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Marriott First World Equity Fund - News
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Marriott First World Equity comment - Mar 19
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Monday, 10 June 2019
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Fund Manager Comment
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Global equity markets have staged a remarkable comeback in 2019 after a dismal end to last year. Performance tables are no longer drenched in red and most markets are in positive territory year-to-date, confounding those who cashed in early. Patience it seems, is indeed a virtue, as too is a strong stomach needed to tolerate the gyrations which seem to define modern equity investing.
The explanation for last year's market fall has been the main reason for this year's rise. Like it or not, the US Federal Reserve Bank is still the leading influencer of global monetary policy. In 2018, higher US interest rates badly affected nearly all market classes. This year, the Fed's policy U-turn has had the opposite effect. Last December's 'dot-plot' projection for two interest rate hikes in 2019 has been changed to precisely none. The Fed now expects just one quarter point rise in 2021. Markets (the ultimate judge and jury) actually think that the Fed could even cut rates later this year.
Such a simple explanation for the drama experienced over the last few months seems to be too easy. Of course, there are many other sub-plots going on behind the scenes. For instance, corporate results year-to-date have generally been quite good. The market, however, has become accustomed to the gentle manipulation of quarterly earnings expectations, so much so that in the US at least there are typically few earnings 'surprises' any more. As a consequence, greater attention than ever is paid to the accompanying statement from the CEO. This information is 'in the market' in an instant, of course, and we still find it far more valuable to speak to the management one-on-one or attend annual general meetings when boards are frequently put on the spot by grumpy shareholders with time on their hands.
These days, we are awash with data, yet markets still seem able to only concentrate on one thing at a time. In December, talk was of a growing crisis between the US and China as Trump declared his support of trade tariffs and investors quickly calculated the impact. Today, the US-China talks barely merit a mention. The US president remains obsessed with building a Mexican wall and the like, whilst the UK and Europe are obsessed with Brexit. Both areas are complex for entirely different reasons. The exoneration of Trump by the Robert Mueller report into collusion with the Russian government strengthens the Republican's grip on power as the 2020 election campaign approaches. In the case of Brexit, currency markets in particular seem to have given up predicting any outcome, good or bad. Politicians have dug themselves into such a deep hole that Brexit may be deferred for some time to come. Just about every outcome is possible, from a second 'people's' referendum, to a customs union or simply revoking Article 50, meaning no Brexit at all. A 'no-deal' Brexit would be the worst option in the near term, but the current crop of politicians must realise that few of them would keep their jobs, if ever this came to pass.
The investing world, therefore, remains as it typically does; frustrating and unpredictable. Thankfully, despite the noise, the companies in our funds show much more stability when it comes to earnings and dividend growth. There are some tricky areas. Profit margins, for instance, are sometimes a little thinner than we would like, and valuations are relatively full. With inflation still very low, however, it is often hard for businesses to justify price rises when consumers now expect the opposite. The world is also getting smaller. The list of sectors into which we are happy to invest seems to shrink every year whilst the number of basket-case economies, Venezuela being the latest but certainly not the last, reduces the investable universe, even before we have studied individual balance sheets.
There are, nonetheless, still many companies which pass through our filtering process and are well placed to benefit from future economic growth. Macro-wise, global GDP is forecast to reach 3.3% this year and slightly more in 2020. Modest, perhaps, but still significant relative to short-term interest rates and inflation in most major markets. As ever, therefore, there is still plenty to go for, especially for those looking for reliable income streams where equities still command a significant yield over cash and government bonds, a state of affairs which is likely to prevail for some time to come.
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Marriott First World Equity comment - Jun 16
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Wednesday, 12 October 2016
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Fund Manager Comment
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Investment commentaries for the second quarter of 2016 will be dominated by discussion over the consequences of the decision by the UK electorate to leave the EU. The immediate market reaction was to devalue sterling by around 10% whilst the Euro also fell against the Dollar by around 6%. Parity looms large. Overuse of the word 'plunge' by the media in the aftermath of the Brexit result suggested that equity markets around the world were in freefall. Whilst markets did at first react badly to the unexpected result, the subsequent rally in all but certain narrow sub-sectors of the market is far more logical and less well reported. UK housebuilders and property companies have generally fallen in value and stayed down as evidence emerged quite quickly that a number of projects were being shelved until the outlook for a post-Brexit Britain became more certain. Shares in domestic UK banks also fell, in part thanks to their close links to the residential housing market and the almost immediate tightening of mortgage criteria as a result of the vote. Bank profit margins are also likely to be thinner as interest rates either stay low or are cut by the Bank of England, anxious to avoid tipping the economy into a self-induced recession.
However, outside of these sectors, for sterling investors the post-Brexit quarter end figures were actually quite encouraging. Global equities ended the quarter up by nearly 9%; Europe was a clear laggard but, even here, the market managed to eke out a slight 0.9% gain in sterling terms. The First World Equity Fund rose by 8.8% and has now gained nearly 14% year to date. Some of these gains are due to currency movements but the fact that First World Equity is invested largely into international equities rather than domestic UK companies, meant that it was well positioned to take advantage of the post- Brexit climate as investors gravitated towards quality, income and Dollar earners, all themes which we have favoured for some time.
Brexit aside, the climate for equity investors is subdued. Interest rates in the UK and Europe are destined to remain close to zero for the foreseeable future. Even in the US, where the authorities have been promising rate rises for some time, the so-called interest rate 'dots' (predictions of rate rises by the Fed) have been disrupted by weaker than expected economic data whilst the turbulent political landscape should mean that the Fed will be even less inclined to make waves of their own. The supportive monetary backdrop, however, disguises the fact that GDP growth is universally lacklustre and inflation stubbornly low. In the UK, the latest sterling devaluation will create some inflationary pressure as the cost of imports moves up and the higher oil price appears to have found equilibrium at around $50 a barrel. This will be expensive for savers; bank interest rates at zero and rising inflation means that they are guaranteed to lose money in real terms. Government bonds are equally unattractive for all but the most pessimistic investors whilst, these days, corporate bonds can often be equity-like in behaviour without the comfort of a plentiful secondary market. Once again, this leaves income orientated international equities as the investment instrument of choice to combat inflation, provide liquidity if necessary, and generate a regular return through uninterrupted dividend flows.
