The sharp fall in the value of the pound since the EU referendum has provided a major boost to the performance of internationally diversified funds. One of the biggest beneficiaries has been the Murray International Trust (MYI), which has just announced its annual results for the year to the end of December.
Murray International operates in the Global Income and Growth sector and has a market value of £1.5bn. Its aim is to achieve a total return greater than its benchmark by investing mainly in worldwide equities. The manager also seeks to increase the fund’s revenues in order to maintain an above average dividend yield.
MYI has had a fantastic year with a NAV total return of 40.3% in 2016. This was well ahead of its 40% FTSE World UK and 60% FTSE World ex UK benchmark that returned 25.8%.
The fall in the pound was a major contributor, as at the end of the year the portfolio only had a 14.7% exposure to the UK, but there is a lot more to it than that. Bruce Stout from Aberdeen Asset Management, who has run the fund since 2004, has pulled off the rare feat of making sure that each part of his strategy, including the stock selection, asset allocation and fixed interest/gearing, has made a positive contribution to the 14.5% outperformance.
Stout is responsible for the portfolio construction across each of the different regional segments of the fund and uses the ‘Global Equity Buy List’ that is constructed by Aberdeen Asset Management’s specialist country management teams. This contains all of their buy and hold recommendations and forms his investment universe.
It is very much a bottom up approach with the manager paying little heed to the benchmark weightings or market values of the stocks. His main focus is on companies with strong business franchises and shareholder-friendly management teams.
Bruce Stout has pulled off the rare feat of making sure that each part of his strategy – stock selection, asset allocation and fixed interest/gearing – has made a positive contribution to the 14.5% outperformance.
Stout is authorised to hold between 45 and 150 stocks, although at the end of the year there were just 48 equity holdings that made up 83.2% of the portfolio, with the balance invested in 24 fixed income securities in the Emerging Markets.
Stock selection is a major source of value added and contributed 5.3% of the outperformance during the year with a further 6.4% (after all costs and other adjustments) coming from the impact of gearing and the fixed income investments. The remaining 2.8% was generated by the asset allocation.
The fund is invested in a diversified portfolio of international equities and fixed income securities spread across a range of industries and economies. There is plenty of flexibility as the Board has not imposed any geographical, sectoral or industrial constraints upon the manager so he has full discretion when it comes to his asset allocation decisions.
Stout is wary of the UK stock market and has kept the weighting at historically low levels due to the high valuations against what he describes as “an opaque economic and political backdrop”. Despite this his UK holdings had a good year with the likes of Weir, BHP Billiton and Royal Dutch Shell all adding to the outperformance.
He is also concerned about the sustainability of banking and insurance businesses in the negative yield environment of Continental Europe and this led him to reduce his exposure to these areas. The upshot was that the regional European weighting fell from 18.2% to 14.4% over the course of the year, with the remaining holdings defensively positioned and the main focus being on Switzerland.
Another unusual aspect of the asset allocation is the low exposure to the US, which only accounted for 18.4% of the fund at the end of the year. To make up the shortfall the portfolio is massively overweight in Asia Pacific ex Japan and Latin America/Emerging Markets that make up 28.9% and 18.7% of the year-end exposures. These regions both had a really strong year, especially with respect to the holdings in Taiwan, Thailand and Brazil.
During the year the investment trust paid three interim dividends of 10.5p per share with the Board recommending a final distribution of 16.0p that will be paid in May assuming that it is approved at the AGM. Once ratified, the total dividend of 47.5p would be 2.2% higher than last year and based on the recent share price of £11.84 gives the fund a historic yield of 4%.
Murray International has an excellent long-term record and offers a very different type of exposure to most of the other UK Growth and Income funds.
The annual dividend was 1.08x covered by revenue of 51.2p per share. This was up 12.0% during the year due mainly to the fall in the value of the pound. Most of the revenue comes from overseas companies and is paid in the local currencies before being converted into sterling on receipt. The upshot is that movements in the exchange rate can have a large impact on the annual revenue.
If the pound appreciates it would put pressure on the income, but the Board intends to maintain a progressive dividend policy. In order to do this it will add to or draw from the revenue reserves whenever necessary. These are just under £71m, which would be enough to pay out dividends at the current level for a whole year.
Gearing, charges and discount
The Board uses gearing for investment or to purchase the company’s own shares and has stipulated that it should not exceed 30% of net assets. In practice it has been much more modest than this and was down from 17.4% at the start of the year to 12.5% at the end.
Like many other investment trusts the Board has successfully managed to negotiate lower management fees. Last year these were 0.5% of net assets plus borrowings, but the old arrangement has been replaced by tiered charges and the performance fee has been scrapped.
In 2016 the management fee was charged at 0.575% of net assets up to £1.2bn, 0.5% between £1.2bn and £1.4bn, and 0.425% above this. The end result was that the ongoing charges fell from 0.75% in 2015 to 0.68% last year.
The Board operates a discount control policy and has the authority to issue up to 10% of the company’s shares at a premium and to buy back up to 14.99% of them at a discount. This has enabled it to achieve a narrow average discount of 0.98% over the last 12 months and it is hoping to receive approval from shareholders to renew both authorities at the forthcoming AGM.
Murray International has an excellent long-term record and offers a very different type of exposure to most of the other UK Growth and Income funds. Its high weighting in Asia Pacific ex Japan and Latin America detracted from the performance in 2013, 2014 and 2015 but came good last year, and this has continued into 2017 with the NAV up another 9% year-to-date.
The fund offers an attractive yield of 4% that is fully covered by earnings and with a large revenue reserve that would help to offset any pressure from a stronger pound. It has delivered exceptional performance in the last 15 months and makes a useful diversifying source of income and growth, especially with the shares trading on a wider than normal discount of 3%.