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12 October 2020updated 09 Sep 2021 1:09pm

How Murray International Trust is reacting to a global pandemic

Opportunities are emerging amongst crisis pressures.

By Bruce Stout

Our portfolio activity has increased year to date, reflecting the need to review business models of current holdings in the context of potential coronavirus impacts. In addition, a number of attractive, diversified investment opportunities have emerged against a backdrop of increasingly narrow and concentrated equity markets. The opportunity to enhance the overall long-term growth and income-generating potential of the portfolio at attractive valuations is welcomed.

Similar to previous periods of excessive market concentration, numerous areas have been overlooked as investors have become obsessed with one sector (in this case technology and e-commerce). But opportunities abound for those prepared to stay focused and disciplined on relative value. Over the past six months we have initiated holdings in diversified growth businesses such as Abbvie (a US pharma company), Ping An Insurance and China Resources Land (insurance and real estate companies in China), Hon Hai Precision (factory automation in Taiwan), Unilever NA (consumer products in the Netherlands) and Broadcom (semiconductors and software in the USA).

These new holdings complement an already diversified global portfolio which is positioned to deliver its long-term mandate of capital growth and an above average dividend yield with real income growth.

Unprecedented pressures on dividends and business dynamics have been exerted by the current crisis, but the overall focus of the portfolio remains on companies with robust cash generation, under-leveraged balance sheets and business models exposed to growth markets such as Asia and the emerging world. This offers a differentiated exposure to positive, long-term, global dynamics. Our team-based approach capitalises on the investment experience of managers Bruce Stout (over 30 years), Martin Connaghan and Samantha Fitzpatrick (both over 20 years), as well as the resources of Aberdeen Standard Investments’ worldwide research coverage.

The importance of discipline

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We recognise the importance of discipline and adherence to process, particularly during periods of excessive exuberance and emotionally-driven asset pricing. The portfolio is constructed on a “bottom-up” basis, investing in companies based on their individual merit, rather than looking at themes or sectors. The objective is a concentrated portfolio of different businesses in different industries across different markets and geographies. In effect, true diversification of capital and sources of income. To achieve this, we discuss and consider potential investments with the rest of the 16 strong Global Equity Team at Aberdeen Standard Investments. The universe of companies considered is the total research output of all of our regional fund managers and analysts, located across the globe. This currently amounts to around 2,500 potential investments, the majority of which are held in regional and country funds. From this potential investments, we select those businesses deemed most suitable to deliver the investment mandate of the Trust, paying strict attention to liquidity, quality and relative value. Over time this had led to a predominately “buy and hold” strategy, with relatively low turnover. Historical periods of high market volatility, coupled with the desire to actively manage the Trust’s gearing where appropriate (usually moving bonds into equities or vice versa) has resulted in some opportunistic increases in transaction activity. The current prevailing circumstances exemplify this.

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Performance and outlook

Near-term reflections on Murray International Trust’s performance might deduce that the current global pandemic has proven relatively problematic for the Trust. Against its reference index (FTSE World Index), relative underperformance is clear to see. This is partly due to disparities between constituents of the index (high USA and technology weightings) and the objective of delivering the Trust’s investment mandate (above average yield from a diversified asset base). Against its peer group, similar relative underperformance is evident. However, marked differences in process, philosophy and subsequent portfolio exposures exist between investment trusts (with proven track records of earning income from underlying investments) and other vehicles covering shareholder dividends from capital.

The current environment for dividends is extremely tough and this is likely to be a shared experience for most income investment trusts. But history has taught us that the recovery is unlikely to be uniform depending on regional exposures, sector concentrations and flexibility of investment mandates. Amassed over many years, Murray International’s large revenue reserves, equivalent to more than one full year of current dividends, is testimony to prudence and a desire to have as much future flexibility as possible, combined with balance sheet strength.