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Marriott First World Equity comment - Jun 14
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Friday, 29 August 2014
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Fund Manager Comment
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Major equity markets have experienced a measured six month trading period in the first half of 2014. In sterling terms, US equities led the way with a gain of 3.1%, but year to date, both UK and European equities are in modestly negative territory. This is thanks in no small part to the strength of the Pound which has gained 3.3% against the Dollar and 4% against the Euro. The surprise package has been the performance of bond markets. Sterling bonds have gained 3.5% over the six month period to the end of June whilst global bonds have gained 2.1%. When US Federal Reserve Bank chairman trigged a 'taper tantrum' last May by announcing that the end of quantitative easing was in sight, most investors reasoned that the next move for bond prices would be down, as yields rose to compensate for the likely ensuing hike in interest rates. Their conclusion was probably right but their timing was some 12 months early. Now, however, with both central banks on either side of the Atlantic openly speaking about tightening rates, the end of an unprecedented period of cheap money is fast approaching. Whilst, logically, this should already have been factored into valuations, the likelihood is that markets will correct when the first hike eventually arrives for the circular reason that the reaction to such a move is itself uncertain. We will be in short term unchartered territory and this could create an interesting buying opportunity.
Elsewhere, large companies have enjoyed a reasonable period of growth after underperforming smaller companies in 2014. Again, this move in 2014 was surprising as smaller companies typically suffer more in a rising interest rate environment as the cost of debt rises and the availability of bank loans declines. However, GDP growth has been far better than expected. In the UK it may well breach the 3% level in 2014 and with sterling strong, domestic, non exporting UK companies have been generally doing well. Latterly, the quest for yield has also been uppermost in investors' minds, hence the recent rotation into safer territory in anticipation of the long awaited rate hikes.
As the artificial reasons for keeping rates lower for longer than necessary dissipates, so central banks will find themselves reacting to the return of the old enemy, inflation. In recent times, central banks have been far more concerned about deflation, or falling prices, and have been keen to stimulate the economy as required. This has meant lower rates and extended QE in the US, UK and most spectacularly of all in Japan where the process has coined its own name - Abenomics. In Europe, however, deflation remains a real worry. GDP growth is patchy and although the eurozone crisis has abated, growth is elusive, even in Germany and especially in France and Italy which are both struggling with a top heavy government and lack of investment.
The UK is probably in the sweet spot right now with good growth rates, low interest rates and a small amount of inflation. The strength of the currency is a worry for exporters, however. We have seen a couple of major companies warn on profits for forex related issues (i.e. sterling strength) and this will continue if exchange rates remain at their current elevated levels.
All things being equal, we believe that we are at the start of a good period for equity markets, rate hikes notwithstanding. Unemployment is falling, corporate growth is in evidence and rates will be low for some time to come, even if they settle at a higher level than today. Geopolitical risks, as ever, remain but it is worth noting that the situation in the Crimean Peninsula and the Ukraine has abated and that Russian equities have regained nearly all of the ground lost in the early days of the crisis. This was almost unthinkable just 3 or 4 months ago.
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Marriott First World Equity comment - Mar 14
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Thursday, 5 June 2014
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Fund Manager Comment
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2014 has started on a quiet note, at least for the three major markets represented in the Fund (the fourth major market, Japan, has had a dreadful start to 2014). As yet, the problems in the Crimean peninsula and the Ukraine have not had a serious impact on markets, but we are mindful that this could change very quickly.
After a stellar 2013, the US has been playing a waiting game in two main areas. Firstly, over the timing of the first interest rate hike for many years and, secondly, whether earnings in 2014 will justify the market rally in 2013.
The backdrop for further equity market gains in the US is encouraging. Markets have taken the impending end of Quantitative Easing in their stride, in no small part thanks to the careful policy guidance which the Federal Reserve Bank has been filtering into the market. In other words, there have been no surprises to date, and markets, of course, hate surprises. Newly elected Fed chairman Janet Yellen has been keen to extend the policy of her predecessor in carefully explaining that interest rates may start to rise whilst being sufficiently vague in terms of using any particular data point as a trigger for this to occur. The key economic release to date has been the unemployment rate, which has been widely used by policy makers on both sides of the Atlantic as an excuse to keep interest rates lower for longer. The snag is that the unemployment rate has been falling faster than predicted, whilst the participation rate, defined as the number of people actively seeking work, has also been falling. To confuse matters further, inflation has also been falling in no small part thanks to lower energy costs whilst the wider economy, measured by an abundance of manufacturing data, is still accelerating. What we appear to be faced with, therefore, is a relatively benign investment climate, the biggest threat to which is corporate earnings (or lack of) rather than macro events. We and the market will, therefore, be watching first quarter earnings in April with particular zeal.
In the UK, a similar issue exists in terms of the point at which interest rates might start to rise. As in the US, inflation is falling, the recovery is gathering momentum, assisted by a buoyant property market, and the currency is strong. The impending 2015 general election means that politicians are already interfering with open markets more than ever and both the energy and insurance markets have reacted badly to the clumsy, clammy hands of politicians attempting to point score in the run up to electioneering proper. This, and sterling strength, is probably the greatest threat to the UK equity market right now providing that earnings momentum can be sustained.
In Europe, every day that goes by without another problem marks a day closer to resolution of the eurozone crisis. The transition from recession to growth is, however, proving to be painfully slow. Unemployment remains stubbornly high and the Euro strong at a time when the peripheral member states need export growth rather than cheap imports. We do not expect any miracles in 2014, however, and our focus within the Fund remains on international companies such as Nestle rather than businesses relying on domestic growth.
