Martin Currie Global Portfolio Trust — High-quality equity offering in an uncertain world

MNP appears well positioned in the current environment of economic uncertainty. Osmani seeks high-quality companies with resilient earnings, pricing power, high returns (above their cost of capital), strong balance sheets and structural growth opportunities.

The manager says that in 2023 the consensus was too pessimistic but he believes that in 2024 investors are too optimistic. He considers that there is a higher risk of a US recession and now places a 40% probability on this outcome. Investors appear to have been too bullish about the prospects of interest cuts, meaning central bankers are having to rein in expectations, while inflation data in the US and the UK released early in 2024 were higher than anticipated. Osmani’s estimates for 2024 earnings growth are considerably lower than the consensus numbers in all regions; in aggregate he forecasts global earnings growth of +4%, whereas the consensus is +11%. The manager notes that when speaking to companies, the consistent message is that the operating environment is uncertain, with higher interest rates negatively affecting economic activity and funding costs, although access to credit is improving. Osmani believes that forward guidance given during the Q423 results season will be cautious.

Artificial intelligence – Osmani believes this is a very important long-term growth theme given the benefits from increasing productivity and creativity. The manager expects AI to generate seismic shifts at economic, government, corporate and household levels, suggesting that 2023 developments were ‘just the tip of the iceberg’. Companies are currently the main adopters of AI, which is necessary to maintain/increase their competitiveness. MNP has sizeable AI exposure (around 23% of the fund); primary beneficiaries are NVIDIA, ASML Holding, Microsoft and Adobe, while Atlas Copco is a secondary beneficiary. Although there may be a risk of froth in the share prices of some AI-related names, the manager says that MNP’s AI-related investments are in companies that have shown they can, or will be able to, monetise their AI potential. He suggests that given the strength in corporate AI spend, Microsoft is in a position of privilege.

Energy transition – this includes green and alternative energy, energy efficient infrastructure (more than 20% of carbon emissions come from buildings) and electric transportation (electric vehicles and railways). Exposure to energy transition makes up around 13% of the fund via Kingspan Group (insulation), Hexagon (automation) and ASML Holding (source of required technology).

Ageing population – around 12% of the portfolio is medtech companies that are capitalising on growth areas including genomics and customised healthcare. MNP has holdings in Illumina, ResMed, Mettler-Toledo International and Coloplast.

The trust’s sector and geographic weightings are a result of bottom-up stock selection. Disclosure of MNP’s geographic weightings is now by country rather than by region. Over the six months to the end of December 2023, the trust’s US exposure increased by 1.4pp, but remains the largest single country active weight (-10.4pp). Other notable variances versus the benchmark weightings include Sweden (+9.5pp) and Italy (+7.9pp).

Over the six months to the end of December 2023, the largest sector changes were higher weightings in healthcare (+2.3pp) and industrials (+1.7pp) and a lower allocation to technology stocks (-1.6pp). Notable differences versus the benchmark were above-index positions in healthcare (+12.1p) and technology (+6.7pp), with underweight exposures to financials (-8.6pp) and communication services (-7.3pp), which is the largest of four sectors where MNP has a zero weighting; together they make up 16.8% of the index.

At the end of December 2023, MNP’s top 10 holdings made up 51.7% of the fund, which was a decrease in concentration compared with 55.2% six months earlier; nine positions were common to both periods.

The manager highlights recent portfolio activity, which has been relatively heavy since we last published a MNP review in July 2023. There is a new holding in Cadence Design Systems, which is a US company providing software, hardware, services and reusable integrated circuit design blocks. It has structural growth opportunities and is an AI beneficiary. Osmani forecasts sales growth of 15% per year over the next five years, earnings growth of 18% per year and return on invested capital (ROIC) increasing from 30% in 2023 to 43% in 2028. The Cadence position was funded by the sale of Ansys as the manager saw downside risk in this company.

