How to invest in complex market conditions

Sam Fitzpatrick from Murray International Trust joins us to discuss the trust’s recent outperformance and the contribution of emerging markets to this performance. She also gives her views on whether the portfolio is potentially better able to weather the market volatility and potential recession than others.

In this interview, Ryan Lightfoot-Aminoff talks with Sam Fitzpatrick from Murray International Trust to discuss the trust’s recent outperformance and the contribution of emerging markets to this performance. Sam also gives her views on whether the portfolio is better able to weather the market volatility and potential recession than others.

Please Note: Below is a transcript of the video, modified for your reading pleasure. Please check the corresponding video before quoting in print, as it may contain small errors.

Video Transcript

Over the last couple of years, the trust has underperformed in this period, but it’s had a much better period in the last 6-12 months. It’s really come into its own, it’s outperformed quite considerably. Can you explain some of the reasons behind this?

[00:27] Sure. So yes, over the past 12-month period to the end of May 2020, the total asset return for the trust in sterling terms is 17.5%. So, a very healthy return, especially given the backdrop. And just a bit of colour around that, when you look at the reports, you can see that stock selection has been very strong and that’s across all different regions and across a wide variety of sectors that we are invested in. So, it has been broad based – that good performance.

Now sector positioning has been generally quite beneficial for the trust. For example, we don’t have any exposure to consumer discretionary stocks, and this is areas of the market like discretionary retailing and media – areas that have been really under pressure given the pressures on individual’s spending power over the last while.

And now it’s not that we have taken an absolute hard view on these types of companies that we don’t want to invest in them. It is on a stock-by-stock basis. But often these types of companies just don’t really fit the remit for Murray International, because often they either don’t pay a dividend or they have no desire to do so in the future. So, it’s just an area of the market where we don’t find opportunities.

Now, in terms of a wider market backdrop, what’s been going on over the past 6-12 months, there is a couple of categories that have been very, very weak. So, as interest rates have gone up linked to high inflation, a sector of very high growth, high valuation companies have derated hugely, and they’ve been really hard hit. And again, it’s an area of the market that we tend not to go to because they don’t have that track record. They don’t have any evidence of being able to withstand market cycles.

So, it’s not a natural place that we would find opportunities for Murray international. So, not being there on a relative basis has been a good thing for the trust. And similarly, we don’t tend to go for companies, – or we never go for companies – that are very highly indebted. So, companies which are having to come to the market for more funding to keep themselves going. Again, we don’t go there. We like well-established companies and quite steady businesses with strong balance sheets, strong cash flows. So, not having that type of exposure has meant that the trust has held up relatively well.

So does this search for better balance sheets and things mean the portfolio’s potentially better able to weather these market volatility periods and the high inflationary environment and even the potential recession? And with that in mind, what sort of stance do you have on potential recession and how people should be investing?

[03:32] So, in terms of volatility, it’s quite a tricky one actually, because I wouldn’t want to give anyone the impression that there’s no volatility in the trust. There is. I was actually just looking through the positions this morning and, of the 52 equities that we hold in the trust, that year-to-date performance has gone from minus 50 on an individual stock basis – so one stock has halved in value – up to another position, which is up 80% year-to-date. So, there’s been a huge spread in terms of performance of the underlying holdings. But the key is that we have such a spread of different types of companies that, on balance, things have held up pretty well.

The categories which have performed poorly year-to-date are things like some technology holdings, industrial holdings, which actually performed very well last year. So, you’ve seen that they’re coming good in one period and then been weaker in the next. And that’s fine because you have other holdings doing the opposite. So yes, there is volatility. But I think that the spread of businesses is very important. No matter what the backdrop, we always strive to have that range of different types of companies there.

Inflation is very much the topic of the day and how that’s going to play out. And how we are going to fare with that, again has yet to really be proven. I think we’re happy that we are not in that really highly valued, high growth category that has suffered because of the high inflation concerns. What has still to be proven though, is the companies that should do better. So, names such as Unilever and Danone, for example, consumer goods companies that we hold in the portfolio. They’re traditionally quite strong in terms of times of difficulty, but it’s yet to be proven whether or not their brand strength is as good as they say.

So, they do have great brands. Unilever for example has Dove soap, Hellmann’s Mayonnaise and Magnum ice creams, all these names you would know. There is demand still for these kinds of products. But when people are really struggling, are they going to be able to push on the prices? And that’s the big unknown just now. So, we’re not immune against inflation, but I think given that we have invested in some of these companies when they’re not priced for perfection, these aren’t companies that the market is sure about. Some other peers, I would say, are in a stronger position in terms of where they’re currently at. So, we’re happy with the holdings we have, but not thinking we don’t have to worry at all. Another thing I would mention with inflation is that because it’s a global trust, we have exposure all around the world.

So, there are categories of equities where they are used to inflation. They’re used to higher interest rates, in places like Brazil, this is nothing new for them. So, as much as we can sit in the UK and be thinking, this is something we haven’t seen for 40 years, how are these companies going to cope? It’s not the same the world over. So, for a global trust, it is good to have these different dynamics going on at all times.