In summary, therefore, all eyes will be on corporate earnings rather than any major policy shifts. With markets entering a period of stability, dividends will most likely constitute an important component of total returns in 2014 and this remains an area where the Fund is heavily biased.
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Marriott First World Equity comment - Sep 13
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Monday, 30 December 2013
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Fund Manager Comment
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A generally positive quarter for risk assets was marred on the last day of trading by the ongoing failure of US politicians to agree on the latest round of budgetary spending. Predictably, this helped to support bonds and gold which had otherwise had a fairly dismal quarter as investors continued to rotate into equities as economic data continued to please on the upside.
Nonetheless, the pattern remains reasonably positive for major equity markets. Economic growth is accelerating gently and companies are benefitting from this trend. The unexpected delay to the Federal Reserve's plans to taper Quantitative Easing, however, underlined the fragility of the recovery in the US where unemployment remains stubbornly high and corporate profits are too often being supported by cost cutting rather than genuine top line growth.
Another area of concern has been the lacklustre performance of emerging markets. This has been going on for some time now, but the latest bout of currency weakness has magnified the losses in hard currency terms and the selling pressure is hardly abating. Nevertheless, there is a growing consensus that concerns are overdone and profit margins in emerging markets remain at a premium to more domestically focused western companies. The Fund does not invest directly into emerging markets but the vast majority of its underlying companies have a significant interest in the region. As a consequence, any slowdown in top line growth for major markets should be offset by an improvement in emerging market sales as, all things being equal, minor markets start to benefit from the growth seen elsewhere.
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Marriott First World Equity comment - Jun 13
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Wednesday, 18 September 2013
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Fund Manager Comment
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The First World Equity Fund fell by 1.5% in sterling terms during June. This performance reflected a weak month for global equity markets whilst a number of other asset classes, notably government bonds, lost ground. Global equities fell by 3% in June. Once again, emerging markets were relative laggards, falling by 6.9% in sterling terms over the same period.
The Fund remained in line with its yield benchmark throughout the period, ending the month with a gross yield of 3.2% similar to the 3.2% composite benchmark drawn from the FTSE350, FTSEurofirst and S&P500 Indices. To a greater extent, this narrowing of the yield gap between fund and benchmark was due to the higher levels of cash which we held in the portfolio during the month. We expect to invest these funds into the market as the third quarter progresses and equities start to show signs of stability.
Global equities weakened during the month as US Treasury yields rose on worries that the Federal Reserve Bank was considering tapering off its programme of Quantitative Easing, buying bonds in exchange for improved liquidity in the banking system. By the end of June, US 10 year Treasury yields had risen to 2.5% from a low point of 1.6% just a few weeks earlier. This led to a sell off across the investable universe, from bonds to equities, commodities and even gold as investors reined in borrowing in anticipation of higher interest rates and shifted into short-term risk free assets (cash).
Whilst the rise in bond yields has been quite sudden, we have long argued that government bond markets appeared to be distorted and that a yield of less than 2% was effectively locking in a loss in real terms, after stripping out the impact of inflation. Bond markets have been driven higher in part by the Quantitative Easing process and technically it makes sense for prices to reverse if this process is coming to an end.
After a strong few months for equity markets, some consolidation is likely at current levels whilst the market digests the latest raft of economic data and analysts begin to sharpen their pencils in anticipation of the second quarter earnings figures due out in July and August. These will give a better indication as to whether the recovery is filtering through to companies in the form of better profits and higher margins. With income still high on many investors' agenda, we still expect support for the strong dividend paying companies in the Fund, notwithstanding that valuations in a number of instances no longer offer the value they did in 2012.
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Marriott First World Equity comment - Mar 13
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Wednesday, 22 May 2013
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Fund Manager Comment
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The First World Equity Fund gained 15.8% in sterling terms during the first quarter of 2013. This performance reflected a generally strong period for global equity markets whilst a number of other asset classes, notably government bonds, lost ground. Performance was distorted to some extent by currency movements, in particular, the strength of the US Dollar which gained nearly 7% against sterling since the start of the year flattering returns from internationally diversified portfolios measured in sterling but having the opposite effect on dollar denominated accounts. Global equities rose by 14% during the quarter led by the US and Japan. Once again, emerging markets were relative laggards gaining just 4.8% in sterling terms over the same period.
The Fund remained consistently above its yield benchmark throughout the period, ending the quarter with a gross yield of 3.3%, ahead of the 3.0% composite benchmark drawn from the FTSE350, FTSEurofirst and S&P500 Indices.
The strength of the equity market was at odds with the disappointing economic news from the UK and, in particular, the Eurozone. China, too, is struggling to make the transformation from a rapidly growing emerging market to a world superpower, a problem reflected in the relatively disappointing returns from Asia during the quarter.
On the other hand, the US economy continues to gain momentum. Whilst the pace of growth is subdued by historic standards, it is growth nonetheless and much of the stock market's recent strength has been based on the assumption that US growth will eventually lead to a global recovery. Certainly, despite the problems in Cyprus, the Eurozone crisis feels very much like yesterday's story even if the core problems still remain.
Japanese equities enjoyed a stellar quarter, however, even after allowing for the sharp depreciation in the value of the Yen. In a concerted attempt to stimulate the lackluster Japanese economy, the newly elected central bank Governor, with the support of newly elected Prime Minister Shinzo Abe, has embarked upon a course of aggressive quantitative easing. This policy has flooded the market with liquidity and driven Japanese equities higher (and the Yen lower). Shock economic tactics of this nature depend upon economic recovery arriving sooner rather than later and we are not convinced. Japan remains one of the highest indebted nations in the world and has been on a downwards spiral since the late 1980s.
