The star manager says quality companies have hardly any room for error at current prices, and that higher yielders are too risky for his strategy. As a result, Stout says he is being forced to trade in and out of companies to snap up short-term opportunities.
"Valuations are getting expensive – a lot of things are now pricey," he said.
"The areas perceived to be safe havens have gone higher and higher in value."
"We’re always very cautious of multiple re-valuation of earnings and dividend growth on this scale. There’s this idea that you’ve got to pay up for growth in a low-growth world, but we don’t really buy in to that."
The manager points out that a lot of the stocks that were attractive have seen their yields fall significantly because of strong share-price performance.
"You’ve got to stand back and ask yourself: 'Can I justify paying a high price for muted dividend growth in many cases?' There’s no point – if the odds are stacked against you, you’re going to lose."
"There’s just no room for disappointment in these companies. The worst thing that can happen is that something that is perceived to be defensive then disappoints. In this instance the market can be very brutal."
"Some companies stay on high multiples for many years. Others might be comfortable buying them for this reason, but it’s not really our way."
Stout points to Diageo as a good example of a company that is now inflated in value.
"It’s not something we own," he said. "It’s on 25x earnings and if you look back 12 months ago it was on 15x."
"It’s got a yield of 2.4 per cent, with single-digit dividend growth. This is pure multiple expensive, given that the growth rate is that low. It’s a classic example of a re-rating."
The manager says he is currently targeting quality "laggard" companies that have not yet seen this kind of re-rating.
He points to the mining sector as one of the very few areas that has attractive opportunities at the moment.
"There’s been no visibility in companies like PotashCorp or BHP Billiton, but they now seem to be responding quite well to bad news," he said.
"We’re looking for quality companies for as cheap a price as possible. Vale in Brazil is another example of this – it’s significantly lagged, but has continued to do a good job."
Back in February this year, Stout said that the 2012 to 2013 surge in equities was a 'junk-driven' rally and anticipated a big correction in lower-quality cyclicals as a result.
"I guess it shows what I know," he joked. "Macro predictions aren’t my forte clearly."
"We’re never going to invest in the lower-quality stuff that does best in a rally and so this isn’t exactly our environment."
"We’ll continue to look for quality companies at the best prices and lock in to capital gains."
"However, it’s becoming increasingly difficult to find good quality at a decent price."
Stout’s style has worked well for investors since he took over the Murray International trust back in June 2004.
Our data shows it is the best-performing trust in the entire IT Global Growth & Income sector over the period, with returns of 355.69 per cent.
It has thrashed its composite benchmark, split 60/40 between the FTSE World ex UK and FTSE World UK indices, in the process.
Performance of trust vs sector and benchmark since June 2004
Source: FE Analytics
The Murray International IT is also number-one in its sector over a five-year period and top-five over one and three years.
The trust has been less volatile than its benchmark over all of the periods and has a lower max drawdown over five years – 30.97 per cent compared with 38.97 per cent.
Performance of trust vs sector and index over 10yrs
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| Murray International Trust | 31.3 | 70.66 | 93.41 | 424.49 |
| Benchmark | 24.3 | 39.28 | 36.21 | 145.34 |
| IT Global Growth & Income | 26.42 | 47.96 | 46.59 | 249.34 |
Source: FE Analytics
The strong performance of the trust and stellar reputation of both Aberdeen and Stout have pushed it on to a very hefty premium: 8.3 per cent at the time of writing, according to data from the AIC.
An investment trust expert recently told FE Trustnet that a premium this high is "unsustainable" and has the potential to be a stumbling block for investors looking to get exposure to the manager.
Stout says Aberdeen is doing all it can to get the premium down, through the issuance of new shares.
"We’re certainly trying to keep it down," he said. "We’ve had a tap issuance for the last five years now, and generated £100m worth of new shares."
"It’s all subject to supply and demand in the market place. We’ll continue with our tap issuance, and hopefully that will do the job."
"A lot of trusts like ours are on premiums at the moment," he added.
The Murray International Trust has an ongoing charges figure (OCF) of 0.71 per cent, excluding performance fee. It is 10 per cent geared.