca Cola under the spotlight to illustrate the impact of dividend-compounding over time. An initial investment of US$10000 into Coca Cola shares back in 1981 had grown to US$2.3 million by 2021, multiplying investors’ starting capital by 230 times. And the handful of investors who stayed true to this global brand would have pocketed US$65000 in dividends in the latest financial year, representing 6.5 times their initial capital outlay. “This is the magic of compounding, and the best way of helping investors to achieve financial freedom,” he said. 

The success story repeats for the other shares mentioned. If you had invested US$10000 in Johnson & Johnson four decades ago, then the capital value of last year’s dividend income would be 4.5 times your original capital investment; had you had invested in Colgate-Palmolive at the same time, you would have receive 4.8 times your original capital in dividends today; and in Procter & Gamble, 3.9 times. These dividend and return track-records explain why the world’s greatest investor, Warren Buffett, prefers investing in a wonderful company at a fair price over buying a fair company at a wonderful price… Buffet is also on record that time is the friend of the wonderful company and the enemy of the mediocre, an observation Matthews christened “the understatement of the century”. 

Making forever your investment friend

Buffett, who is also famous for saying “our favourite holding period is forever”, made a US$1 billion investment in Coca Cola in 1998 on behalf of his investment holding company, Berkshire Hathaway. And his rationale for the investment remains as rock solid today as it was then. In one of many interview clips on the decision, he commented: “If you take care of a great brand, it is forever”. He described Coca Cola as a business that sold more units each year and continued to gain market share around the world … that explains why he owns 400 million shares in the business and had never sold a share. The trick, apparently, is to identify companies that will outperform on the back of the United States’ long-term GDP growth outlook. 

“Owning shares in quality, dividend-paying companies for the long term is a highly effective way of ensuring good investment outcomes for our clients; it may sound simple but is incredibly effective,” said Matthews. Unfortunately, investors have become more and more fickle in recent years. The average holding period for shares has been falling each year going back to the 1930s. Around 1950, investors held shares for an average of eight years. Today, the average retail investor holds a share for less than six months, making it impossible to spice up capital return with dividends. “From a compounding perspective we are completely missing the boat,” said Matthews, before identifying the complexity of markets as one of the main contributors to shorter holding periods. 

A confusing product and terminology environment

Investors are bombarded with too many products and a confusing array of financial jargon to boot. Globally, there were around 161 unit trusts in 1960 versus more than 126000 today. “Then you throw into the mix jargon like alpha, beta, delta and efficient frontiers plus all the economic and political confusion that we experience in the modern world and you end up with [unimaginable] complexity and a reduction in effectiveness with regards to the outcomes that asset managers are able to produce for their clients,” commented Matthews. As a lay investor, this writer can attest to the paralysis that accompanies too much choice and complexity. It is often easier to do nothing than to decide on financial instrument; offshore vs onshore; mix of asset classes etc. 

The kneejerk response of investors to emerging trends, financial  market shocks and product innovation goes some way towards explaining the big return divergence between equity fund investors and equity market indices. In the US, the S&P500 returned 10% per annum over the last 30-years versus the average equity fund investor’s 4%. And that equates to missing out on around US$1 million in return from an initial US$100000 investment. “As an industry, it appears as if we are paying compound interest as opposed to earning it,” lamented Matthews, before punting the Marriott International Investment Portfolio as an antidote for this poison. 

This fund aims to reinstate the investment return basics of investing in high quality, dividend paying companies and then stick with those companies over the long term to benefit from dividend compounding. According to Matthews that requires identifying and investing in a simple, transparent and low cost offshore shares like Coca Cola, Colgate-Palmolive, Diageo, Johnson & Johnson and Microsoft, to name a few… The hope is that owning a share portfolio of such recognisable global brands will drive a mindset shift among investors, away from chasing returns to becoming long-term, connected owners. 

Trusted brands deliver reliable, growing dividends

“These are companies that own the world’s most recognisable brands, they produce products that we trust and they operate in industries that are integral to our daily lives,” concluded Matthews. “And that enables these companies to produce incredibly reliable and growing dividends, thus earning the reputation of being the best dividend compounders in the world. All that investors need to do to secure a good outcome from an income and a total return perspective is to own those companies for long periods of time to benefit from compounding”. And that, dear reader, sounds like investment common sense. 

Writer’s thoughts:
Most modern day investors achieve their equity market exposure via unit trusts, which means they have a limited understanding of or affinity for the brands in the underlying portfolio. Do you ever discuss the individual shares in unit trust portfolios, or are your clients most interested in the asset manager name and / or asset manager performance track record? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.