Today’s economic landscape has never been experienced before, even by the most seasoned investor, yet many are becoming complacent about the turmoil that all asset classes and regions are currently enduring, according to Aberdeen’s Bruce Stout (pictured below).
The manager, who runs £1.1bn Murray International Trust, believes that now is the time to batten down the hatches and seek comfort in familiar safe assets rather than take larger risks in the hope that market conditions will soon improve.
The trust has delivered a strong long-term performance, having reached the top spot in its IT Global Equity Income sector for its total return over the last decade, but it has fallen by the wayside over the last one and three years having slipped into the bottom decile.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
Not only did Murray International Trust’s NAV underperform its FTSE World ex UK benchmark last year, it also declined in absolute terms with its total loss of 7.8 per cent (inclusive of a 3.3 per cent dividend increase) compared to its benchmark’s return of 2.6 per cent. 
“The benchmark total return was positively affected primarily by the performance of United States equities and to a lesser extent by Japanese equities. The company is underweight in both these relatively lower yielding markets,” chairman Kevin Carter said.
“Beyond that, numerous global equity markets declined in sterling terms with particularly severe corrections in companies exposed to the energy, commodities, utilities and industrial sectors. Many of our portfolio holdings are in countries and stock markets which were especially affected by these trends. In addition, performance also suffered from a number of specific stock developments.”
Following the release of the trust’s annualised results this morning, Hargreaves Lansdown’s Richard Troue says that a quality growth bias among investors has bruised Stout’s performance due to the trust’s value-orientated stance. However, he says the investment vehicle aims for a level of capital preservation and is therefore disappointed that the trust has fallen so far below its benchmark.
“Resource-related holdings proved problematic over the year, with Royal Dutch Shell and BHP Billiton in the UK, as well as oil services company Tenaris in Europe, detracting value. A bias towards developing regions of the world, including Asia Pacific, Latin America and broader emerging markets, also presented a further headwind,” Troue said.
“One positive for investors is the trust has scrapped its performance fee. The structure of its annual management fee has also changed, resulting in an overall fee reduction. While disappointing in the short term, Bruce Stout’s prudent approach has proven a success over the longer term.”
The manager himself says that, despite his investing experience which spans over many years, he has never seen such strange market behaviour as he has over the last year and points out that there are numerous headwinds across the globe negatively impacting almost all areas of the market.
He says that this unsettling investing environment, coupled with market complacency in terms of how dire the situation really is, has magnified today’s bizarre and unpredictable landscape and warns that investors should stick to making safe and familiar calls at the moment.
“To some people, familiarity breeds contempt. To others, it is a source of constant comfort. To most, it provides confidence, clarity and conviction on which to act. Remove the familiar, it's said, and sanity soon follows. Nowhere does this more regularly occur than in financial markets,” he explained in his annual report.
“History is littered with examples of arrogance discarding the familiar for self-justification – ‘it's different this time, profits and dividends don't matter, business cycles and market forces are dead, a new paradigm for all to see’. When such contempt arises, the financial consequences are seldom redeeming.”
“Structurally plagued by unrecognisable economic fundamentals, yet possessing unquestioning conviction that nothing is seriously untoward, the financial world ignored escalating dissonance between familiarity and contempt over the review period [2015].”
The manager points out that policymakers have lulled investors into a false sense of security by saying the global economy progressing towards normalisation although, although Stout says there is no conclusive evidence to support this.
He adds that investors have been told plummeting energy prices have been responsible for depressed global consumption but argues that consumers are already over-indebted and are therefore more likely now to save rather than spend.
Performance of oil over 2yrs
Source: FE Analytics
On top of this, he says that real inflation and interest rates have failed to impress while the target inflation of 2 per cent was not reached as most of the developed world’s inflation fell towards zero.
“Predicting imminent higher interest rates at the beginning of 2015, only the United States dared to tentatively tighten by year end,” Stout continued.
“Scurrying in the opposite direction, the European Central Bank and the Bank of Japan kept up the pace of monetary expansion through continued quantitative easing. Beleaguered savers remained victims of financing fiscal largesse, with zero interest rates effectively eliminating any income returns.”
“This absurdity descended into farce in Europe. Prevailing negative bond yields witnessed savers paying heavily indebted European governments for the privilege of lending to them – extraordinary to believe, guaranteed capital-loss investment proved popular amongst bond investors in Europe throughout 2015.”
Over on the other side of the pond, the manager adds that equity buybacks remained commonplace in the US which led to the retirement of vast amounts of stocks at record high valuations. He argues that capital investment was yet again sacrificed at the expense of short-term market views, and points out that global corporate defaults remained at record lows so nobody questioned this break-down of credit quality.
“With over 20 developed world economies hostage to private and public sector debt above 200 per cent of national income, surely someone, somewhere could not pay. The mask of respectability held firm, despite a constant stream of unrecognisable indicators emerging,” he said.
“To those familiar with history, nothing was familiar. Whilst at best disconcerting, and at worst downright dangerous, the most unsettling aspect is how ambivalent the world has become to the prevailing distorted financial landscape.”
“Current economics, markets, geo-politics and demographics may confound the laws of rational behaviour and common sense, yet few are prepared to acknowledge the fact. The collective denial casts an eerie silence over the reality of an increasingly unrealistic world.”
Going forwards, Stout remains less-than-optimistic that these unusual and challenging market conditions are set to change, although he points out that predicting the future against such an unfamiliar backdrop is futile.
“The global economic landscape that prevails today cannot be found in any textbook or indeed in the historical experience of even the most seasoned investor. It is most definitely unfamiliar. From an economic perspective events of the past few years make no sense,” he argued.
“Governments across the globe have expanded sovereign balance sheets beyond breaking point through irresponsible excessive money creation to achieve virtually nothing. Growth in the developed world constantly disappoints, debt levels have expanded significantly and living standards, at best, have stagnated.”
“Sadly none of this should come as a surprise. Failure to grasp the nettle of chronic debt dependency and unsustainable consumption expectations remain the developed world's Achilles heel. Politically unpalatable and economically unviable, realistic redress is constantly shunned by policymakers persistently procrastinating with less painful options.”
“Artificially depressing bond yields may have bailed out the banks, but responsible savers still foot the bill. Yet still the unorthodox monetary intervention continues. It is common knowledge that repeatedly pursuing the same actions expecting a different outcome is the definition of madness and, unfortunately, the stated aims and actions of numerous central banks today are symptomatic of exactly that.”
Given this unfamiliar backdrop, the manager says that investors should focus on good companies that they are familiar with, have strong fundamentals and are producing affordable products with a sustainable market demand.
He also says that global diversification, despite being out-of-favour at the moment, will be maintained in Murray International Trust’s portfolio.
Top holdings of the trust include British American Tobacco, ASUR, Taiwan Semiconductor, Philip Morris and Unilever Indonesia. It also has more than a fifth of assets in Asia Pacific ex Japan, with 17.4 per cent in Europe ex UK and 16.7 per cent in the US.
Murray International Trust is trading on a 3.8 per cent discount, is 14 per cent geared and yields 5.3 per cent. It has an ongoing charge of 0.73 per cent.
