The case for offshore still remains compelling

Lourens Coetzee is an Investment Professional at Marriott.

Demanding equity valuations and a subdued outlook for growth in South Africa suggest investors may need to increase their offshore exposure to ensure an acceptable investment outcome. Marriott believes the case for offshore equities remain compelling as it is possible to purchase some of the largest and most recognisable companies in the world on dividend yields higher than South African alternatives. These attractive dividend yields afford investors the opportunity to diversify internationally while improving both the quality and income producing capacity of their portfolios.

The chart below highlights the dividend yield differential between a selection of quality international companies and the dividend yield of the South African All Share Index.

Source Bloomberg

Equities are also attractively priced relative to bonds and cash in first world markets. Very low interest rates mean investors can currently receive more income from equities than government bonds and cash. This is a very rare occurrence as equities, unlike bonds, also provide investors with income growth which ultimately translates into capital growth. It could therefore be argued that there is no place for bonds and cash in an international portfolio as the inclusion of these asset classes will reduce both the yield and the expected capital growth from the portfolio.

The chart below compares the dividend yields of Coca-Cola, Nestle and Johnson & Johnson to the yields of the US 10 year Treasury and US cash.

Source Bloomberg

To ensure income growth from an equity portfolio in the current volatile economic environment investors need to be more selective. Marriott is of the view that an investment strategy based on restricting equity exposure to companies that produce reliable dividend streams is likely to deliver a more predictable outcome. These companies tend to focus on selling basic necessities, enjoy global distribution and have strong balance sheets. They also have track records demonstrating an ability to grow their profits and dividends irrespective of interest rate or business cycles.

The table below highlights the dividend growth produced by Marriott’s international equities in 2014.

Source Bloomberg

Investors can access these companies in three ways:

1 Marriott’s rand-denominated feeder funds offering access to Marriott’s International Funds
2 Marriott International Funds (Ireland Domiciled)

a. First World Equity Fund (£)
b. International Income Growth Fund ($)
c. International Real Estate Fund ($)

Minimum investment - £ 15,000

3 The International Investment Portfolio - personalised share portfolio
Investors may select one of three managed discretionary share portfolios or create a non-discretionary portfolio. One of the major benefits of an offshore share portfolio is its tax efficiency. As the investor is the beneficial owner of the shares they will not be taxed twice on the dividends they receive.

Minimum investment - £ 50,000

In summary, the investment case for first world equities remains compelling as the dividend yields of high quality multinational companies are currently higher than first world bonds as well as South African equities. This affords South African investors the opportunity to diversify internationally and improve both the quality and income producing capacity of their portfolios.