Martin Currie Global Portfolio Trust — New manager motoring ahead

Global equities have delivered handsome total returns to investors over the last five years, meaningfully outpacing the performance of the UK market (Exhibit 2, LHS). However, in recent quarters, world markets have become more volatile as investors focus on slowing economic growth (partly due to the ongoing dispute between the US and its trading partners), along with changes in monetary policy. Global markets have reacted positively to the US Federal Reserve’s move towards a more dovish stance; as an example, according to Barron’s, the US S&P 500 bellwether index generated its best first half-year gain since 1997 (H119 total return of 18.5%). However, buoyant stock markets have resulted in less attractive valuation multiples. Looking at Datastream indices, on a forward P/E multiple basis, US and global equities are trading respectively at 17% and 11% premiums to their 10-year averages. In an environment of slowing economic growth and above-average valuations, investors may benefit from a more discerning approach; a fund with a concentrated, high-conviction portfolio, which is enjoying a meaningful improvement in investment performance, may hold appeal.

MNP was launched in March 1999 and is listed on the Main Market of the London Stock Exchange. On 30 June 2018, Zehrid Osmani (ex-senior portfolio manager and head of European equities research at BlackRock) was appointed as the trust’s co-portfolio manager, becoming sole manager on 1 October 2018 following the retirement of Tom Walker. Osmani is head of Martin Currie’s global long-term unconstrained (GLTU) team. MNP holds a diversified portfolio of 25-40 high-quality global equities. There are no limits on portfolio construction, except that there must not be a reliance on a particular macroeconomic factor such as interest rates or oil prices. Gearing of up to 20% of NAV is permitted (not employed since 2008); at end-June 2019, MNP had a net cash position of 2.3%.

Currently, MNP’s objective is to achieve ‘long-term capital growth in excess of the capital return from the FTSE World index’. However, at the June 2019 AGM, a resolution was passed to change the objective to ‘long-term returns in excess of the total return from the MSCI All Country World index’. Benchmarking against a total rather than capital return will improve MNP’s comparability with other trusts, while the MSCI index is deemed to represent the global market more effectively, including emerging market coverage. These changes to MNP’s objective and benchmark will come into effect at the start of FY20 (1 February 2020).

Data from MNP show that from launch to end-January 2019, the trust’s NAV and share price total returns of 277.1% and 366.0% are ahead of the benchmark’s 253.7% total return.

Osmani comments that there are still uncertainties in terms of the macro background; he had hoped that by now there would have been more progress made in the US-China trade dispute, although there were encouraging signs of a step forward at the recent G20 meeting. The manager describes global economic momentum as ‘soggy’, and notes that earnings estimate revisions, on balance, are negative rather than positive. This is not just due to trade tensions; he also notes that Chinese economic weakness is spilling over into Europe, particularly affecting Germany’s export-led economy. Osmani suggests this ‘is not helpful’, and also believes that the lack of a Brexit resolution is negatively affecting growth and sentiment. On the flip side, he says that a positive outcome of weaker economic momentum is more dovish central bank monetary policy. In the US, the Federal Reserve has paused hiking interest rates, and has signalled that they could be lowered if required; while in Europe, the president of the ECB has said there may be further quantitative easing in an attempt to stimulate the economy.

With an uncertain macro backdrop, the manager stresses the importance of focusing on companies that have an element of pricing power and ‘can deliver in all weathers’. In terms of sectors, he notes particular strength at luxury goods firms, mixed outlooks for industrial companies and a very weak environment for operators involved in the auto supply chain. Considering different geographies, Osmani comments that he is finding some good long-term opportunities outside of the US, including in emerging markets.

Osmani heads up Martin Currie’s seven-strong GLTU team, which is part of a wider group of 55 investment professionals. The GLTU team’s philosophy is that companies with a high and sustainable return on invested capital generate above-average total returns over the long term. Environmental, social and governance (ESG) considerations are an important element to the research process, and the investment team has engaged with almost all of MNP’s investee companies during the last financial year, covering a range of issues including supply chains, sustainable packaging and water policies, and senior management remuneration. The focus on ESG also includes detailed analysis of investee companies’ accounts, Osmani suggests that this is one of MNP’s competitive advantages and helps to protect its investors’ assets.