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Marriott First World Equity comment - Sep 12
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Wednesday, 14 November 2012
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Fund Manager Comment
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In our June 2012 commentary, we encouraged investors to build up equity positions in dividend rich sectors such as those contained in the three Marriott International Funds. Valuations were relatively modest and sentiment was low as a result of sustained weakness in most global economies. The third quarter of 2012 has rewarded such an approach, with a return of nearly 4% from global equities in sterling terms lifting gains for the year to date to 9%.
Strangely, not that much has really happened on the ground to justify the swing in confidence which we have experienced in recent weeks. Globally, unemployment remains a serious problem, most notably in the Eurozone, where one quarter of the workforce in Greece and Spain are now out of work. Nor, too, is there ample evidence of green shoots of recovery in any major market. Economic data readings are erratic and suggest that most markets are bumping along the bottom and will continue to do so for the foreseeable future as governments continue to search for a mythical silver bullet to end their respective debt crises.
One 'solution' was presented to the market in September in the form of QE 3 or 'QE Infinity', the title given to the latest round of monetary pump priming from the US Federal Reserve Bank. Like most movie sequels, subsequent rounds of QE have been far less convincing than the original. Nonetheless, the promise of low interest rates at least until 2015 together with the determination to improve the cost and availability of credit led to a sharp rally in risk assets, including precious metals, as investors (ourselves included) deduced that higher inflation was a likely consequence of this latest policy move. Whilst we welcomed the market rally which extended into credit markets as well as a predictable (if short lived) rally in raw commodity producers, the fact remains that repaying years of accumulated debt is going to take a considerable time and will not necessarily coincide with any political election cycle.
Amidst all of the economic noise, it is easy to forget that a number of businesses continue to go about their work efficiently and profitably. Whilst these businesses are not immune from market cycles, the diversity and quality of their product portfolios means that they can ride out short term volatility, often using their cash flow to enhance earnings by accumulating rivals along the way. One such example is the drinks manufacturer Diageo which has recently acquired the Brazilian company Ypioca (Ypioca manufactures cachaca, the most popular distilled alcoholic beverage in Brazil). The move is indicative of the trend in some leading manufacturers to acquire brands in emerging markets where projected economic growth is generally higher than in their developed counterparts. Diageo continues to pay an attractive dividend which, as its acquisition trail would suggest, is comfortably within the scope of its free cash flow, with some to spare. This is exactly the type of business which we are seeking to include in our Funds provided, of course, that we are not being asked to pay over the odds for the privilege.
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Marriott First World Equity comment - Jun 12
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Wednesday, 15 August 2012
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Fund Manager Comment
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The second quarter of 2012 was another difficult investment period for investors. Global equities fell as the recovery in the US faltered and the prospects for the Eurozone worsened. The First World Equity Fund fell by 0.2% over the second quarter taking the gain over the course of the first half of 2012 to 1.3%.
The reason for this latest bout of uncertainty was, one again, Europe. Although some progress appeared to be made at the latest European Summit in June, the fundamental problems remain unresolved. All Eurozone member states currently enjoy the ability to arrange their own tax budgets. As is now widely known, many Eurozone members, for e.g. Greece, have abused this arrangement. The establishment of a central Eurozone fiscal arrangement has been put forward as a way of restoring confidence to the financial system in the longer term by allowing countries to pool risk. This would theoretically reduce borrowing costs for the weaker members as the risk of default would shrink allowing governments to begin repaying debt at more affordable rates. It would also lift equity markets and, by definition, lead the way to a more sustainable economic recovery. There are, however, a number of barriers to this welcome solution. Firstly, some countries, notably Germany, are reluctant to concede fiscal control to, in their view, a less effective central European agency. Secondly, because such a move would involve a change to the original European Treaty of Maastricht, it would almost certainly require individual countries to hold a referendum.
Despite Germany's reticence, it is difficult to see how the currently broken Eurozone model can be repaired without fiscal union. For as long as Germany remains unwilling to move in the direction of a federal Europe, we believe that equity markets will remain choppy at best and there may be no quick solution to Eurozone problems. The catalyst to a solution will probably be when Greece completely collapses under the twin burdens of debt and austerity and is forced out of the Eurozone altogether. Greece may be followed by one or two of the other peripheral countries such as Spain and Portugal in quick succession. An alternative is that Germany, unable or unwilling to shoulder responsibility for Southern Eurozone countries, leaves the Eurozone itself and returns to the shelter of the Deutschemark.
Whilst in the short term, it is hard to see much evidence of recovery, longer term there remains compelling reasons for building up equity positions in dividend rich sectors. Some of the market volatility may be dampened by dividend pay-outs and selling at rock bottom prices is rarely the best way of creating wealth in the longer term and we continue to advocate a portfolio of income orientated equities.
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Marriott First World Equity comment - Mar 12
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Monday, 21 May 2012
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Fund Manager Comment
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The first quarter of 2012 marked a return to relative normality for international markets. This time, it was corporate rather than geopolitical issues which finally gave equity markets a genuine reason to rally. However, the macro background was significantly helped by the European Central Bank whose latest Long Term Refinancing Operation eased the pressure on Europe's liquidity starved banks in a stroke. The First World Equity Fund gained nearly 2% in sterling terms against a backdrop of broadly rising global stock markets. This was less than the returns from major equity market indices where the so called high beta names led by recovering banking and technology stocks drove the market higher. On the other hand, international bond markets suffered as yields drifted higher, depressing prices as investors sold down low yielding Government bonds. It is 30 years since bond investors on both sides of the Atlantic have experienced a decade of negative returns and for much of this time bonds have outperformed equities, defying the general history of stock-market investing. Perhaps more interesting is the fact that so many major pension funds have become obsessed with bond investment at the expense of equities and few bond traders will have ever experienced a deep bond bear market. From an economic perspective, initially it does not appear to make sense that bonds should start to under-perform at a time of lacklustre economic growth. Markets are, of course, nothing if not forward thinking. If one was to use history as an example, the economic stagnation of the 1930s proved to be far more lucrative for equity investors than for bond investors. Historically, longer term equity rallies begin when equities look cheap, not when economies are robust and today, the yield comparisons between bonds and equities make the argument for equities quite compelling.