And for a recession, I think the implications will be far and wide. I’m very pleased we’re not in that very high-end space. There will be categories within consumer discretionary that will probably hold up okay. Maybe in extremely high-end areas where very wealthy people will still be able to afford the types of things that they buy. But again, these areas of the market aren’t a natural fit for Murray International because of the income requirement on the trust.

I can’t give investment advice whether I want to or not in this forum, but certainly with inflation in terms of outlook, I think it is here to stay. I think given it’s so widespread, it’s coming from so many different sources. It’s not going to disappear overnight. So, what we do always is just try again, to have a spread of businesses, businesses with a track record that often you can point to the last time in emerging market examples that they coped fine in this environment. And build that into the portfolio.

That very neatly brings me onto my next question. You touched on the emerging markets, which the trust has a much higher weighting in compared to many of the peers. They haven’t done so well recently along with many markets. So, how’s the fund managed to outperform still, have you maybe got an example or two of a couple of great holdings that have done very well for you in the emerging market space?

[08:19] So, emerging markets as a whole have underperformed their developed market peers over the past 12 months, but if you drill down, it tells a very different story. Within emerging markets, you have had China down I think 26% in sterling terms over the past year. Even places like Poland which fall within emerging markets in Europe, it’s down because of the fears over Russian gas supplies. But you have places like Latin America, Chile and Brazil, which are very commodity dependent and they have been very, very strong. So, Chile is up 26% in sterling terms, Brazil is up 13%. So it’s not a case of, they all do the same thing at the same time. And we never invest in countries. We don’t invest in regions. We invest in companies and that’s where we can add value and we have added value.

And it’s interesting that over the past 12 months, if you look at the breakdown of Murray International and see where the value has come from, the best performing has been Latin America. I think on average, the holdings are up 46% over that time period. And there’s some real standout performers within there. We have a company in Chile called Soc Quimica [Sociedad Química y Minera de Chile] that has been in the trust for quite some time and this company produces a range of different agricultural chemicals. And it also produces lithium, which is much in demand just now for the production of batteries for electric vehicles. The world just can’t get off this commodity just now. So, that has almost quadrupled in the past 12 months, it has been extremely strong. We keep taking money out of the name because it has performed so strongly, and we know it won’t last forever. There is more supply coming on. So, we have to be mindful of that. But that’s a good example of a particular company within emerging markets, which has been a very strong performer.

Another one would be Grupo Asur [Grupo Aeroportuario del Sureste], a Mexican airport operator. It’s one of the largest positions in the trust and it’s a company which we have held for many years, and it’s come back stronger than ever following the pandemic. So, it was weak during the pandemic as its business came to a standstill. But what we’re seeing now is a huge rebound in traffic, passenger traffic, it’s predominantly in holiday travel. So, it’s not reliant on business travel, which I think is certainly more vulnerable going forward, but people are desperate to get away on holiday if they can. And they are in a prime position to benefit from that. So, it’s got a strong balance sheet, it’s got really strong cash flows. It has a management team that has weathered difficult times in the past. So, it’s actually in a really strong position just now. So, two examples of emerging market holdings, which have done very well despite the region overall doing relatively poorly.

That’s interesting. Thank you. Switching gears a little bit, the trust can also invest in bonds. They’ve had a really torrid time of late. What’s been the secret here?

[11:37] Again, it’s similar to the being selective message. So, first of all, I would like to stress to people that we don’t have to invest in bonds. We never have had that as a requirement. It’s all about what opportunities we see. It’s great to have that ability. It’s great to have that flexibility. And when it comes to fixed income, we rely very much on the expertise of the emerging market bond team within Aberdeen. That’s their area of expertise. We use that very much, so we would never invest in any bonds if it wasn’t already held by that specific team. And we would only invest in emerging market bonds because it’s the only category that really makes sense from an income perspective, everything else just doesn’t deliver on the income front. And we would always for the trust buy below par. And all that means is we would invest knowing that we were going to earn money from a capital perspective when the bonds mature. So that’s a golden rule. We don’t want to lock in a loss in that regard to start with.

We do go in gently. So, we have currently 7% of the trust in fixed income, spread around 17 different bonds just now. So, we would rather have small positions in a number of things. And, over time, that has come down quite markedly. So, not too long ago, about a year or so ago, that was more like 18%. And the reason it came down so much in that time is because a lot of the bonds we had invested in were insanely expensive by the time we sold them. So, we sold our Vale bonds, a corporate bond, for example, back in December 2020 at 140, it’s only worth 100 at maturity. So, we were able to really capitalise on that capital appreciation. And, at that time, we were able to reinvest that money into equities, which had the potential to give you capital upside, but also gave us a higher yield anyway. So, it was a bit of a no brainer. That’s why that weighting has come down so much. And, over time, if you look at it, bonds have added value for Murray International. Although at times the category has been weak. But it is very selective and it is only on a case-by-case basis where we think they can add to the trust.

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