Martin Currie Global Portfolio Trust — Co-manager appointed as part of succession plan

Exhibit 2 (LHS) shows the performance of global and UK equities, in sterling terms, over the last five years. Returns for investors in overseas assets have meaningfully exceeded those of UK assets over the period, which has been helped by sterling weakness. Since early 2016, equities have delivered strong returns due to synchronised global economic growth and an upward revaluation in share prices. While both US and world equity valuations are above average (Exhibit 2, RHS), corporate earnings growth remains robust, which is supportive for further – albeit likely more modest – equity gains. With ongoing macroeconomic issues, such as trade tensions between the US and its overseas partners, investors seeking global equity exposure may be interested in a fund comprising high-quality companies generating strong returns on invested capital.

MNP was launched in March 1999, originally investing in UK and global equities, along with an allocation to private equity. In 2007, the maximum permitted overseas equity allocation was increased from 25% to 50%. This limit was removed altogether in June 2011, when the trust adopted a more global focus, changing its name from Martin Currie Portfolio to Martin Currie Global Portfolio. Manager Tom Walker aims to generate long-term capital growth and real dividend growth from a diversified portfolio of 40-50 high-quality, primarily large-cap global equities. MNP is unconstrained in terms of market cap, geography or sector. Gearing of up to 20% of net assets is permitted, but the manager has not employed gearing since 2008. At end-May 2018, the trust had a net cash balance of 1.3%.

The board measures MNP via three key performance indicators: NAV total return performance versus the total return on the FTSE World index (over a rolling three-year period); the performance versus all peers in the AIC Global sector (over a rolling three-year period); and maintaining ongoing charges at less than 0.75%. Data from Martin Currie show that since launch to end-FY18, MNP’s NAV and share price total returns of 367.4% and 271.1% respectively have outpaced the 250.6% total return of the blended benchmark. Walker notes that the trust has lower volatility of returns than the average of the AIC Global sector, which he describes as “our niche in a crowded sector”.

With a view to succession planning, MNP recently announced the appointment of Zehrid Osmani as co-portfolio manager, who will work alongside Walker. Osmani has 21 years’ investment experience, most recently as head of European equities research at BlackRock, where he had a specific focus on unconstrained, high-conviction, long-term portfolios. He joined Martin Currie in May 2018 and is head of its global long-term unconstrained team.

Regarding the current macroeconomic environment, Walker says there has not been much change in recent months. He believes that interest rates will remain low, which is supportive for global equities, but that total returns will be lower than investors have enjoyed in recent years. He notes geopolitical noise – such as the risk to global trade due to US protectionism and the discord at the recent G7 summit – which suggests that the higher levels of stock market volatility experienced in 2018, compared to the benign levels in 2017, may well continue.

Walker says that the key US economy is “trundling along”, noting that economic data are mixed and there are no inflation concerns. As a result, he expects a continuation in the moderate pace of US interest rate increases. Within Europe, the manager notes an economic deceleration, such as in Germany, which is an important driver for growth in the region, as well as the UK, where Brexit negotiations remain an overhang. However, this uncertainty should mean that sterling remains weak, which has positive currency translation effects for investors holding overseas equities. Walker believes that the majority of emerging market economies are “in good shape”. However, in the longer term, he remains concerned about the large build-up of debt, which he says has reached levels in the Western world last seen during the global financial crisis.

At the corporate level, the manager says companies are still generating good earnings growth, which in aggregate has been helped by lower US corporate tax rates, providing further support for equity returns. In Asia, the manager notes that positive earnings revisions continue. He notes the return of the Chinese consumer, in the form of higher demand for luxury goods, as concerns about a crackdown on conspicuous consumption appear to be waning. While global stock markets have taken a pause, the manager can still see mid- to high single-digit total returns on a 12-month view.

Walker aims to generate long-term capital growth from a diversified portfolio of high-quality global equities. He believes that companies with high and sustainable returns on invested capital (ROIC) outperform global indices over the long term. The manager says that focusing only on a company’s earnings does not take into account its returns on capital investment. He believes that high ROIC businesses are: sustainable over the long term; need less capex to sustain their growth; have higher cash available; and warrant higher valuation multiples. In conducting thorough fundamental research, which includes a five-year share price target, the manager is able to draw on the broad resources of Martin Currie’s 54-strong investment team. Team members have an average 14 years’ industry experience, and in aggregate meet with more than 1,100 companies each year. An analysis of a company’s environmental, social and governance (ESG) record is an increasingly important part of the investment process. Martin Currie is a signatory to the UN Principles for Responsible Investment. In 2017, for the first time, the company received an A+ rating in all three components: strategy and governance in the investment process; integration of ESG factors into its analytical work; and active ownership through engagement with investee company managements.

