Both trusts are among the largest and highest profile in the industry and have excellent long-term records, but 2013 was a poor year for the two managers, who underperformed their respective benchmarks as well as their peers.
Stout’s £1.4bn trust has been one of the most consistent in the investment trust universe over the last decade, outperforming both its Global Growth & Income sector average and composite benchmark – split 70/30 between the FTSE World ex UK and FTSE World UK indices – every year between 2005 and 2012. This has seen the trust power ahead of both measures over cumulative periods, and indeed it is number-one in its sector over the past decade.
However last year Murray International made gains of just 4.14 per cent, compared with more than 20 per cent from its sector and benchmark.
Source: FE Analytics
The severity of this underperformance has seen the trust fall behind its sector average and benchmark over a three-year period, although it is still well ahead over five years.
Templeton Emerging Markets has been less consistent, with very strong years often followed by much weaker ones.
The £1.7bn trust had an excellent period between 2005 and 2007, but was hit harder than most in 2008 when the markets took a tumble. Our data shows it was down almost 41 per cent, compared with losses of 28.93 and 35.39 per cent from its sector and MSCI benchmark respectively.
Source: FE Analytics
Mobius returned to his winning ways in the up years of 2009 and 2010, but following an average showing in 2011, his trust has fallen behind both its sector and benchmark in the last two calendar years.
Like Murray International IT, it is still comfortably outperforming over cumulative five- and 10-year periods.
Performance of trusts and benchmarks over 10yrs
Source: FE Analytics
A spokesperson for Templeton says the trust is susceptible to periods of underperformance because of the style it uses.
“Over the years TEMIT has had periods of underperformance compared with various indices and other funds,” the spokesperson said.
“However, these periods of underperformance [gave us an opportunity] to add to positions, since the general approach of the fund has been to purchase undervalued and unpopular stocks which in the short-term will not perform well but in the long-term will outperform.”
“We continue to search globally for the best opportunities with a long-term view.”
Speaking exclusively to FE Trustnet, Aberdeen’s Stout says that his trust faced “a perfect storm” in 2013.
“Our priority is to preserve the capital of our shareholders in the tough times and grow it in the better times,” he explained.
“Going into 2013, we believed markets were expensive and were cautious as a result, and now we think they’re very expensive. You’re going to have to see a hell of a lot of earnings growth to justify the rise we’ve had.”
“We’ve been in more defensive areas such as telecoms and quality industrials, which to a large extent have delivered on earnings and dividend growth, but have been of no interest to the market which have instead been following global liquidity flows, which have benefited financially stretched areas like the banks.”
“On top of that, we’ve been underweight Japan and the US. The US is the best performing and biggest component of our benchmark, and Japan has had the best year since 1972, so it’s hardly surprising we’ve underperformed.”
“The US and Japan are low-yielding markets and aren’t very fertile hunting grounds for the companies I want. One of our other priorities is to offer a strong and rising dividend, and because of that we can’t get involved in companies with no earnings and no dividend, many of which have done well this year.”
Stout’s overweight in emerging markets has also cost the trust. Mexico and Brazil are both overweights, for example.
“Anything in Asia and Latin America was a negative last year, even for companies that did well,” he said.
“Finally the relentless rise in sterling, which is baffling to me given that we’ve had a current account deficit since the 1950s, had a negative impact on our overseas holdings,” the manager added.
Murray International has 7 per cent in fixed interest, which also weighed on performance, although Stout confirmed that this is the lowest level it has been for some time as he expects yields to rise from here.
Stout confirmed he has no plans to change his style or focus, and will continue to back quality companies that he believes stand the best chance of increasing earnings and dividends.
“We’ve outperformed for 11 years, but you can’t do it every year,” he said. “We’re not going to change things now and start chasing past performance.”
Stout’s concerns with global equity market valuations will be examined in greater deal in an FE Trustnet article later this week.
The trust’s falling premium compounded a disappointing year for Stout, falling from a high of 12.5 per cent to 4.95 per cent at the time of writing. Stout says he is more comfortable with the premium at the current level, as it should benefit a big chunk of the shareholder base.
“It’s certainly better for investors who are looking to buy or who are on a monthly savings plan, as they’ll have access to the underlying assets at a cheaper price,” he said.
“This is principally a retail trust, and so it’s better for most of those holding it. When it comes to managing the discount, we’re doing it on their behalf,” he added.
Charles Cade, analyst at Numis Securities, thinks Stout remains a master of his trade and thinks the recent fall in the discount makes it more attractive than it has been for some time.
“What Murray International’s performance last year showed is just how difficult it is to outperform every single year,” he said. “He’s had a lot in emerging markets and not so much in Japan and the US, which had a great year.”
“That being said, he’s a very good manager and there’s certainly nothing wrong with his process. I was wary of the trust’s premium last year which got excessive, but it’s a lot more reasonable now. I think it’s always dangerous to buy a trust when the premium has been running away, so if you like Stout, last year’s blip could be seen as an opportunity.”
The underperformance of Templeton Emerging Markets IT has also seen its discount widen of late. According to data from the AIC, it is trading on a discount of 11 per cent, compared with a one-year average of 9.15 and a three-year average of 7.99 per cent.
Given the contrarian style of Mobius (pictured), who prioritises cheap companies that are underestimated by the market, Cade believes his trust could be a good bet for investors positive on emerging markets.
“Emerging markets have had a tough time in general and most of the value-orientated managers have suffered most, particularly in the last year,” he said.
“Mobius and his team have a clearly delivered process, and don't pay any attention to the benchmark in the short-term. When a trust like this underperforms and the discount widens, that's usually the best time to be buying it.”
Murray International IT has ongoing charges of 0.71 per cent, but also charges a performance fee. As well as looking to deliver capital growth, the trust aims for a sustainable and growing income. Its yield is currently 4.2 per cent.
Although Stout is generally quite cautious at the moment, such is his confidence in his stockpicking skills that his trust is 15 per cent geared.
Mobius’ Templeton Emerging Markets IT has ongoing charges of 1.3 per cent, but does not have a performance fee. It is not currently geared.
The number of underperforming funds is significantly lower than in the open-ended universe, though it must be said that there is a significantly smaller pool of multi-billion pound investment trusts.
