Murray International Trust — Business as usual at Murray International

MYI is differentiated from its peers by its high (c 33%) exposure to emerging markets. This reflects the managers’ views about the higher growth prospects and relatively attractive valuations in these regions compared with those in developed markets.

The trust delivered muted absolute returns in H123 due to headwinds from higher interest rates and a difficult earnings environment. Real dividend growth has been difficult in the last two years because of high inflation. Nevertheless, MYI offers an above-average yield versus its peers and its managers aim for a 4%+ dividend yield and a growing dividend by investing in quality businesses that are generating strong cash flow. As the cost of borrowing has increased significantly, cash flows and dividends from highly levered companies will come under pressure.

Stout articulates the top-down views of the team. From the bottom of the market during the global financial crisis in March 2009 to the end of 2021, in a zero-interest rate policy environment, equities delivered an average 9% annual total return; however, between 1990 and 2021 they delivered a mid-single digit average annual total return. As a return to a zero-interest rate policy looks unlikely, equity returns should be more muted than they have been in recent years.

The managers believe that the world is at a crossroads in terms of a recession in developed markets versus a recovery in emerging markets, which is due to differences in their interest rate cycles. Stout opines that in developed markets thoughts centre around the chance of a recession. A ‘draconian increase in interest rates on the back of a borrowing binge’ means that the cost of debt has tripled and will negatively affect consumption, hence a recession looks likely. The manager questions how this will affect earnings and dividends, and what valuation multiples are appropriate in a world of higher interest rates. Stout suggests that there can be further multiple compression. In terms of asset quality, higher interest rates can lead to a ‘can’t pay won’t pay’ mentality and he believes that labour cost inflation could continue, having been absent for a long time, exacerbated by a low post-COVID employment participation rate.

In contrast, the manager says that the authorities in most emerging market countries saw inflation coming and proactively increased interest rates, and these countries do not have the issue of labour cost inflation. In Brazil, the base interest rate was recently cut by 50bp to 13.25% with inflation around 4%, while in Mexico the base interest rate is 11.25% versus inflation around 5%. Stout anticipates that over the next two to three years there will be significant interest rate reductions in emerging markets, leading to higher consumption and domestic money flowing into equities. While in developed markets, interest rates have not peaked so if interest rates are cut it will be a panic reaction in response to a recession.

In the table in Exhibit 1, which highlights Datastream indices, apart from the UK and Europe, emerging markets are the least expensive region. The Datastream Emerging Markets Index is trading on a 12.7x forward P/E multiple, which is a 3.1% discount to its 13.1x 10-year average. In relative terms, the Datastream Emerging Markets Index is currently at a 17.5% discount to the Datastream World Index, which is wider than the 15.8% average discount over the last decade.

At end-July 2023, MYI held 64 positions, 50 equity and 14 fixed income, which compares to the required range of between 45 and 150. Exhibit 2 shows the trust’s geographic exposure (the data are subject to rounding). Over the 12 months to the end of July 2023, notable changes in the portfolio weightings are a c 5% higher allocation to European equities and a further c 3% switch out of fixed income securities and cash into equities.

At end-July 2023, MYI’s top 10 positions, across a range of sectors, made up 32.8% of the portfolio, which was a higher concentration compared with 29.5% 12 months earlier; nine positions were common to both periods. Within this list are companies with high yields such as tobacco company Philip Morris International (5.4%) and those with a more modest yield but dividend growth potential such as Broadcom (2.2%).

During H123, there were very few transactions due to a lack of interesting opportunities. Also, cash was accumulated to repay a £60m debt facility at the end of May 2023. There were some complete disposals from the fund: Indocement, Lotus Retail Growth Property Fund, Nordea Bank and Ecuador government bonds; all of which were lower-conviction positions. Nordea has performed well and has an attractive dividend yield but there could be credit concerns in a weaker economic environment. The bond sales were part of the ongoing shift out of fixed income securities after COVID. Two positions were trimmed: Grupo ASUR and Atlas Copco.

In July 2023, the long-term holding in Taiwan Mobile was sold. Although the company continues to execute on its long-term strategy of using its strong cash flow to fund network investment and ecommerce, the managers were looking to reduce MYI’s communications exposure. Part of the proceeds were used to fund a new position in Hong Kong Exchanges and Clearing, which owns and operates stock exchanges and futures exchanges, and related clearing houses in Hong Kong, Mainland China and the UK. The company operates through five segments: cash, equity and financial derivatives, commodities, post trade and technology. 