Since the start of the century, traditional measurements of equity valuations have been distorted by one major crisis after the other. Whilst this is all part of the risk element of equity markets, investors cannot be blamed for suffering fatigue from the eurozone crisis, the banking crisis, the housing crisis, 9/11 and so on. The eurozone crisis has, of course, yet to be fully resolved and we expect more turbulence as the year progresses. Nonetheless, the backdrop for equity markets looks a little better than the same time last year. Equity yields are generally good to excellent, corporate cash balances in our core sectors are healthy meaning that dividend cover is improving and companies are already pricing in dividend increases which, in a normal cycle, provides protection against inflation. The downside of a high equity approach in the near term is volatility. The Fund's concentration on high yielding blue chip companies does, however, dampen this volatility whilst the resulting cash flow from dividends smoothes returns over the medium and longer term.
In terms of regional exposure, the Fund maintains a higher weighting to the US and UK at the expense of Europe. We still expect GDP growth in the US in 2012 to outpace all other major markets whilst the relatively low level of exports which the US sends to Europe will provide some insulation from the fallout in the eurozone. In the absence of so many credible alternatives, we remain of the view that high yielding blue chip equities across a range of diversified sectors remains the investment of choice in the current climate.
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Marriott First World Equity comment - Dec 11
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Friday, 16 March 2012
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Fund Manager Comment
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The First World Equity Fund gained 1.7% in sterling terms in 2011 against a backdrop of broadly declining global stock markets. The MSCI World Index fell by 6.4% during the year due to slowing economic growth and the impact of the eurozone crisis. After two years of under-performance, value and yield orientated blue chip companies had a good year in relative terms which translated into positive returns for the Fund for the whole of 2011.
We do not expect the eurozone crisis to abate any time soon. Greece appears to be edging towards an exit and this will mean further volatility and protracted pain for Europe's banks where we have virtually no exposure. The Fund instead tends to concentrate on holding companies in staple businesses such as food, drink and telecommunications. Such sectors are often dominated by higher yielding companies, in part because they have been steadily increasing dividends over the past few years whilst their share prices have remained static. The Fund is now yielding 4.5% gross and is edging towards 5% as we look to lock in attractive yields on lower days for the market (of which there have been plenty in 2011). In real terms, this yield is only fractionally higher than consumer price inflation in the UK but we expect inflation to abate in 2012 as energy prices (oil and gas) subside and pressures from elsewhere in the economy ease as economic growth remains flat.
In terms of regional exposure, the Fund has a higher weighting to the US and UK at the expense of Europe. We expect GDP growth in the US in 2012 to outpace all other major markets whilst the relatively low level of exports which the US sends to Europe will provide some insulation from the fallout in the eurozone. Emerging markets, on the other hand, had a bad 2011, falling on average by 20% in sterling terms as investors reduced risk. Whilst we do not have any direct exposure to such markets, all of the underlying constituents of the Fund have important subsidiaries in these regions which we expect to drive growth in the medium terms as the balance of economic power continues to shift eastwards and, in the case of America, towards the south.
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Marriott First World Equity comment - Sep 11
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Thursday, 22 December 2011
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Fund Manager Comment
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The third quarter of 2011 represented one of the most difficult quarters in financial markets since the collapse of Lehman Brothers marked the emotional low point of the banking crisis in 2008. In some ways, these latest falls were worse, coming as they did at a time when markets were starting to show modest signs of recovery. In the event, the massive structural issues facing Greece and the lack of firm leadership by the European authorities precipitated a flight to safety to US and UK government bonds, despite the low interest yields on offer and the prospect of guaranteed negative real returns. The majority of equities in our First World Equity Fund have exceptionally strong balance sheets and remain long term safe havens because of the defensive nature of their earnings, their liquidity and their high dividend yield. They, however, have been subject to high levels of volatility. Liquidity is generally considered to be a strong attribute of any security but in times of crisis it can be a hindrance as hedge funds and large programme traders sell their most liquid assets to meet margin calls, irrespective of the fundamentals. Certain sectors have been avoided. For example, we continue to avoid bank stocks as over-regulation and, in many instances government ownership, will subdue earnings for some years to come. Whilst Europe's problems have been reflected in the dire falls in their equity markets over the quarter, America at least is showing a little more resilience. The latest US GDP numbers show a modest improvement in this economy although the fragility of this recovery will not be helped by the recent surge in the Dollar. Whether committing fresh capital to equity markets or reinvesting income, it is important to remember that the most attractive buying opportunities often occur in an asset class when the majority of investors are fearful, become forced sellers or have just given up. Recent acquisitions by a number of major quoted companies show that they see excellent value in the stock market. United Technologies, for example, paid a near 40% premium to the market price to acquire aircraft components manufacturer Goodrich whilst Hewlett Packard paid a similar premium for the UK software company Autonomy. A surprising number of deals of this nature are currently taking place whilst the number of new issues has all but dried up. For investors who are prepared to be patient, equity market falls of this magnitude represent an opportunity rather than a threat and we are selectively adding to holdings on those on weaker days of the market.
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Marriott First World Equity comment - Jun 11
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Thursday, 8 September 2011
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Fund Manager Comment
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Market sentiment in the second quarter of 2011 was dominated by Europe and, in particular, the threat posed by a Greek default. After weeks of procrastinating, the European Union and the International Monetary Fund eventually agreed to bail out Greece after the Greek parliament had agreed to implement an austerity package designed to reduce their crippling level of debt.