There are three stages to the stock selection process, building conviction at each stage:

In January 2019, the board approved the adoption of a fully unconstrained approach, which allowed the manager to buy what he considers to be ‘some very exciting’ new names. Osmani stresses that MNP is a very concentrated, high-conviction portfolio. He has reduced the number of holdings from the mid-40s to the current level of 32 (while retaining a diversified exposure), and he says that he would be comfortable reducing this number to below 30 if the right opportunities present themselves. The trust’s active share has continued to rise (currently 93.9%); this is a measure of how a fund differs from its benchmark, with 0% representing full index replication, and 100% showing no commonality. Reflecting the growth and high-quality nature of MNP’s investments, compared with the index it has higher forecast earnings and dividend growth, a higher return on equity and, in aggregate, a stronger balance sheet. Due to repositioning the fund, Osmani reports that MNP’s portfolio turnover is running around 35% pa; however, once this is complete, a ‘steady state’ level should be less than 20% pa, implying a holding period of more than five years.

Much of the GLTU team’s research efforts focus on three overarching themes (the future of technology, demographic change and resource scarcity), which the manager believes will remain relevant for multiple decades. They include sub-themes such as cyber threats, robotics, climate change, organic food, growth of the emerging markets middle class and bespoke healthcare. Osmani highlights the electric vehicle market, which he suggests could grow at 30% pa to 2030, explaining that he focuses on researching companies higher up the value chain where there is less competition and risk of disruption, so pricing power is higher. The manager believes that the ‘mega-theme’ research approach is a very sensible framework and can highlight which areas require more focus. He says it captures a high level of intellectual capital and is an imaginative way to highlight an important element of the research process.

At end-June 2019, MNP’s top 10 holdings made up 38.1% of the portfolio. This was a modest increase in concentration versus 35.2% a year earlier; four positions were common to both periods. There have been meaningful changes in the trust’s geographic exposure over this period (Exhibit 3), most notably a higher European weighting (+17.0pp, and now more than double the index level) and a lower weighting in North America (-13.1p). There are no longer any Japan-listed companies in the portfolio (-3.8pp). However, Osmani and his team are less focused on where companies are listed, and also analyse the portfolio based on where investee companies generate their revenue. On this basis, the fund has an overweight versus the MSCI AC World index to developed markets (including an above-index exposure to the US economy) and is underweight in emerging markets.

Changes in MNP’s sector exposure are more modest (Exhibit 4), led by healthcare (+8.2pp), consumer goods (+5.6pp) and industrials (+4.1pp), with notable reductions in telecoms (-5.2pp), and consumer services (-3.4pp). It is interesting to note that MNP now has zero exposure to the oil & gas, telecoms and utilities sectors, which together make up c 12% of the benchmark.

Osmani highlights a few of MNP’s recent new holdings:

Recent complete disposals include: 3M (limited upside to target price – since the sale, the stock has underperformed following a profits warning); Airbus (the stock had performed well and the risk/reward profile looked less compelling); Aptiv (lower-conviction position); Cognizant (a poorly performing holding that has subsequently continued to underperform due to lowering its earnings guidance); Compass (lower-conviction holding, sold to fund the Beazley position); Croda (lower-conviction position); CVS Health (potential merger and regulation risks); Inditex (growth outlook is challenged); Lockheed Martin (lower-conviction position); Richemont (stronger demand outlook for soft rather than hard luxury goods, so sold to fund the Kering position); and The Cooper Companies (regulation risks).

During FY19 (to 31 January), MNP produced NAV and share price total returns of +1.6% and -0.3% respectively, compared with the benchmark’s +0.9% total return. Positive contributors included ADP (human resources software), AIA (life insurance), CSL (blood fractionation), Shire (taken over by Takeda Pharmaceutical), Visa (electronic payments), and Waters (analytical laboratory instruments and software). Positions detracting from performance included British American Tobacco (increased regulatory threat) and Facebook (higher scrutiny surrounding data protection).