So far this year, there has been narrow stock market leadership once again. This is illustrated by the sector performance of the US market shown in Exhibit 4. In 2022’s weak market, energy was the ‘only game in town’, supported by higher energy prices. This year, in a much stronger market environment, attention has shifted to the growth opportunities from artificial intelligence (AI) with communication services and technology significantly outperforming the broader US market.

Connaghan highlights the performance differential this year between two of MYI’s US holdings. In 2022, AbbVie’s share price rose by c 20%, while Broadcom’s fell by c 16%. So far this year it is a different story with AbbVie down by c 10% and Broadcom up by c 55%.

Broadcom and AbbVie entered the portfolio around the same time in 2020. AbbVie’s Q123 headline results were in line with consensus expectations but there was a negative mix effect. Its largest product, Humira (more than 35% of 2022 sales), had stronger numbers than forecast, but this drug is going off patent and results for AbbVie’s two lead products, Skyrizi and Rinvoq, missed estimates. Q223 results exceeded consensus expectations and the company raised its full-year earnings guidance. AbbVie’s share price rallied by c 5% on the news.

In contrast, Broadcom’s share price has generally been on an upward trend so far in 2023, having beaten consensus estimates and raised its forecasts. The company is an AI beneficiary; currently c 15% of revenues, which could increase to 25% in 2024. Connaghan explains that Broadcom’s share price has been less volatile than those of its peers in recent years as it has moved to diversify its portfolio.

The six largest funds in the AIC Global Equity Income sector shown in Exhibit 5 employ different strategies. MYI is now the second-largest company following JPMorgan Global Growth & Income’s (JGGI’s) strong performance and combinations with Scottish Investment Trust and JPMorgan Elect. The trust’s NAV total return is above average over the last three years, ranking third, and below average over the last one, five and 10 years. MYI’s valuation is below average in a group where one fund is trading at a premium. Its net gearing is above average but has come down in recent months as a debt facility expired at the end of May 2023 and could not be refinanced on attractive terms. The trust offers the most attractive dividend yield, which is 100bp higher than the mean.

Using Morningstar data to compare the six funds in the selected peer group, MYI’s closest peer is Henderson International Income (HINT) as both are classified as large-cap value funds. JGGI and Scottish American (SAIN) are classified as large-cap growth funds (SAIN has a c 8% weighting in property and c 4% in fixed income securities), while Invesco Select Global Equity Income and STS Global Income & Growth Trust (STS) are large-cap blend funds. MYI’s performance is superior to HINT’s over one, three and five years but lags over the last decade.

Morningstar designates funds by their exposure to cyclical sectors (those that are highly sensitive to a business cycle’s peaks and troughs), defensive sectors (anticyclical) and sensitive sectors (those that have moderate correlation to the business cycle). MYI has a higher exposure (c 50%) to sensitive sectors than its five peers and is the only fund with a zero weighting in consumer cyclical stocks. The other fund of note is STS, which has the highest exposure to defensive sectors and the lowest exposure to cyclical sectors.

In terms of geographic exposure, MYI is a standout in the peer group with around 33% of its fund invested in emerging markets. It has the largest Asian exposure, is the only fund with a notable Latin American weighting and has the lowest North American exposure, which will have detracted from the trust’s relative performance in recent years as the US has outperformed for most of the years over the last decade.

In H123 (ending 30 June) MYI’s NAV and share price total returns of +2.2% and -2.5%, respectively, trailed the benchmark’s +7.9% total return.

Fitzpatrick highlights that European equities were the largest positive absolute contributor to the trust’s NAV (+8.6pp), which was led by the holding in BE Semiconductor Industries (BESI). It was added to the fund around 12 months ago and did not perform well initially. However, things changed in H123 when its share price rose by c 75%. BESI is a mid-cap (sub €10bn) differentiated semiconductor equipment company in the early stages of growth.

Latin American equities were the second-largest positive contributor (+6.8pp). Several names performed well, for example Grupo ASUR is seeing increased passengers following COVID and Kimberly-Clark de México is benefiting from both price and volume growth. Performance in Latin America has been partially offset by weakness in the shares of some of MYI’s cyclical businesses such as materials companies Vale and Sociedad Química y Minera de Chile.

The trust’s two other largest asset classes delivered mixed results: Asian equities (+0.8pp) and North American equities (+0.3pp). In Asia, TSMC performed well, in line with other semiconductor companies, while the holding in China Vanke suffered from negative sentiment towards the Chinese property sector, although the managers have confidence in the company’s robust fundamentals. In North America, Broadcom’s share price strength propelled the company to MYI’s top position.