Within the drug development and outsourcing industry, Osmani switched MNP’s holding in WuXi Biologics into a new position in Sartorius Stedim Biotech, which is benefiting from increased drug complexity, innovation and trends towards outsourcing and single usage. The manager envisages a clear growth pathway for this company, which is recovering well from post-COVID business normalisation and Chinese economic headwinds. Osmani forecasts sales growth of 14% per year over the next five years, earnings growth of 18% per year and ROIC increasing from 9% in 2024 to 12% in year four. WuXi was the trust’s last Chinese holding as in recent years the holdings in Alibaba, Tencent and AIA were sold.

Adyen, which joined MNP’s portfolio earlier in 2023, had issued a profit warning because of the competitive US landscape. The company took shareholder concerns on board, moved from a six-month to a quarterly reporting period, and last November hosted a capital markets day. Adyen highlighted why it considered its payment platform superior to those of competitors, which provided Osmani with the conviction to increase MNP’s holding in the company. This has proved to be the correct decision as Adyen’s share price has since rallied significantly. The company has issued mid-term targets, and has a greater focus on increasing profitability rather than just driving the top line by hiring more salespeople, while its US business seems to have stabilised.

Having initiated a position in veterinary medicine company Zoetis in 2022, the manager added IDEXX Laboratories to MNP’s portfolio. These two companies are similar, but IDEXX has a focus on pets rather than livestock. It is the market leader in an attractive structural growth market that has high barriers to entry; IDEXX has 90% recurring revenues. This stock had been on Osmani’s radar screen and share price weakness provided a buying opportunity. He forecasts sales growth of 10% per year over the next five years, earnings growth of 17% per year and ROIC increasing from 46% in 2023 to 67% in 2028.

The manager funded an additional investment in Illumina by selling the holding in Masimo; both were smaller positions. Masimo was a lower conviction holding with a risk of its business being negatively affected by weaker consumer momentum. The company had previously made a non-core acquisition and posted a profit warning. Illumina is a market leader in gene sequencing and has new product launches planned in the next couple of years. However, this company has also had issues. Illumina acquired its former-owned cancer detection diagnostic company Grail before the deal had received EU regulatory approval. There was also a proxy battle with activist investor Carl Icahn, which resulted in the departure of Illumina’s CEO. The company has a new CEO and investors are awaiting his plans; a forced sale of Grail is likely.

Osmani re-initiated a holding in Mettler-Toledo International, which provides precision instruments and services; share price weakness provided a buying opportunity. Its industrial business has been hurt by economic weakness in China, while its healthcare operations have been negatively affected by post-COVID business normalisation and China weakness, as a clampdown on corruption halted some healthcare spending. The manager forecasts sales growth of 5% per year over the next five years, earnings growth of 9% per year and ROIC increasing from 38% in 2023 to 49% in 2028.

MNP’s Croda International position was increased, funded by the sale of Kerry Group, as Osmani looked to consolidate the number of the trust’s portfolio holdings (currently 30).

There are 13 funds in the AIC Global sector, of which MNP is one of the smallest. Despite market headwinds as investors remain focused on macroeconomic developments rather than company fundamentals, Osmani is continuing to adhere to his philosophy of seeking high-quality companies that can be held for the long term. The portfolio is straightforward, containing only profitable listed and no private companies. Martin Currie was one of the first investment managers to recognise the benefits of taking ESG considerations into account in the stock selection process, and a zero-discount policy has been in place for more than a decade.

Despite the difficult investment backdrop for Osmani’s quality growth approach, MNP’s NAV total return is marginally above the peer group average over the last five years, ranking eighth. As a reminder, the trust only restarted using gearing in November 2020, which is likely to have negatively affected its returns over the last five and 10 years.

On 29 January 2024, MNP had the highest valuation in the sector, where no fund was trading at a premium. Its ongoing charges are in line with the mean, and no performance fee is payable. The trust’s net gearing is below average and, unsurprisingly given its focus on capital growth rather than income, MNP has a below-average dividend yield.

