The global macro-economic landscape shifted considerably during 2022. Inflation, originally triggered by the global reopening and exacerbated by the Russia-Ukraine war and supply chain bottlenecks, remained elevated and forced central banks to act decisively. The US FOMC, for example, hiked rates by an unpreceded 4.25% during the year, while the UK implemented 8 separate interest rate increases, with their base rate now 3.5% - the highest level since before the 2008/09 financial crisis.

Elevated inflation and strong central bank action created an investment environment which made it difficult for investors to avoid capital loses over the year. The broad MSCI All-World index of developed and emerging market equities finished the year -18.4%, its biggest decline since 2008. Further, the US 10-year government bond yield, a global benchmark for long-term borrowing costs, increased from ~1.5% at the end of 2021 to 3.9% at the end of 2022 - the biggest annual increase on record. Increasing bond yields have an inverse effect on bond prices and, as a result, the US total bond index declined by 13.1% during the year.

The decline in both equity and bond prices during 2022 (a rare event - it has happened only 3 times in the USA over a calendar year since 1871) put a premium on the selection of high quality, income generating investments. A company’s ability to generate strong free cash flow today (a key component of companies within the Marriott portfolios) was paramount, with the market rewarding companies that are able to deliver sustainable dividends now rather than at a projected point in the future. This factor helped the performance of the Worldwide Fund to hold up well during the year especially considering mining companies (a major beneficiary of the Russia/Ukraine war) are excluded from our investable universe due to their unpredictability.

As we move forward into 2023 elevated interest rates, and inflation which is not yet fully under control, will continue to put pressure on consumers globally. In light of the challenging environment the World Bank recently downgraded its global GDP growth projection for 2023 to just 1.7%. Importantly, the companies in our portfolios, in addition to being highly profitable and cash flow generative, also boast brand loyalty, pricing power, balance sheet strength and the ability to maintain margins. These qualities enable consistent earnings and dividend growth through all stages of the economic cycle, including downturns.

The fund also has an approximate 25% exposure to government bonds which similarly tend to perform well in difficult economic conditions. This is because a cut back in consumer spending typically pushed down inflation making bond yields more attractive. With a weighted average yield of approximately 10.7%, the bonds held in the portfolio are currently offering investors very good value.

In summary, we remain confident investors will continue to favour cash generative, dividend paying stocks in the years ahead as interest rates are likely to remain elevated for some time. However, in 2023 it won’t just be about attractive yields. The most aggressive hiking cycle in 50 years is likely to slow global economic growth substantially in 2023. Thus, it appears likely that high quality dividend payers with strong balance sheets and resilient earnings will be the most sought after. That is precisely the profile of company our income focused investment style is all about.