On a sector basis, noticeable positive contributors to the trust’s absolute performance in H123 were technology (+33.0pp), utilities (+22.9pp) and industrials (+12.1pp), while the largest detractors were real estate (-20.7pp), basic materials (-13.4pp) and healthcare (-8.9pp).

MYI’s relative performance is highlighted in Exhibit 7. The trust has had a difficult six months due to a narrow stock market where investors have been particularly interested in US large-cap technology stocks that are deemed to be beneficiaries of the growth in AI. MYI has an underweight exposure to this area. The relative short-term pullback has affected the trust’s medium-term record, although its three-year results are comfortably above those of the benchmark.

Exhibit 9 shows MYI’s cumulative upside and downside capture over the last decade. The upside capture of 89% and downside capture of 105% illustrate the investment objective of offering an above-average dividend yield with real (higher than inflation) growth in both income and capital, rather than a sole focus on capital appreciation.

An upside capture of less than 100% implies that MYI’s performance will struggle to keep up in a momentum-driven market. However, with a downside capture around 100%, the trust’s performance should broadly mirror its benchmark during periods of market weakness.

MYI has an 18-year record of consecutive annual dividend increases. Following two years of an uncovered distribution during COVID, FY22 saw a return to a covered dividend (c 1.1x).

The board has announced that the trust’s FY23 annual dividend will be at least the same level as the 11.2p per share (split adjusted) FY22 total distribution. So far, two interim dividends of 2.4p have been announced in respect of FY23, which are in line with the first two quarterly dividends paid in FY22. At end-H123, MYI’s revenue reserves were c £70.5m, which is equivalent to c 1.0x the last annual dividend payment. Since 2021, the managers can write covered put and call options on underlying portfolio investments and employ stock lending to modestly boost income.

Looking at Exhibit 11, over the last three years MYI has broadly traded in a range of a 4% premium to an 8% discount; the trust’s latest 6.5% is towards the low end of this valuation range. It is wider than MYI’s 1.7% to 2.8% range of average discounts over the last one, three and five years. Over the last decade, MYI traded at an average 0.3% premium.

Renewed annually, the board has the authority to issue up to 10% and repurchase up to 14.99% of MYI’s issued share capital. Aiming to reduce volatility in the trust’s valuation and make a small positive contribution to the NAV, the board repurchases shares if they trade at a persistent discount to ex-income NAV, while issuing shares if they trade at a persistent premium to cum-income NAV. During H123, there were no share repurchases, although there have been modest buybacks so far in H223. Around 1.1m shares were sold from treasury in H123, raising c £2.8m.

Launched in December 1907, MYI is one of the oldest UK investment trusts; it is listed on the Main Market of the London Stock Exchange. Bruce Stout, a senior investment director in abrdn’s global equity team, had been the trust’s lead manager since 2004, although he has been directly involved with MYI since 1992. Earlier this year, Stout announced his intention to retire at the end of June 2024 so his colleagues Martin Connaghan and Samantha Fitzpatrick, who have worked with him since 2001, were made MYI’s co-managers with immediate effect.

The team aims to generate long-term capital growth (while preserving capital during periods of stock market weakness) and an above-average dividend yield from a globally diversified portfolio of equities and fixed-income securities. Around 33% of the fund is invested in emerging markets as the managers believe these regions offer the prospect of higher economic growth than developed markets, alongside relatively attractive company valuations.

MYI’s performance is measured against an all-world reference index; before 27 April 2020 it was benchmarked against a composite measure (40% UK and 60% world ex-UK). The trust’s investment objective was also changed on this date, aiming to achieve an above-average dividend yield, with long-term growth in dividends and capital ahead of inflation, by investing principally in global equities (MYI’s prior aim was to achieve a total return greater than its benchmark by investing predominantly in equities worldwide). The board believes the different wording gives shareholders a clearer picture of what the trust is trying to deliver.

There are no geographic or sector limits on portfolio construction, but at the time of investment, a maximum 5% of the fund is permitted in a single security, although in practice this percentage is much lower. From time to time, the trust may invest in equity-related securities such as depositary receipts, preference shares or unlisted companies, and derivatives are permitted for efficient portfolio management. Its currency exposure is unhedged. Gearing of up to 30% of NAV is permitted (in normal market conditions).