Osmani explains that the market environment in H223 had two distinct periods. At the end of June and the end of December 2023, US 10-year government bond yields were around 3.8% but spiked to 5.0% in the middle of October. The period of rapidly rising interest rates proved very challenging for MNP’s growth-focused portfolio, although there was a considerable improvement in the trust’s performance as interest rates came down towards the end of 2023.

During H223, the largest positive contributors to MNP’s absolute performance were NVIDIA by a wide margin, due to being an AI beneficiary and continuing to deliver results above consensus expectations, Kingspan, Atlas Copco and Adobe. On the other side of the ledger, the largest performance detractors were Masimo (now sold), ResMed, Estée Lauder and Moncler.

Exhibit 10 shows MNP’s cumulative upside/downside capture analysis over the last decade. Its upside is 102%, suggesting that the fund is likely to modestly outperform the global equity market when share prices are rising. MNP’s downside capture is much larger at 120%, implying that the fund is likely to underperform during periods of market weakness.

It is interesting to note that while the upside capture has hovered around 100% over the last decade, the downside capture increased significantly during 2022, a period when growth stocks were out of favour in an environment of rising interest rates. In the prior couple of years, MNP’s downside capture was below 100% and its upside capture was modestly above 100%, suggesting that during this period the trust had the potential to outperform its benchmark in both a rising and a falling global market.

MNP makes quarterly distributions in July, October, January and April. The annual dividend has been maintained at 4.20p per share for the last seven financial years; in FY23, it was c 0.5x covered compared with c 0.3x in FY22.

In June 2022, MNP’s shareholders approved the payment of dividends from realised capital gains. The board believes this allows more flexibility, facilitating the payment of an appropriate dividend, without constraining the manager with an income target.

At the end of FY23, MNP had 202.60p per share in realised capital gains and 1.14p per share in revenue reserves. Combined, these distributable reserves equate to c 49x the last annual dividend payment. So far in FY24, three interim dividends of 0.90p per share have been declared, which are in line year-on-year.

MNP’s board has employed a zero-discount policy since 2013, aiming to ensure that, in normal market conditions, the trust’s shares trade close to NAV. Renewed annually, the board has authority to repurchase up to 14.99% of MNP’s shares and allot up to 10% of its issued share capital to manage a discount or premium. The trust’s shares are trading at a 2.3% discount to cum-income NAV, which compares with a range of a 2.2% premium to a 3.4% discount over the last 12 months. Over the last one, three, five and 10 years, the trust traded in a 0.5% to 1.3% range of average discounts.

So far in FY24, c 5.4m shares (c 7.1% of the YE23 share base) were repurchased and held in treasury, at a cost of c £17.6m, while c 0.7m shares (c 0.9%) were reissued from treasury.

Launched in March 1999, MNP is listed on the Main Market of the London Stock Exchange. Zehrid Osmani, who has 25+ years of investment experience, became lead manager on 1 July 2018, alongside Tom Walker as co-manager; Osmani became sole manager on 1 October 2018. He was formerly a senior portfolio manager and head of European equities research at BlackRock, with a proven track record in fundamental research and unconstrained investment. He is head of Martin Currie’s global long-term unconstrained (GLTU) team.

Martin Currie is now a division of Franklin Templeton Investments following the acquisition of its former parent Legg Mason on 31 July 2020. The company maintains its autonomy and its investment philosophy and processes remain unchanged.

Since 1 February 2020, MNP’s objective has been to generate a total return in excess of the total return of the MSCI AC World Index (previously a capital return in excess of a less broad global index). Its investment policy is as follows:

The board monitors MNP’s success via three key performance indicators:

Osmani is head of Martin Currie’s 10-strong GLTU team and is supported by a wider group of more than 30 investment professionals who meet hundreds of companies every year. He aims to generate a total return above that of the MSCI AC World Index by focusing on high-quality, undervalued growth stocks with the potential to outperform consistently. The manager has an unconstrained, high-conviction approach and invests with a long-term, five- to 10-year horizon. At end-December 2023, there were 30 holdings in the portfolio. There is a systematic three-step investment process that builds conviction at each stage:

