The global diversifier

Chris Salih 08/08/2024 in Global, Investment Trusts

A guide to Murray International Trust

As the name suggests, the Murray International Trust offers an international portfolio of global equities while also having the flexibility to invest in fixed income. The trust targets an above-average dividend yield, with long-term growth in dividends and capital ahead of inflation, with the trust consistently offering a dividend yield of 4-5%. The result is a diverse mix of companies, not only from a geographic and sector perspective, but also in terms of the level of dividend paid.

The long-term focus on quality companies is reflected by the trust delivering 19 years of consecutive dividend growth. This feeds into the trust’s third objective, which is to offer a strong dividend reserve – allowing it to pay out dividends to investors during challenging periods. The trust was forced to delve into this reserve during the height of Covid in 2020 and 2021, when many companies cut or stopped paying a dividend. However, the trust returned to full dividend coverage in 2022 and now has a full year of dividend in its reserves.

Industry veteran Bruce Stout – who has run the trust with great success for the past two decades – retired in June 2024, with co-managers Martin Connaghan and Samantha Fitzpatrick taking on his full management responsibilities. Both have worked closely with Bruce since 2001 and have significant experience when it comes to global equity and income mandates.

A bottom-up approach targeting businesses with pricing power

This is a genuinely international portfolio. abrdn is well-known for its global equity research capabilities and the managers make full use of the resources available to them.

The managers prefer simple businesses that have a strong ability to produce surplus cash and a resilient business model. These could be in any industry. The managers are also prepared to invest anywhere in the world they see value, with Murray International’s investment process giving them a buy list of around 900 stocks to choose from. The team’s investment horizon when selecting stocks is at least five years.

The trust also has the ability to invest in fixed income securities, with the process of selecting and monitoring both sovereign and corporate bonds following exactly the same structure and methodology as equities, with the manager using the global investment resources available.

The portfolio has been truly global in nature, with reasonably strong exposure to Asia and emerging markets (currently 35% including Latin America)*. This can lead to substantially different performance to its peers; the trust has struggled when developed markets have outperformed emerging economies – as we’ve seen in periods during the QE era. Its high yield focus also means it has lower exposure to certain growth sectors – such as technology – than some of its peers, which has been a headwind. Ultimately, the process of focusing on defensive businesses which can retain both earnings and dividends, without paying over the odds, has been incredibly successful over the long term, providing stability to investors.

The trust is typically high conviction, and currently has only 46 equity positions as well as 14 positions (6% of the portfolio) in fixed income, most of which sits in the emerging markets space. We discuss the current portfolio in more detail in the “Manager’s View” section.

The trust currently has a yield of 4.6%* and an ongoing charge of 0.53%*.

Why now for this portfolio

  • The portfolio is well diversified across sectors and geographies (including a large weighting to emerging markets) – making it very different to its peers
  • A discount of almost 10% (5 August 2024)** is significantly wider than the five-year average
  • A history of being benchmark agnostic and targeting quality companies with pricing power has proven successful at delivering consistent returns and managing downside risk
  • Having repaid a £30m debt facility in May 2024, the trust has no further debt obligations until 2031
  • Attractive yield and almost two decades of dividend growth

Manager’s View

“In an ideal world, we’d want a trust with 50 names with nothing in common. Right now the portfolio is currently as diversified as it has ever been.”

The team target strong companies, with a preference for those who do not have debt commitments, as it means they are more willing to pay a dividend. The ability to say no to debt, particularly in an environment where rates are higher, is something they’ve always looked for (it is also something the trust has done itself).

Although the ethos of the portfolio has remained unchanged, the opportunity set has widened in recent years, with the ability to diversify into numerous sectors which paid very little dividend in the past (luxury is a good example of this). The offshoot of this is the trust no longer has to be as heavily invested in areas like the UK, whereas previously diversification opportunities were not as widely available. The team are also happy to introduce smaller dividend payers (examples include Diageo and Pernod Ricard which have a dividend of circa 3% but the ability to grow from that point).

Co-manager Samantha Fitzpatrick says: “In an ideal world, we’d want a trust with 50 names with nothing in common. Right now the portfolio is currently as diversified as it has ever been. We do have some stocks which move together and we are aware of that. A good example is in the semiconductor space where we have the likes of TSMC, Broadcom and BE Semiconductor – we’ve actually been trimming the first couple because they’ve been hitting the 5% limit for a single stock, having grown so fast. But we try to be anything but a one-trick pony.”

Another theme would be the healthcare sector, where the trust has exposure to AbbVie and Merck. Both have responded well to the threat of drugs coming off patent, with management being proactive and broadening out their respective product offerings.

This diversification is reflected in the geographical breakdown, with roughly 25% held in North America, Asia and Europe; and a further 10% in Latin America. The team have no direct investment in Japan and very little in the UK.

Fitzpatrick says: “The spread of exposure is very interesting and has meant that over the past couple of years, we’ve had stocks in the portfolio that have doubled and stocks in the portfolio that have halved. We are alright with that because the diversification has meant the overall return has not been as volatile as it would otherwise be.”

The rationale behind the lower exposure to the UK is that the team simply believe they can find better opportunities within each  sector in another part of the world. A good example would be UK insurers, where despite reasonably strong yields, the team believe the likes of Zurich Financial in Switzerland and Tryg Insurance in Scandinavia offer a better quality of underlying business model and management – ultimately delivering a more sustainable yield.

