The highly-popular Murray International Investment Trust has moved onto a discount for the first time since 2010, according to data from the AIC, with factors such as currency headwinds, increasingly negative sentiment towards emerging markets, fears of a rate rise and dull NAV performance all contributing to the selling. 
The large global trust, which is headed up by star manager Bruce Stout (pictured), had been a firm favourite with investors due to its focus on capital preservation, income generation and strong past returns.
However, Murray International has been hit by a multitude of headwinds over recent months which have forced its shares onto a 0.5 per cent discount to NAV. While that doesn’t seem huge from an absolute point of view, it is certainly a big change in trend.
Data from the AIC shows, for example, that it has (on average) traded on a 4.8 per cent premium and 6.35 per cent premium over one and three years respectively and even traded on a 9.3 per cent premium to NAV at points over the past 12 months.
Murray International’s discount/premium over 5yrs
Source: FE Analytics
This fall in sentiment, coupled with the trust’s high exposure to emerging markets, has led to very poor recent share price performance.
According to the FE Analytics, Murray International is down 9 per cent over 2015 following its 14 per cent fall since late May. The IT Global Equity Income sector and its composite benchmark – FTSE World ex UK and FTSE UK 60/40 split – are both in positive territory year to date.
Performance of trust versus sector and index in 2015
Source: FE Analytics
Given there has been such a significant swing in its share price, should investors be looking to buy or is a further widening on the cards? Charles Tan, analyst at Cantor Fitzgerald, says a buying opportunity has opened up.
“I don’t think I’ve ever seen the discount move to this sort of level. Aberdeen are a group we know and love for emerging markets and the trust is headed up by a manager who is well-known and well-regarded,” Tan said.
“I think it has simply been a victim of the selling pressure in emerging markets but, personally, if I have a bit of spare cash available I’d be dipping my toe in.”
Certainly, Stout has been deserving of his star manager status. He has managed the £1bn trust since June 2004 and over that time it has been the performing trust in the sector with returns of 273.59 per cent, beating its composite benchmark by more than 100 percentage points in the process.
Performance of trust versus sector and index under Stout
Source: FE Analytics
However, the trust’s recent poor performance is all too clear to see in the graph above. As Tan points out, it has been the increasing negative sentiment towards emerging markets (which account for 50.8 per cent of Stout’s portfolio) which has really hurt the trust.
The initial problems have stemmed from China, as its plummeting equity market and the knock-on effect of those falls on its economy have put pressure on the wider emerging market asset class. Since 8 June, the Chinese equity market is down 30 per cent while all other major emerging market indices, apart from India, are in negative territory.
However, with the US Federal Reserve likely to raise interest rates over the coming months, the dollar expected to strengthen as a result and commodity prices still falling, many experts warn that emerging markets will continue to struggle.
“The weakness in the commodity market does not bode well for producers, while weak domestic demand and a deteriorating global trade environment are not positive for emerging consumers,” Marino Valensise, head of multi-asset at Barings, said.
“Moreover, the recent gyrations in the Chinese domestic equity market and subsequent interventions by the authorities have made global investors uncomfortable. More than that, in an environment where the Federal Reserve is getting closer to a rate rise, emerging markets are likely to continue to feel the heat.”
“We remain on the sidelines, waiting for a more convincing entry opportunity before establishing a major position; this will probably materialise once markets adjust to the new interest rate cycle.”
Tan agrees that there are clear dangers facing emerging markets over the coming year and therefore says Murray International is only for long-term investors who can stomach a degree of volatility.
“In terms of the outlook for emerging markets, things could definitely get worse before they get better. The issues in Russia have been well flagged up, China’s concerns are also well known and are likely to spread across the Asian region. Brazil, well, where do you start?”
Performance of indices since June 8th 2015
Source: FE Analytics
“Yes, things could definitely get worse from here. But, with a glass half full attitude, I would say we are much closer to the bottom than we have ever been.”
There have also been other factors at work which have hurt performance, though.
Stout has become renowned for his bearish view on global markets, stating on a number of occasions that huge amounts of central bank intervention via ultra-low interest rates and quantitative easing have done little for the underlying economy except distort and inflate asset prices.
As a result, he has kept very defensive weightings to developed markets such as exposure to mega-cap, dividend paying companies with reliable earnings.
While those companies have performed very well over recent years as usual fixed income investors have been forced to take higher risk to find a reasonable level of yield, the prices of these ‘bond proxies’ have generally been hit over the year as yields on UK gilts, German bunds and US treasuries have spiked on the back of improving economic data, the talk of higher interest rates and a lack of underlying liquidity.
Stout himself says the strengthening of the US dollar and sterling has been a major factor.
“Sterling’s relentless appreciation against the majority of international assets within the portfolio accounted for most of the capital depreciation during the period,” Stout said. “Defensive positioning proved resilient in local currency terms, but such an unanticipated move in sterling produced unwelcomed returns.”
He added: “Economic and political fundamentals within the UK arguably do not fundamentally support a sustainable currency appreciation of this magnitude, therefore such strength is unlikely to last.”
All that considered, Numis Securities head of research Charles Cade says investors should wait to buy into Murray International despite its current discount.
“My view is that we are waiting for it to widen to a more significant discount,” Cade said.
“I don’t know what they will do in terms of share buybacks but discounts tend to move with NAV performance and that premium has been quite sticky, even though performance has been dull for quite a while.”
“I think, over the short term with market outlook towards emerging markets quite poor, there will be further pressure on that discount.”
As Cade points out, the trust hasn’t been a stellar performer over recent years. It considerably underperformed it sector and benchmark in 2013 and 2014 and while its share price outperformed in 2011 and 2012 that was largely due to its widening premium rather than NAV growth – as the table below shows.
Source: FE Analytics
Its recent underperformance has left the trust with an optically attractive dividend yield of more than 5 per cent, though.
However, while Cade still rates Stout highly, he says investors should wait for further share price falls, given the current positioning and outlook for the portfolio.
“Ultimately, we like the fund on a medium view and it certainly looks more attractive now than it has done (we were quite critical when the board didn’t issue more stock when it was on a large premium).”
Cade added: “If it were to move out to a 5 per cent discount, we would certainly be interested.”
Murray International is geared at 16 per cent and has ongoing charges of 0.73 per cent.