Investors need to look beyond developed markets that have been distorted by a decade of central banks’ “monetary experiments” for the best income prospects, according to Bruce Stout, manager of the Murray International Trust.
The veteran investor has eschewed lower yielding markets like the US, where cashflows have been used for share repurchases, and Japan where a dividend culture is less ingrained. In addition, he remains concerned about the sustainability of yields on offer in Europe and the UK, which could be challenged by a shift in monetary policy.
As such, the global equity income manager’s search for attractively valued, income-paying stocks has taken him beyond the developed economies where central banks have distorted the market and into areas where he believes investors can find more normal conditions.
Investors in the trust have twin objectives of diversified global exposure and above average income, which can be found in the often overlooked emerging markets, he said.
Stocks in developed markets have climbed ever higher on the back of loose monetary policy as emerging markets have lagged behind, as the below chart shows. However, the distorting effect of such loosening makes it difficult to forecast the future path of markets, said Stout.
Performance of indices over 10yrs
Source: FE Analytics
“What happens in the developed world is such a difficult thing to try and forecast now because there are very few parallels within economic history given the number of distorted relationships that exist today,” he said.
“It’s quite futile to try to work out what the end game is for them. We find it more productive to focus on companies and where they do the vast majority of their business.”
Stout said he pays little attention to the domicile of a company and closer attention to the characteristics of its businesses.
“You can buy a great retail operation in the US or whatever, but if the retail business is then destroyed by whatever disrupting trend even the best management is not going to make that business successful.”
“Of course, one of the problems and attractive things about emerging markets is the local landscape or local political climate,” Stout added. “It acts as deterrent to foreign companies because they don’t understand or its too much bother and therefore the domestic operator that has a massive competitive advantage.”
The Murray International manager aims to pick 50 stocks from a universe of 70,000, with companies judged on ‘quality’ and ‘price’.
Quality may relate to the management, business focus, balance sheet and corporate governance record, whereas the price component considers a number of key financial ratios, the market peer group and business prospects.
“Ideally, we want 50 companies from 50 different countries, 50 different currencies and 50 different industries because, theoretically, you won’t have any correlation,” he said. “But you always have correlation in financial markets whether currency or index or ‘perception’ correlation.
“The perception that developed markets are brilliant and the rest of the world is awful or that emerging markets are brilliant and the rest of world is awful.”
While the income manager keeps one eye on the yield, it does not exclude companies with a lower yield but the ability to grow over time.
“Murray International never wants to get in the situation where every single holding has a certain yield, but we have quite a few holdings that have below 2 per cent yield but the balance sheets are strong and grow strongly over the next year or two,” he said.
As such, the manager owns several technology stocks among its top holdings such as Taiwan Semiconductor, Samsung and Intel.
“Technology stocks generally don’t have good payouts. they’ve got more to invest because the tech product lifecycle is so short they’re just continually investing,” he said.
However, the stocks do have strong balance sheets and the flexibility to increase dividends at some point in their life cycle.
The main thing for the trust is to identify the companies that are able to pay and grow dividends over the long term, particularly at a point in the market where margins have come under increasing pressure.
Performance of VIX 2017-2018
Source: FE Analytics
On a market level, Stout said he had been left unsurprised by increased volatility last year having predicted its return after a relatively benign 2017.
“We had the lowest equity market volatility that we’ve ever seen [in 2017] it was lower than the bond market,” he said. “So, you didn’t have to be Einstein to say last year that ‘I think volatility will be higher’. That was an easy one, it was never likely to be lower.”
The catalyst, said the Murray International manager, was hidden in plain sight: trade wars and protectionism.
“It escalated and escalated until the penny drops that ‘who benefits from this?’ Everybody is worse-off and, if it gets really nasty, you’ll get lower growth and higher inflation.”
He said that had been the catalyst for the sell-off in the second half of the year, which saw the momentum trade reverse and technology stocks tumble.
In such an environment of higher volatility investors must stay focused, said the manager, as relative performance is likely going to be “all over the place”.
“You’ve got to ignore the noise and don’t get emotional about it,” he explained. “Stay focused on what outcome you’re trying to deliver and that’s trying not lose any money. When it’s getting really bad like that it’s very difficult to find places to hide.
“We try not to get too focused on the relative performance because it’s hard enough trying to work out absolute performance. Don’t ask me to work out relative performance, it’s about a benchmark of stock you don’t own and might not be appropriate to the fund.”
While risk assets have become more expensive following a decade of quantitative easing and low rates, there are still pockets of value to be found, according to Stout.
“Over the long term you would seek to grow assets and grow dividends but that doesn’t happen every year,” he explained.
“Markets can’t go up all the time, but they have done since 2009. Apart from a pause in 2011 they’ve gone up in a straight line and during that time markets have become more and more expensive based on this abusive monetary experiment that has now got out of control.
“We have to be conscious of that, but it doesn’t mean to say that you can’t find deep value,”
Stout said for dedicated investors there will always be companies that are underowned or undercovered or those that people are prejudiced about because of their domicile.
He concluded: “That’s what we’re looking to capitalise on, but we acknowledge we can’t do it every single day.”
Since Stout took over in June 2004, the five FE Crown-rated Murray International trust has made a total return of 461.73 per cent against a 283.45 per cent gain for the average IT Global Equity Income peer.
Performance of trust vs sector & benchmark under Stout
Source: FE Analytics
The trust is 11 per cent geared, is currently trading at a premium of 4.6 per cent to net asset value (NAV) and has a 4.3 per cent yield. It has ongoing charges of 0.64 per cent, according to data from the Association of Investment Companies (AIC).