Ironically, Greece's problems saw the Euro rally during the quarter, by 2.2% against sterling and by 2.4% against the Dollar perhaps as a result of the expectation that Greece was likely to be expelled from the eurozone and that the Euro would be much stronger as a consequence. A more likely view, is the possibility of a Euro style Brady bond package of the type used to bail out a number of emerging markets in the late 1980s. (Brady bonds were issued as special bonds backed by the US Treasury and allowed the countries concerned to restructure their finances without defaulting). A Euro version would throw a lifeline to many of the banks currently exposed to the Greek crisis and also provide a solution to the problems faced by other fragile Eurozone members such as Ireland and Portugal. It would, however, require decisive action by the EU and the IMF. Elsewhere, equity market returns have been driven as much by currency movements as by genuinely improving fundamentals. In sterling and dollar terms, global equities gained just 0.4% over the quarter after a promising start derailed by the Euro crisis. Bond investors fared better. Sterling bonds rallied by 2.6% and Dollar bonds by 2.5% as investors decided that interest rates were likely to remain lower for longer. Certainly, there was little rush to buy equities although with inflation still significantly above trend, government bond (and cash) investors appear to be resigned to accepting negative real returns. Equity valuations in general are fair, but the dividend yields of securities in the Marriott portfolios are attractive.
In our view, higher yielding equities in carefully selected blue chip names represent the most sensible way to combat inflation at present. We expect this theme to gather momentum over the rest of the year, as investors focus their equity selections on well known names in their domestic markets, particularly those paying a good dividend yield. We expect interest rates to remain lower in the UK, Europe and the US for far longer than is generally being recognised. Central banks may use any softening in inflation data as an excuse for this strategy but the reality is that benign neglect of their domestic currencies and any subsequent devaluation is a relatively easy and painless way of improving current account deficits, helping exports and therefore lowering unemployment, something the Obama administration will be desperate to achieve before the 2012 election campaign gets underway. International equities should benefit in this environment and here, The Marriott First World Equity Fund is especially well positioned.
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Marriott First World Equity comment - Mar 11
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Wednesday, 25 May 2011
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Fund Manager Comment
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Markets have endured a mixed first quarter to date with geopolitical events overshadowing a generally positive corporate outlook. The US, in particular, has continued to forge ahead, partly thanks to the second round of quantitative easing which has injected nearly $600bn into the US economy. Consumer confidence figures have rebounded, unemployment is falling, albeit slowly, and corporate earnings are supporting higher dividend payouts. The real uncertainties are being generated by massive geopolitical concerns. The moves towards democracy in Tunisia and Egypt have been overshadowed by the events in Libya where the country's president remains in office despite calls for abdication from the UN. With the Libyan crisis occurring at the same time as the ongoing power play in the Ivory Coast, the world is crying out for some strong leadership. All of this has, of course, served to drive energy prices higher. Whilst OPEC can flood the market in the short term, longer term a high oil price will undermine the fragile global economic recovery at a time when inflation is already creeping higher and interest rates can go no lower. The unfolding tragedy in Japan underlines the continued globalisation of capital markets and the threat of apparently unrelated events correlating to put pressure back on global stock markets. We commented earlier in the year that we expected market volatility to continue unabated in 2011. Until recently, we had expected the driver of such volatility to come from Europe where we still have concerns over how the peripheral nations of the Euro zone will adapt to the long period of economic adjustment which they will face as interest rates move higher. All of this means that we are, as ever, being vigilant about the need to focus on strong balance sheets and well covered cash dividends. We continue to believe that higher yielding blue chip equities remain one of the best places to invest money for total return in an increasingly uncertain market environment.
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Marriott First World Equity comment - Dec 10
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Thursday, 24 February 2011
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Fund Manager Comment
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Momentum has carried through into the final quarter of 2010 encouraged by the second round of Quantitative Easing in the US. The similarities with the stock market rally in the early years of the 21st century are uncanny. Then, equities rose on the back of low interest rates and easy credit. This led to a credit bubble, the collapse of which nearly brought the global banking system to its knees. Today, the easy credit has gone but low interest rates remain and conventional monetary stimulus has been replaced by the latest round of a $600bn spending programme by the Fed in an attempt to pump prime a lacklustre US economy. This is a high risk strategy. No one knows for certain whether such stimulus will work or what the longer term consequences will be. In our view, the outcome should provide a major lift to the equity market but the consequences are likely to be a combination of higher inflation and a weaker US Dollar. This would be politically and economically desirable for the US economy whose export market will receive a boost whilst simultaneously providing support for asset classes such as equities, precious metals and property prices. It will, however, not be good for US bond markets, particularly at the longer end of the yield curve. This is not an issue with which we have to grapple for this fund, but we would otherwise remain very wary of this sector, inflation proofed issues aside. Investors looking for yield should continue to look towards quality equities to provide an alternative income stream to bond markets with built in protection against inflation. It rarely pays to 'fight the Fed' and with GDP and manufacturing data continuing to improve, we believe that this equity market rally has some way to go. The recent US mid term elections have proved to the incumbent Democrats that the voting public are interested in the economy first and foremost and we expect the Obama administration to stop at nothing to make things happen before the next presidential elections in 2012.
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Marriott First World Equity comment - Jun 10
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Wednesday, 8 September 2010
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Fund Manager Comment
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After the euphoria of the post credit crunch recovery phase in 2009, markets are now refocusing on the latest crisis, this time the travails of Greece and the future of the Euro zone. Whilst Greece is the worst offender in terms of a huge budget deficit and, worse, a history of data manipulation, it is far from alone. Spain, Portugal and Italy are all on the periphery of the Euro zone and suffering from an over extended economy with few easy ways of repaying debt any time soon. Whilst a break up of the Euro zone is possible, we now believe that a more likely solution is the continued devaluation of the Euro, a trend which began in 2009 and has continued apace in 2010. Whilst this should help exports and create jobs, an estimated 60% of trade takes place within European borders so the impact of a devalued currency is diminished. The UK is in a better position in so much as it can set its own interest rates and financial strategy. This has not prevented it from also accruing a mass of debt which must eventually be rolled over or repaid. The bond markets will determine the cost of this exercise, rather than the central banks and the cost will therefore be higher than widely forecast. With a dependence on financial service sector jobs and a profligate former government, it will take years to rebuild the UK's balance sheet, as indeed it will in the US. From an investment perspective, we prefer names with a truly global reach in recession resilient industries. A focus on income also helps but with governments on the look out for easy tax pickings we continue to put an emphasis on First World companies with significant interests in developing markets.