As mentioned, the trust does have a greater exposure to emerging markets (35% inclusive of Latin America), than its peers. The team have been vocal in the past that there is more clarity in the developing world, citing the need to control inflation faster – because it destroys the purchasing power of low income people/families – meaning there is now more clarity for these regions.

Connaghan says: “Look at the likes of Latin America, Indonesia, and Asia – the path looks transparent as to how they are going to get interest rates down, inflation is moderating and, as a result, you will probably get a pick-up in overall growth levels, which is good for the economy and certain sectors. There is much more transparency in the emerging world and, crucially, less wage pressure.”

The team are aware there are still dangers in the market, such as the post-Covid impact on inventory cycles and geopolitical uncertainty increasing the likelihood of nearshoring. However, this also creates opportunities, examples of which include Grupo ASUR (Mexican airport operator) and Walmex (Mexican arm of Walmart), both of which benefit from being close to the US.

Portfolio activity and debt repayment

In the first half of 2023, the team allowed their cash allocation to build up to repay a £60m debt facility in May. When the team took out the loan five years ago it cost 224 basis points – by contrast, the managers were being quoted as high as 6%, something they felt was too large to justify.

There were similarities in the first half of this year, with the trust paying back a £30m facility in May. Mercedes was the only addition in the first half of this year, with the team typically finding minimal exposure in the consumer discretionary sector as yields are still tricky to achieve. The managers believe that despite the stock being weak, the yield remained attractive (8.35% at July 2024) and was a great entry point.

They also sold a few names to help pay back the aforementioned debt. They sold Roche after receiving their big annual dividends, with the team already having a few healthcare names with greater conviction. China Vanke’s decision to cancel its dividends also acted as a catalyst for the team to sell their position.

They also sold out of TransCanada (TC Energy) and re-invested into Endridge, a Canadian pipeline company they already own. The final removal was Epiroc, a Swedish construction and mining equipment company.

The team have also been top slicing a few names, particularly those that have approached the 5% limit for a single position. A good example of this is Broadcom, which they bought in 2020 when it had a 7% yield. The stock has performed so strongly, the yield is now below 2% and the team have had to cut back at the 5% threshold  for the portfolio on numerous occasions in 2024. This has been reinvested into other North America names like Cisco Systems, Johnson & Johnson and Telus.

The fixed income allocation remains unchanged.

Performance

Over the past three years, the trust has produced a positive NAV total return of 27.9%, marginally ahead of the 24.7% produced by the Association of Investment Companies Global Equity Income sector. From a share price perspective, the trust has returned 18.7% (vs. 16.2% for the sector) over three years.

It should be noted that the portfolio is targeting a relatively strong yield, which lends itself towards having more of a value tilt. Other differences include the larger emerging market exposure and the allocation to fixed income. Over five years, the portfolio has returned 40.3% (vs. 51.2% NAV for the sector) reflecting those headwinds to a greater degree, such as the inability to be heavily invested in large US tech.

As mentioned, the portfolio is all about diversification and consistency of returns, as referenced by producing similar returns in its financial years for 2022 and 2023 (8.8% and 8.6% NAV total return respectively), despite vastly different economic environments***.

Connaghan says at a time when there are a lot of funds/trusts with a very similar top 10-20 holdings, investors appreciate this portfolio offers something a bit different.

He says: “An income portfolio should have a bit more of a defensive nature and a value focus – it’s all about balance. We don’t get downbeat if things are tougher when the market is being driven by low or no-dividend paying companies, we just can’t be exposed to them and deliver the investment objectives. We focus on growing capital steadily over time and not being overly correlated to other products out there.”

What else do investors need to know?

The trust is currently on a 9.2% discount, having traded as high as a 9.2% premium and a 10.4% discount in the past five years**. It should be noted the average discount has been 1% over this period (there have been very few times it has traded at more than a 5% discount). The average discount for trusts in the sector is also below 5% (4.8%)****.

Connaghan says he is surprised by the number of large, liquid global equity trusts which are on significant discounts – adding that this is an attractive opportunity for shareholders. This is reflected by the fact the board have bought back 12m shares in the past 12 months or so. Gearing is relatively low at 4%**.

Outlook

A true diversifier in every sense flying under the radar

This trust has evolved as income markets have evolved over the past few years. It can tap into almost any income source. You only have to look at the top 10 holdings to highlight the spread of dividend payers, with names like Philip Morris International (5.5%) and TotalEnergies (4.8%), being complemented by growthier names like Broadcom (1.9%) and BE Semiconductors (2.1%)^. The same is true from a geographical and sector perspective, with no dominant theme resulting from the bottom-up process.

This trust has shown an ability to tap into quality companies, with pricing power, across the globe. The result is a trust with a great long-term track record while also protecting capital during challenging periods. Having faced a number of headwinds in recent years (US tech/Covid dividend cuts), the trust now has started to build up some momentum. With the discount almost in double digits, now may be a good entry point for such a solid all-rounder.

 

*Source: fund factsheet, 30 June 2024

**Source: Association of Investment Companies, 5 August 2024

***Source: Murray International 2023 Annual Report

****Source: FE fundinfo, figures to 2 August 2024

^Source: Murray International Presentation, December 2023

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.