MNP’s portfolio has a high active share (92.1% at end-December 2023); this is a measure of how a fund differs from its benchmark, with 0% representing full index replication and 100% showing no commonality. Compared with the MSCI AC World Index, in aggregate, the trust’s holdings have higher forecast revenue, earnings, free cash flow and dividend growth, higher valuations in terms of forward P/E and EV/EBITDA multiples, a higher ROIC and less leverage based on net debt/EBITDA. These relative metrics reflect MNP’s biases towards growth and high-quality companies with pricing power. Portfolio turnover is typically up to 20% per year, implying a holding period of around five years.

The manager says that the team’s approach is to keep in constant touch with portfolio companies, along with other relevant contacts, thereby gaining deeper knowledge. He highlights that the group has great access to senior managers despite having a relatively modest amount of assets under management.

Martin Currie believes that good ESG practices are a fundamental component of a high-quality company. The firm has been a signatory to the United Nations Principles for Responsible Investment since July 2009. In September 2022, under the new and revised reporting framework, Martin Currie was awarded the highest possible five stars for investment and stewardship policy and for incorporation, and four stars for voting. MNP was the first fund in the AIC Global sector to be awarded the highest Morningstar Sustainability Rating (five globes), recognising the commitment to mitigate the risks that the trust’s investors face in the ESG space. For more information on MNP’s approach to ESG, please see its website.

Osmani strongly believes that including ESG analysis in investment decisions delivers improved returns for MNP’s shareholders and is integrated throughout MNP’s proprietary investment process. More than 50 underlying criteria are assessed to capture the complexity of ESG risks facing a company’s long-term growth outlook and sustainability. Each risk is rated on a scale of 1 (lowest risk) to 5 (highest risk). There are a further 20 criteria to analyse social exploitation risk.

Factors considered by Osmani and his team typically include shareholder rights, accounting standards, remuneration, board structure, supply chain, data protection, pollution/hazardous waste policies, water usage and climate change policies. Their findings may influence important financial assumptions about a company, such as its cost of capital, revenues or costs, and therefore an estimate of its intrinsic value; a poor ESG track record may indicate wider sustainability issues within a firm.

Having been ungeared between 2008 and 2020, in November 2020 the board announced that it had entered into a £30m three-year unsecured sterling term loan facility with Royal Bank of Scotland International (RBSI). This was fully drawn down the following day at a fixed interest rate of 1.181% per year and equated to c 10% of MNP’s NAV. On 23 November 2023, the £30m loan was repaid in full and a new £10m three-year revolving loan facility was fully drawn down for a minimum six months. It has a variable rate of the sterling overnight index average (SONIA) plus 1.55%. At end-December 2023, MNP’s net gearing was 2.3%.

Since 1 July 2022, MNP’s investment management fee is 0.45% of ex-income NAV per year (previously 0.50% per year up to £300m of ex-income NAV and 0.35% of ex-income NAV thereafter). Also, there is no longer a separate company secretarial fee (£56k + VAT in FY22, and subject to an annual uplift based on the rate of UK inflation). The effects of these changes on a c £250m asset value fund would lead to a c 14% reduction in annual fees and a simpler cost structure. In FY23, MNP’s ongoing charges were 0.61%, versus 0.68% in FY22. There was a modest 2bp creep in H124 to an annualised level of 0.63%.

MNP is a conventional investment trust with one class of share – there are c 71.4m ordinary shares in issue, with a further c 27.3m held in treasury. At end-FY23, the trust’s equity capital was split as follows: 65.8% versus 75.8% (at end-FY22) banks and nominee companies; 10.4% versus 11.2% individuals and trustees; and 23.8% versus 13.0% other holders. Over the last year, MNP’s average daily trading volume was c 75k shares.

At the 1 June 2023 AGM, former chair Gillian Watson stood down after having served for more than 10 years. Mindful of the trust’s size and cost base, the board will continue with four non-executive directors.