“The day the virus ends will be very different from the day it began”. Looking forward, the words of President Macron very much resonate with regard to how economic and business landscapes might evolve in the wake of the pandemic. Near-term, Covid-19 is unquestionably a disinflationary shock given current capacity underutilisation and high unemployment. But longer term, the seeds of a potential inflationary shock have been sown; expansionary fiscal policy is likely to remain until employment reaches politically acceptable levels (essentially condoning open-ended quantitative easing); potentially higher minimum wages (Senator Biden proposes $15 per hour in the United States); deeper and more punitive de-globalisation/protectionism; and an almost universal political acceptance of allowing higher inflation, rather than austerity as the price to pay for economic and social damage inflicted by coronavirus.

Such conditions are ripe for inflation to emerge. In light of recent International Monetary Fund projections for US Sovereign debt to surpass 150% of GDP by year-end 2021, demands for the debt to be inflated away are already gaining momentum. Respectability will be sought for such a politically and socially pragmatic solution, but with bond yields at 40 year lows such a scenario is most definitely not priced into fixed income markets.

For a growth-obsessed world and associated equity markets, rising inflation and rising bond yields would represent a serious threat to prevailing valuations. Current growth stock multiples appear predicated on an unwavering belief in the scarcity of growth, unquestioning faith in perpetually prevailing low interest rates and outright conformity of a new paradigm of disruptive technology. These remain the dominant themes for equity investors. Yet when inflation expectations rise, cyclical stocks usually outperform.

The pandemic may have wreaked irrevocable damage on some sectors of the economy, but do markets really believe the future holds no place for mining, commodities, real estate, homebuilders, agri-chemicals, oil and gas, construction or transportation, not to mention Asia, emerging markets and beyond? Portfolio diversification has increasingly proved an unpopular and underwhelming strategy in an investment world with a seemingly insatiable appetite for the “internet of things”. But, as pandemic fears ease and the reality of redemptive policy actions becomes quantifiable, the risk/reward between portfolio concentration and portfolio diversification appears poised to rotate favourably towards the latter.

Life after lockdown

We are now six months into the current Covid-19 pandemic and investor focus is shifting to the evolution of policy response as countries negotiate their exit from lockdown strategies. Two key issues dominate the landscape: the ultimate shape of economic recoveries which is still confined to the realms of intense speculation, and the profound longer-term consequences of this episode in global economic history. Current risks associated with secondary waves of infection severely influence recovery trajectory prospects. Observers have closely monitored Asia for indications of speed and profile of returns to normality, but great caution must be exercised with such comparative analysis.

Countries that have not or do not replicate the same levels of containment as Asia are unlikely to follow the same recovery path, a risk which is currently materialising in the UK, the United States and parts of Europe. With regard to longer term impacts, it would be naive to believe that life will simply return to normal after lock-down ends. Permanent output loss from labour markets, behavioural changes, bankrupt businesses, de-globalisation, on-shoring supply chains and accelerated digitalisation are already gathering momentum, even before the post-viral landscape has begun to be defined. Further down the road, the fiscal enormity of underwriting wages, providing unlimited credit support to business and printing a tsunami of global liquidity will also need to be addressed. This “nobody’s fault” recession still needs to be paid for, but the silence surrounding how, when and by whom remains deafening.

Discrete performance (%)

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Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

Risk factors you should consider prior to investing:

·       The value of investments and the income from them can fall and investors may get back less than the amount invested.

·       Past performance is not a guide to future results.

·       Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

·       The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

·       The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.

·       The Company may charge expenses to capital which may erode the capital value of the investment.

·       Movements in exchange rates will impact on both the level of income received and the capital value of your investment.

·       There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.

·       As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

·       With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as “sub-investment grade”. These may produce a higher level of income but at a higher risk than investments in “investment grade” bonds. In turn, this may have an adverse impact on funds that invest in such bonds.

·       Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

·       The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

Bruce Stout is the investment manager at Murray International Trust 

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