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Bruce Stout: I’ve never had less exposure to the UK nor as much in emerging markets | Trustnet Skip to the content

Bruce Stout: I’ve never had less exposure to the UK nor as much in emerging markets

25 November 2019

Murray International’s Bruce Stout says that a growing dividend culture in emerging markets means that the manager can find high-yielding companies beyond the UK.

By Eve Maddock-Jones,

Reporter, Trustnet

Two decades ago the only place to get reliable growing income was in the UK stock market, according to Murray International’s Bruce Stout, but new options mean that he has taken his exposure to the lowest levels ever.

The manager of the £1.7bn investment trust said markets have shifted in the past few decades, particularly when it comes to finding high yielding opportunities in bonds and equities.

He said: “20 years ago I had 45 per cent in the UK and now it’s 9 per cent, with the overweight bias reversing into emerging markets, which is now over two-thirds [of the portfolio].”

Stout (pictured), who has been manager of the global equity income trust since 2004, said UK exposure was the lowest it had been during his tenure on the trust, including his time as deputy manager.

“20 years ago, if you wanted to run a very diversified global trust and have a 5 per cent dividend yield then you couldn't do that unless you had a disproportionate amount in the UK,” he said.

“[But] in the last 20 years, the areas of the world that have followed economic orthodoxy and looked after balance sheets and looked after shareholders are Asia and emerging markets.”

As such, yields of 4 per cent – around the yield of the FTSE All Share index – are now more common in emerging markets and Stout has begun to allocate there.

Looking at developed markets, Stout highlighted that investors in general still have a false perception of the UK market and developed markets overall.

In conversations with UK investors most told the manager that a ‘normal’ dividend yield is between 4.5-5 per cent.

“Well, the last time I looked a gilt yield was less than one per cent,” said Stout. “So, a dividend yield at 5 per cent and a gilt at 1 per cent is a completely different set of circumstances than it has been historically.

“In this unorthodox world – and by that I mean in the UK, the US, Europe, where every yield curve has been flattened to zero or where some of them are negative – you’re actually paying a company for the privilege of owning a bond. Why would you do that? I can't get my mind around it.

“Why would I pay less than 40 basis points a year to own a 10-year bond? I don't get any income. I don't even get a Kit Kat. So why would I do it?”

According to Stout, the reason investors don’t want to move in on what he describes as a “fantastic opportunity in emerging market debt,” is largely because of historical perceptions of emerging markets.

Looking at Indian banks as an example, Stout said that they are conservatively managed with extremely high capital ratios. Yet. most investors in developed markets see them as a riskier asset than a German or Italian bank, despite the latter’s deep market issues.

“When we look forward from here [at India], we see interest rates much higher than they should be. And they have been there because of protectionism,” he said.

“We see inflation much lower than the target from the central bank and we see interest rates with an enormous flexibility for monetary and fiscal policy: something that the West can’t do.

“And [we see] real income growth and purchasing power parity growth in the next five-to-10 years. Look at the flexibility they've got to grow and compare that to the flexibility we've got to grow in the next five or 10 years.

“So, quite simply from Murray International’s point of view the best 10-20 opportunities and companies today in the world are not in the UK, you can’t find them,” Stout added.

Taking Taiwan Semiconductor Company – the trust’s largest holding at 5.3 per cent and held by the manager for the past 15 years – as another example, Stout noted it’s “double-digit dividend growth” and status as a world-leading stock.

Performance of stock over past 5yrs

 

Source: Google Finance

“But that doesn't mean we like it better or worse than anybody else,” he added. “What it means is we have a high comfort level that, come what may, this thing delivers and delivers and delivers.”

In comparison, UK-listed emerging markets-focused Standard Chartered Bank, represents just over 1 per cent of the portfolio, with Stout noting several challenges faced by the company.

“It's got some very interesting franchises, but it has issues the way lots of companies have issues in its execution,” he explained.

With a buy-and-hold strategy aiming to hang on to holdings for the long term of 10-15 years, Stout is able to ride out periods of inconsistency.

Nevertheless, for UK investors to find these opportunities it will require them to challenge their preconceptions about emerging markets.

“I think the biggest issue, I think, for the for the West or the developed world is that they cannot admit that they're living beyond their means,” Stout said. “We’ve had the longest and weakest business cycles on record in the US,” he said, despite the vast amounts of monetary and fiscal policy pumped into markets by quantitative easing.

“What do you do for your encore? “Nothing. You’ve got no monetary flexibility and no monetary flexibility.”

“Asia and emerging markets will take over the developed world for the first time since 1820,” Stout concluded. “There’s nothing the developed world can do about it because they’ve got no policies left and we have all these expectations in an ageing population that cannot be satisfied.

“But no politician will stand up and say that because you won’t get votes with that. It’s just a fact: developed markets are horrible and the unfunded liability is unbelievable.”

Performance of trust over the past 5yrs

 

Source: FE Analytics

Over the past five years, Murray International has made a total return of 42.36 per cent compared with a 64.94 per cent gain for the average IT Global Equity Income peer.

The trust is currently 13 per cent geared, trading at a 4.2 per cent premium to net asset value (NAV), has a dividend yield of 4.3 per cent and ongoing charges of 0.69 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.