A buying opportunity is opening up in bombed-out mining and energy companies, according to Aberdeen’s Bruce Stout, who has taken profits from some of the defensive stocks in his highly-popular Murray International trust and rotated into cyclicals such as Total. 
Stout has been known, certainly over recent years, for his very bearish view on the market, warning on a number of occasions about the huge distorting effects the likes of ultra-low interest rates and quantitative easing have had on risk assets.
This cautious view has meant his Murray International Investment Trust, which has historically traded on a wide premium to NAV, has lagged in NAV terms over recent years as his defensive positioning hasn’t been conducive to an environment which has been largely ‘risk on’.
However, the manager’s views on the market seemed to be coming to fruition over recent months as indices around the world sold-off aggressively in August due to fears of hard landing in the Chinese economy and uncertainty surrounding the future of US interest rates.
Performance of indices since April 2015
Source: FE Analytics
Markets have bounced back to a degree over the last few weeks with many indices posting strong gains, but Stout expects further pain for large parts of the equity market given the high valuations still on offer.
However, the experienced global manager says investors can afford to be positive on certain areas.
“The largest quarterly decline in global equity markets for over four years in the quarter just ended has left many investors somewhat shocked and stunned at the ferocity of stock movements,” Stout (pictured) said.
“They shouldn’t be. Precarious fundamentals have prevailed for some considerable time now and investor complacency has undoubtedly escalated in line with asset prices.”
“Whilst numerous equity markets arguably remain very stretched relative to historic valuations, some sectors such as energy and commodities are becoming increasingly attractive as widespread revulsion towards them intensifies.”
He added: “Selective opportunities will continue to be exploited from a long-term perspective.”
Energy stocks have certainly borne the brunt of the recent volatility in markets.
The oil price, for example, has more than halved since January 2014 and currently stands at $47 a barrel. While it rallied strongly from its lows in the first part of 2015, China’s slowing growth and the agreement with Iran has seen it fall 30 per cent since May.
This has severely hindered the shares of energy companies as investors have begun to question their future profitability if the oil price were to stay below the $70 a barrel level for an extended period of time.
According to FE Analytics, for example, the FTSE All Share Oil & Gas Producers index is down 7.18 per cent year to date compared to a 2.88 per cent gain from the wider UK equity market.
Performance of indices in 2015
Source: FE Analytics
Of course, those falls haven’t been limited to UK oil companies and therefore Stout started upping his exposure to the sector in late September – over which time energy stocks have rallied back strongly.
“Further cash was raised from the large position in ASUR, with the proceeds reinvested in Total, the French integrated energy supplier,” Stout said in his latest note to investors.
Stout’s largest equity weightings are still to classic defensive companies such as British American Tobacco, Unilever Indonesia, Taiwan Mobile and Roche. However, he now holds 4.1 per cent across Total and Royal Dutch Shell.
Stout has managed his closed-ended fund since June 2004, over which time it has been the best performing IT Global Equity Income trust with returns of 277.56 per cent. Its composite benchmark – FTSE World ex UK and FTSE World UK 60/40 split – has made 146.72 per cent over the period.
Performance of trust versus sector and index under Stout
Source: FE Analytics
While it is still considerably outperforming on a 10-year view, the trust is down against its benchmark and sitting in the bottom quartile over one, three and five years.
There have been a number of reasons for this. Not only has the manager been defensively positioned, he has maintained a high weighting to both emerging market debt and equity which has severely hindered returns.
That poor NAV performance has led to a widening discount as investors have sold their shares and looked for other options. All told the trust (which had traded on a 9 per cent premium) is now on a 2.6 per cent premium – though it had been far worse earlier last month when the shares went out to a 5 per cent discount to NAV.
Murray International’s discount/premium over 5yrs
Source: FE Analytics
This widening discount and falling NAV has led to the trust’s current 5.4 per cent yield. In a recent FE Trustnet, Stifel analysts Iain Scouller, Maarten Freeriks and Anthony Stern said it was sustainable and therefore added that now is a buying opportunity.
“Murray International has had a tough year, with the NAV total down 7 per cent and an 18 per cent fall in the share price (capital only) compared with a 7 per cent fall in the sector average over the same period. However, this decline has resulted in an increase in the dividend yield to an attractive 5.4 per cent.”
The team at Numis also recommended the trust last week and the premium has already started to widen.
“We believe the best time to buy a manager with a strong long-term track record is often after a period of underperformance.”
“At times the fund has traded on premiums in excess of 10 per cent, meaning that we have been wary of recommending the fund, but it is currently trading on a 1.4 per cent discount and we believe it is attractive for income investors.”
Murray International has gearing of 16 per cent and ongoing charges of 0.73 per cent.
