The outlook for the UK equity market is fraught with risk, according to star manager Bruce Stout, who will be maintaining his Murray International trust’s lowest allocation to the domestic market in decades due to various economic concerns. 
The shock Brexit result during last month’s EU referendum has divided opinion towards the UK equity market, as despite all the doom and gloom associated with the Leave victory, the FTSE has rallied significantly.
According to FE Analytics, the FTSE 100 has returned some 6 per cent since the vote.
Paradoxically, however, Stout – who has managed the popular £1.4bn Murray International trust since June 2004 – says having his lowest ever weighting to UK assets has been the major driver of returns.
This is because of his exposure to emerging markets and other international equities, as sterling’s hefty decline since the EU referendum has bolstered his trust’s relative returns.
Relative performance of sterling in 2016
Source: FE Analytics
“Having its lowest exposure to UK equities in decades proved positive for the trust’s overall portfolio over the month,” Stout (pictured) said.
“Whilst global equity markets, and indeed UK financial markets themselves, held up reasonably well to the ‘unexpected shock’, the same could not be said of sterling. Extreme weakness against most major trading currencies was testimony to how International capital markets viewed the changing circumstances of the UK’s European status.”
Following a number of poor years for the trust, Murray International has had a barnstorming 2016 so far.
According to FE data, the closed-ended fund has returned a hefty 35.8 per cent year-to-date compared to gains of 15.49 per cent and 13.15 per cent, respectively, from its composite benchmark and the IT Global Equity Income sector average.
Though the trust’s discount has narrowed slightly of late to 1.7 per cent, it has been strong underlying NAV returns of 30 per cent which has been the major driver of shareholders’ total returns.
Performance of trust versus sector and benchmark in 2016
Source: FE Analytics
Currently, Stout holds 11 per cent in UK equities – though that allocation is limited to mega-cap international stocks that derive a large proportion of their earnings in foreign currencies. His largest FTSE-listed holdings include British American Tobacco and Royal Dutch Shell, for example.
While Stout has clearly benefitted from sterling weakness, some suggest the pound’s plunge has opened up a buying opportunity in UK (specifically domestic-facing) stocks.
“We want to buy UK equities because not only has sterling gone down a lot, but the prices of the underlying assets have gone down a lot as well,” Hawksmoor’s Ben Conway said after the referendum result.
“In particular, we are focusing on UK-listed stocks below the FTSE 100 has they are the ones which have been hit the hardest and are therefore clearly more attractive to overseas investors than before.”
Conway’s thoughts were echoed by FE Alpha Manager David Coombs, who has been buying various mid-cap trusts, in an article last week.
“UK mid-caps look really cheap to many investors. I think you can afford to invest today,” Coombs said.
“Of course when markets are down shares will drop, but does that mean the company is just going to disappear in a month’s time? Absolutely not. You have to just put a bit in and if you lose 10 per cent, you lose 10 per cent. Don’t worry.”
However, with so much uncertainty surrounding Brexit, Stout sees no reason to invest due to a big move in the currency.
“The result of the UK’s European referendum dominated economic news flow over [the last month] as global opinion considered the consequences of exit on British politics and the British economy. Whilst premature to accurately quantify economic impacts, it’s reasonable to assume the Brexit bonfire of uncertainty will continue to burn for some considerable time.”
There is clearly a sense of uncertainty surrounding the Brexit procedure and future policies from the Bank of England, but Stout’s underweight position in the UK wasn’t initiated due to concerns about the EU referendum.
Indeed, he has long been concerned about the outlook for the UK economy.
As such, despite the fact the FTSE 250 (which is domestically orientated) has significantly outperformed the FTSE 100 (which is more internationally facing) over recent years, the manager doesn’t believe that more UK-centric companies will continue to perform well.
Performance of indices over 5yrs
Source: FE Analytics
“Plagued by punitively high public and private sector debt, hostage to foreign financing of unsustainable current account and budget deficits, overly dependent on consumption for growth and lacking meaningful economic diversification due to under investment and globally uncompetitive exports, with or without Brexit the UK economy has been in structural decline for years,” Stout said.
“More attractive investment opportunities continue to be found overseas where greater transparency exists for future corporate earnings and dividends.”
Today, though, figures suggest that UK GDP strengthened of late – though these were calculated before the Brexit vote – and FE Trustnet will round-up the opinion of leading industry commentators regarding the news in an article later today.
Outside of the UK, Stout holds 40.7 per cent of his portfolio in global emerging market equities (as well as 15 per cent in emerging market debt). This structural positioning, as well as Stout’s focus on capital preservation, has meant Murray International has been a strong long-term performer.
Indeed, FE data shows it has been the best performing portfolio in the IT Global Equity Income sector since he has been at the helm with gains of 373.82 per cent, beating its benchmark by some 210 percentage points in the process.
Performance of trust versus sector and index under Stout
Source: FE Analytics
Murray International has gearing of 12 per cent, yields 4.3 per cent and ongoing charges of 0.75 per cent.