Comparing MNP’s portfolio against the index, it is similarly valued on a variety of metrics, has higher historic and forecast earnings growth, and is higher quality, based on measures such as return on equity, interest cover and balance sheet strength. The portfolio has a high active share of 90% (0% is full index replication and 100% means no commonality with the benchmark). Over time, the number of holdings has been reduced from c 70 to c 40. Portfolio turnover is typically 20-30% pa, but is currently running above 50%, as the manager is finding a number of attractive investment opportunities to replace lower-conviction positions. In terms of geographic exposure, over the last 12 months MNP’s North American exposure has reduced by 7.0pp and the trust is now underweight versus the benchmark. The largest increase over the period is in emerging markets (+5.9pp).

On a sector basis (Exhibit 4), over the last 12 months the largest increase is industrials (+6.0pp), while the largest decrease is consumer services (-4.8pp). The manager notes that MNP has more technology exposure than the data suggest, as FTSE Russell categorises US companies Accenture and Automatic Data Processing as industrials and Visa as a financial, while Walker considers them all to be technology companies. Together, these three positions make up c 10% of the portfolio.

New holdings in recent months include:

Walker has taken significant profits in UK equipment rental company Ashtead. He is concerned that the company’s results will be materially affected if there is a period of lower demand. US insurer AIG was sold, as an anticipated business turnaround has not materialised. The manager has also taken profits in UK mining company, BHP, Chinese energy firm CNOOC, and Italian energy company Eni; all three have seen their share prices rally in response to higher commodity prices.

Over the year to end-May 2018, MNP’s NAV and share price total returns of 7.7% and 7.0% respectively are behind the benchmark’s 8.7% total return. The main positive contributors to performance were Chinese multinational e-commerce company Alibaba (+1.19pp) and US financial services firm Visa (+0.76pp). The largest detractors were UK consumer goods manufacturer Reckitt Benckiser (-0.74pp) and US apparel retailer L Brands (-0.67pp).

While MNP has lagged the FTSE World in most of the periods shown in Exhibit 6, it has meaningfully outperformed the FTSE All-Share index over three, five and 10 years, illustrating the potential benefits of investing in overseas rather than solely in UK equities.

MNP has a zero discount policy, which was adopted in July 2013, ensuring that its shares trade at, or around NAV, in normal market conditions. So far in FY19, 3.2m shares (3.4% of the share count at end-FY18) have been repurchased at a cost of £7.5m. The current 2.2% share price discount to cum-income NAV compares with the range over the last 12 months of a 1.2% premium to a 3.8% discount. It compares with the average discounts of 0.8%, 0.6% and 0.6% over the last one, three and five years respectively.

MNP is a conventional investment trust with one class of share. There are currently 89.2m ordinary shares in issue. 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. Gearing has not been employed since 2008, although up to 20% of net assets is permitted. At end-May 2018, MNP had a net cash position of 1.3%.

On 5 April 2018, the board announced a new fee structure. Effective from 1 February 2018, the annual management fee will be reduced from 0.5% to 0.4% of NAV. Historically, a performance fee was payable if the increase in NAV per share exceeded the capital return of the benchmark FTSE World Index by more than one percentage point over the period since a performance fee was last earned. If the NAV had risen over the period, the performance fee was 15% of the outperformance, or 7.5% if the NAV had fallen, and was capped at 1% of net assets. No performance fee has been paid since FY12.

A new performance fee is effective from 1 February 2018. If MNP’s cumulative NAV outperformance versus the capital return of the FTSE World Index over the period to 31 January 2020 is greater than 1%, a performance fee is payable, which is 12.5% of the cumulative outperformance during the period. The percentage is not reduced if MNP’s NAV has fallen over that period. The performance fee remains capped at 1% of net assets. For subsequent periods, the performance period runs from 1 February following the last financial year end when a performance fee was paid to the end of the current financial year.

In FY18, MNP’s ongoing charges were 0.68%, which was 6bp lower than 0.74% in FY17, and well below the board’s 0.75% target.

Since FY14, dividends are paid quarterly in July, October, January and April. The board has a progressive dividend policy; total annual distributions have been increased or maintained every year since the trust was launched in March 1999. Since launch, annual distributions have compounded at an annual rate of 6.4%. The total FY18 dividend of 4.2p was in line with FY17 and was 0.9x covered by income. At end-FY18, MNP had revenue reserves (before the final dividend payment) equivalent to c 1.4x the last annual dividend. MNP’s current dividend yield is 1.7%, which compares favourably to its peers in the AIC Global sector (Exhibit 9).

In Exhibit 9 we show the nine members of the AIC Global sector with more than 30% North American and less than 30% UK exposure. While MNP’s NAV total returns are below the averages over the periods shown, the manager notes that these have been achieved with lower than average volatility of returns. The majority of peers may also have benefited from the use of gearing in a rising stock market. Due to the trust’s zero discount policy, its shares continue to trade close to NAV. MNP’s dividend yield is the third-highest in the selected peer group.

There are five directors on the board of MNP, all of whom are non-executive and independent of the manager. Chairman Neil Gaskell was appointed as a director in November 2011 and assumed his current role in May 2012. The other four board members and their dates of appointment are: Mike Balfour (senior independent director, January 2010), Gillian Watson (April 2013), and Marian Glen and Gary Le Sueur (both December 2016).