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Marriott First World Equity comment - Mar 10
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Thursday, 24 June 2010
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Fund Manager Comment
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Momentum for investing into high quality companies paying sustainable dividend yields has been growing since the start of the year. Although January was a little shaky, markets have rebounded in February and March to date. Although we expect some profit taking either side of the Easter break, corporate earnings have been strong enough to justify current valuations and if economic growth continues to accelerate the market has scope for further short term appreciation. Whilst Dollar strength has helped Sterling returns, it is worth remembering that a significant part of earnings in both the UK and European components of the portfolio are generated outside of their domestic market. The Fund benefits, therefore, from the liquidity and accounting standards of the First World with a sprinkling of emerging markets growth which is contributing nicely to the bottom line of many companies in the Fund's portfolio. As at the start of March, the Fund was fully invested.
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Marriott First World Equity comment - Dec 09
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Tuesday, 23 March 2010
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Fund Manager Comment
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After a strong period of recovery in late 2009, it would be reasonable to expect some consolidation within the fund in 2010. However, those businesses which have led the market higher in recent months have often been those companies which were hardest hit by the credit crisis and whose weakened balance sheets prevent them from paying dividends which are the lifeblood of the Marriott First World Equity Fund. As a result, whilst the Fund fell in value in 2008, the falls were muted compared with large sections of the market.
Conversely, recovery was also a relatively modest affair set against the performance of certain sectors in 2009, notably financials and technology. This is to be expected in a fund of this nature where Marriott's income focused investing style seeks dependable growth and steady income streams rather than the cyclical boom and bust of riskier areas of the market. Marriott looks for businesses which can outperform through a variety of market cycles remaining focused on fundamental value, old fashioned cash flow and strong management teams, attributes which lead to medium and longer term performance in more difficult times as well as in periods of rising markets..
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Marriott First World Equity comment - Sep 09
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Thursday, 17 December 2009
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Fund Manager Comment
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The Marriott First World Equity Fund fell back in October thanks to a combination of falling equity prices and a surprisingly strong pound which, up until recently, had been a prime target for short sellers. Q3 results have, to date, been better than expected and equity market weakness was caused by profit taking rather than anything more sinister, in our view.
Certainly, any pull backs over the last few months have been treated by investors as a buying opportunity and we expect that the current modest wave of selling will meet an equally rapid buying flurry from those investors with cash still on the sidelines earning next to nothing on deposit. Interest rates are likely to remain unchanged when the Fed, the Bank of England and the ECB all meet this month; the gross yield on First World Equity is some 10 times greater than that available from cash deposits in major markets. Nonetheless, valuations are now offering fair rather than good value and we expect most of our returns between now and the year end to be generated by income rather than capital gains.
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Marriott First World Equity comment - Jun 09
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Wednesday, 16 September 2009
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Fund Manager Comment
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Some of the momentum from earlier in the quarter was lost over the month of June. Opinions are very divided over the reason behind this modest correction in a number of markets. In some quarters it is felt it is too early to assume an immanent economic recovery is assured. The recent rally, largely driven by China stockpiling and indeed recording some early success with its stimulus packages may be inadequate to fully offset the deep seated problems in the west. The rebalancing of portfolios also appears to be largely complete for this stage of the economic and market cycle. Further evidence of the recovery is required before further tactical asset allocation can take place and therefore both economic and corporate data will be closely scrutinised over the summer months. Unfortunately the World index has been held back by the modest 3% return form the US equity market and this does mean global investors will pay increasing attention to US economic data in order to gain a better understanding on how the economy is progressing and the role it will play as far as the rest of the world is concerned. Although there is a risk that markets may move sideways for a period, one should not underestimate the number of opportunities that are available.
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Marriott First World Equity comment - Mar 09
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Tuesday, 12 May 2009
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Fund Manager Comment
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March has been a month of mixed emotions as far as the equity markets are concerned. Returns have generally been very good with investors being rewarded handsomely in the majority of markets and there is little doubt sentiment improved as the period progressed. However, the fact that many markets touched new lows in the early part of the month does indicate that the economic downturn still has some way to go. There had been faint hopes a recovery may have been forthcoming in some key economies as soon as Q3, however the stage does increasingly appear set for Q4. The question we are asking is if now is the time to buy for the recovery or indeed if this latest rally is an opportunity to take profits/cut losses and move into cash. Before answering this question we need to look back to find the cause of the rally. The turning point in the equity markets came when Citigroup informed investors that it was profitable in January and February. Other banks have since followed suit both in terms of comments and actions (for example by buying in subordinated debt). As a result investors increasingly feel the banks are, at long last, now getting back in control of their own destiny. Given a strong banking sector is a vital ingredient for every economy, it is understandable why the markets have reacted in such a way. Beyond the banking sector there is little doubt many other companies will be reporting some very distressed numbers which will clearly highlight the degree of the slowdown. Many are still likely to fail or indeed need to be reconstructed and there is little doubt shareholders in some entities may still suffer some quite serious pain. It will not however be the numbers investors focus upon as companies report, although it will be these that make the press headlines. At this stage in the cycle the key part of any announcement will be the outlook, with the chairmans' statements being scrutinised for evidence the underlying business is starting to improve. A broad selection of "green shoots" would be a very positive factor although given the strength in many commodity markets recently, there is a risk of anything less being a disappointment. However, ultimately, the determination of the governments to resolve the downturn cannot be doubted and whilst we may have to be patient, we can to a degree be relatively relaxed that the first stage of the recovery is almost assured. It is after this that the real questions and investment dilemmas will arise as the cost burden for the global stimulus fall on individuals and business alike. The economic slump will result in massive change. For example, the developing world will undoubtedly increasingly demand a greater voice when it comes to determining global policies given the vulnerability they have experienced as a result of problems in the west. Many poor countries have suffered badly and require urgent assistance in order to avoid becoming an even bigger burden on the west. Finally, many countries are increasingly uneasy over the impact of the world's reserve currency being the US dollar, especially given the way the Americans are now printing money in order to stimulate a recovery and therefore devaluing other countries' reserves. Whilst this is not a new call, the rationale is now much stronger. As long as the US remains in the driving seat, this will not occur, but the global credit crunch will result in a long expected power shift with America's influence being diluted much sooner than expected just a few years ago and change at some point is almost inevitable. At this point it is impossible to evaluate the implications, however with such a backdrop we do gain comfort by investing in a broad spread of names with a global perspective in key sectors. The single asset class approach, if correct, will reap great returns, however as we go through this transition it is a much higher risk strategy than in the past. Therefore, to conclude, we firmly believe it is prudent to continue to drip feed cash into the global equity markets in order to take full advantage of the diversity of the income stream which ultimately feeds the dividend cash flow. We believe this will be a very valuable resource as a major global transition starts to takes place.