Exhibits 7 and 8 highlight the significant improvement in MNP’s relative performance. Osmani suggests this is evidence that the research process and high-conviction approach is working well. Over the last six months, positive contributors include new holdings in Ferrari, Kering and Moncler, while the manager notes some of the names that have exited the portfolio have subsequently underperformed, including 3M, Cognizant and ProSiebenSat.1 Media.

Due to the recent improvement in performance, MNP has now outperformed its benchmark in both NAV and share price terms over almost all periods shown. The potential benefits of global investment are also highlighted by the trust’s meaningful outperformance of the FTSE All-Share index over all periods shown.

The board has employed a zero discount policy since July 2013, aiming to ensure that, in normal market conditions, MNP’s shares trade close to NAV. Renewed annually, the trust has authority to repurchase up to 14.99% of its shares and allot up to 10% of its issued share capital in order to manage a discount or premium. During FY19, the board repurchased c 8.6m shares (9.3% of the end-FY18 share base) at a cost of c £21.2m. In recent months, the discount has narrowed and for the first time since FY16, in response to increased shareholder demand, MNP has been issuing shares at a premium (see Exhibit 1), which is arguably due to the trust’s improved investment performance.

The trust is currently trading at a 1.3% share price premium to cum-income NAV (versus a range of a 3.1% premium to a 5.7% discount over the last 12 months). MNP’s discount control policy has proved to be effective, as over the last one, three and five years its discount has averaged 0.6%.

MNP is a conventional investment trust with one class of share. There are currently 83.6m ordinary shares in issue. Gearing has not been employed since 2008, although this stance is under constant review (gearing of up to 20% of NAV is permitted). At end-June 2019, MNP had a net cash position of 2.3%.

In FY19, ongoing charges of 0.63% were 5bp lower year-on-year and well below the board’s target maximum of 0.75% (primarily due to the reduction in the management fee from 0.5% pa to 0.4% pa, with effect from 1 February 2018). A performance fee is payable for outperformance versus the benchmark, capped at 1% of net assets and paid in 12 months’ arrears; as at 31 January 2019, a performance fee of £406k had accrued.

MNP pays four dividends a year in July, October, January and April. Total annual distributions have been increased or maintained every year since the trust was launched in March 1999, compounding at an annual rate of 5.6%.

In FY19, the total dividend paid was 4.2p per share, which was in line with the prior two financial years, and was 0.9x covered by income. Income per share in FY19 was 3.47p, 5.4% lower year-on-year, largely due to a stronger pound versus the US dollar over the period. At end-FY19, MNP had revenue reserves (before the final interim payment) of £4.6m, which is c 1.3x the last annual dividend. Based on its current share price, MNP offers a 1.4% dividend yield.

MNP is a member of the AIC Global sector, which comprises 16 funds with a variety of investment mandates. There has been a significant improvement in the trust’s performance in recent months (achieved without any gearing), which is reflected in its improved standing. MNP now ranks second over one year (10.5pp above the mean), and is now also modestly above average over three and five years. There are two funds (Lindsell Train and Scottish Mortgage) with outsized returns over the medium and long term; if these are excluded, the averages over three, five and 10 years fall to 48.6%, 84.1% and 226.0% respectively. The trust is one of five funds that are currently trading at a premium to NAV. Its ongoing charge is below average, although it is one of three trusts eligible for a performance fee. Befitting its focus on capital growth, MNP has a below-average dividend yield.

Following the retirement of Mike Balfour at the June 2019 AGM, there are now four directors on MNP’s board, all of whom are non-executive and independent. Chairman Neil Gaskell joined the board on 24 November 2011 and assumed his current role on 22 May 2012. The other three directors and their dates of appointment are Gillian Watson (1 April 2013, senior independent since 11 June 2019), Marian Glen and Gary Le Sueur (both 1 December 2016).

On 21 June 2019, the board announced the appointment of Christopher Metcalfe as MNP’s fifth non-executive, independent director (effective 19 September 2019). His background is in equity fund management and investment trusts, having held senior positions at Newton Investment Management, Schroder Investment Management and Henderson Global Investors. Metcalfe is a non-executive director of JPMorgan US Smaller Companies Investment Trust.