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Marriott First World Equity comment - Dec 08
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Friday, 20 March 2009
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Fund Manager Comment
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Portfolio Review
Inflation Protected bond exposure maintained at around 12% overall.
AAA rated conventional bonds increased and exposure increased to 12%.
Equities now approximately 68% of the total.
Reduction in exposure to banks whose dividend may be under threat. Increase in Fixed Interest weighting.
Defensive sectors still generally preferred, including Energy, Utilities, Tobacco and Telecoms.
No real estate exposure in portfolio.
Yield Comparison at 31 December 2008:
- MIGF 5.66%
- Yield target 2.74% (JPM Global Gov Bond 2.43%, S&P 500 3.04%)
- US CPI 1.1% year-on-year (2.0% excluding Food and Energy)
Equity Market Review
Markets ended the year on a relatively good note after an appalling 2008. In dollar terms, global equities lost 20.9% of their value in 2008 despite double digit rallies in several markets in December. Once again, local currency returns were distorted by some momentous currency movements. In Europe, for example, markets gained a modest 0.75% in December but the swing of the euro against the dollar meant that such a movement translated into a gain of 10.6% in dollar terms.
The December rally was triggered by the realisation that interest rates would continue to be cut in all major markets in response to the growing threat of deflation. Ironically, deflation is generally considered to be negative for equity markets but there was a growing sense that the sell-off in October and November in particular had been overdone. Inter-bank rates are beginning to ease and low savings rates will eventually encourage savers to seek yield elsewhere. With the S&P 500, for example, yielding over 3% compared with a US discount rate of 0.5%, there is ample encouragement for investors to look to equities to provide income over bonds.
Elsewhere in the world, Asia and emerging markets generally enjoyed something of a rebound from the carnage of the previous few weeks and months, gaining 1.8% and 4.4% respectively in local currency terms. We do not, however, believe that such movements represent anything other than a relief rally at this point. It will take some time for the impact of lower interest rates to filter into the real economy and our inclination remains that of selling critically weakened companies (e.g. banks) into pockets of strength whilst building up positions in more robust businesses with strong cash flow, low debt and a progressive dividend policy on those darker days in the market.
From a currency perspective, we believe that sterling is probably in oversold territory and expect some of the recent movements to be reversed, particularly against the dollar, as 2009 progresses. Longer term, we remain nervous of the growing public sector borrowing requirements in most major markets (perhaps with the exception of Japan) but feel that President-elect Obama's spending plans will have a particularly detrimental impact on the US dollar over the medium term once the currency market's present obsession with a flight to safety has run its course.
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Marriott First World Equity Fund comment - Sep 08
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Monday, 10 November 2008
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Fund Manager Comment
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September saw a marked deterioration in investor sentiment as the financial crisis dramatically returned to centre stage. Broad indices in Europe and the US lurched downward, with falls of between 9% and 13% being seen in local currency terms. The strength of the US dollar also impacted on the sterling and euro Indices, thereby extending the declines to around 15% on a US dollar-adjusted basis. The financial sector continued to hold centre stage as a succession of financial institutions in the US, including Fannie Mae, Freddie Mac, Lehman Brothers, AIG and Washington Mutual either folded or sought help from the Treasury. The pain, however, was not limited to the US, as Fortis, Bradford and Bingley and Hypo Real Estate, to name but a few, also succumbed to market forces. Other sectors also experienced selling pressure, with oils and commodity stocks taking the brunt as commodity prices continued to retreat.
The dollar continued to rally in the early part of September before retracing as the credit crisis intensified. However, it again built up steam towards the end of the month, leaving it about 4% up against the euro and 2% higher against sterling for September as a whole. The higher dollar also contributed to a decline in oil, although gold actually rose modestly on "safe haven" buying.
Immediate concerns about inflation have been rapidly giving way to genuine worries that the current freeze on credit markets will cause significant damage to global economic growth. Central bank intervention has increased, pumping vast amounts of liquidity into markets to stop credit completing drying up, but the ultimate solution will be a return of confidence that allows banks to start to trust one another again. The current process of trying to get a $700-billion rescue package through Congress in the US, which will allow the Government to purchase "toxic" assets from Banks will help, but further work needs to be done. All this central bank activity, however, could have inflationary ramifications over the medium term once economies begin to reflate, but this is probably the least of the problems at present.
Problems in the banking sector have now spilled over into the "real" economy, and this is a worrying development. Nevertheless, we still believe that central bank action will prevent a prolonged downturn, although it is probably too late to stop at least a technical recession. In this environment, volatility will undoubtedly continue, although we feel we are now very close to a significant bottom.
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