Stocks are selected on a bottom-up basis, so sector, regional and country allocations are a result of these decisions. abrdn employs a long-term approach, focusing on companies that its research analysts identify as high quality. Firms are considered on five key factors: the durability of its business model and its economic moat; the attractiveness of the industry in which it operates; the strength of its financials; the capability of its management team; and an assessment of its ESG credentials. Company valuations are assessed across a variety of relevant measures including earnings yields, free cash flow yields and dividend yields. The managers select companies that have the most attractive quality and valuation characteristics, while offering the best expected risk-adjusted returns. abrdn uses a global coverage list that is constructed by each of the specialist regional analyst teams (UK, Europe, Asia Pacific ex-Japan, North America, Japan and emerging markets) containing all companies with buy-and-hold recommendations, which provides the trust’s investment universe.

For MYI’s fixed-income holdings, the process for selecting and monitoring both sovereign and corporate bonds follows the same methodology used for equity investment. Portfolio geographic and sector exposures are a function of each security’s relative valuation and prospects. Within the portfolio there are typically 60–80 companies across the market-cap spectrum with position sizes of between c 1% and c 5%. Equity holdings are generally initiated at around 1.0% to 1.5% of the fund, while initial fixed income positions tend to be smaller. If a holding reaches 5% of the portfolio, it is trimmed within 30 days and the manager will sell a holding within 30 days if it is no longer on abrdn’s global coverage list, subject to the timing of dividend payments.

Although ESG and climate-related factors are not the overriding criteria in relation to the managers’ portfolio decisions, they do form a very important part of the investment process and have done so for more than 30 years for three key reasons:

The managers can draw on the resources of abrdn’s ESG equity analysts and central ESG investment team (more than 20 experienced specialists) who collaborate to generate a deep understanding of the ESG risks and opportunities associated with each company analysed.

Climate change risks are vast and becoming increasingly financially material for many of abrdn’s investments, not only in the high-emitting sectors, such as energy, utilities and transportation, but also along the supply chain, for providers of finance and those reliant on agricultural outputs and water. Companies that successfully manage climate change risks are expected to perform better over the long term.

A systematic and globally applied approach to evaluating stocks allows abrdn to compare companies consistently on their ESG credentials, both regionally and against their peer group. Findings from research and company meetings are captured in formal research notes. All firms analysed are allocated an ESG rating between 1 and 5, where 1 is best in class; 2, leader; 3, average; 4, below average; and 5, laggard. Once abrdn invests in a company, it is committed to helping that firm maintain or raise its ESG standards further. Regular engagement is seen as a necessary fulfilment of its duty as a responsible steward of clients’ assets and provides an opportunity to share examples of best practice seen in other companies.

On 1 June 2023, the company announced that it had repaid its £60m 2.328% unsecured fixed-rate term loan that expired on 31 May 2023. The board considered options to replace this loan, however acceptable commercial terms were not available.

MYI now has £140m in borrowings with The Royal Bank of Scotland International (RBSI): a £30m 2.25% fixed-rate term loan expiring on 16 May 2024 and two unsecured loan notes (£50m at 2.24% expiring on 13 May 2031 and £60m at 2.83% expiring on 31 May 2037). On 8 September 2023, MYI’s net gearing was 6.3%.

Since 1 January 2022, MYI has a reduced tiered fee structure of 0.5% of NAV up to £500m and 0.4% of NAV above this level (previously 0.5% of NAV up to £1.2bn and 0.425% of NAV above £1.2bn). It is split 30:70 between the revenue and capital accounts respectively. In FY22, the trust’s ongoing charge was 0.52%, which was 7bp lower than 0.59% in FY21, helped by the lower tiered fee structure. During H123, MYI’s ongoing charge remained at 0.52%.

MYI is a conventional investment trust with one class of share; there are 624.9m ordinary shares in issue, with a further 22.2m shares held in treasury, and its average daily trading volume over the last 12 months is c 780k shares.

In May 2022, abrdn completed its acquisition of ii (interactive investor), which is the UK’s second-largest retail platform. abrdn is looking to migrate its share plans onto the ii platform in December 2023.

David Hardie will step down from the board on 31 December 2023, and will be replaced as chair by Virginia Holmes. On 21 April 2023, the board announced the appointment of two new independent, non-executive directors. Gregory Eckersley’s tenure commenced on 1 May 2023, while Wendy Colquhoun joined the board on 1 September 2023.

Eckersley is an experienced equity investor with a career in a mix of leadership and asset management roles. His previous employers include Cigna International Investment, Draycott Partners, Alliance Capital and Alliance Bernstein, where he gained experience of investing in emerging market and global portfolios before accepting the role of global head of internal equities at the Abu Dhabi Investment Authority (ADIA). In 2019, after six years with ADIA, Eckersley returned to the UK to run his own consultancy named Ecko, offering strategic advice to small and early-stage businesses.

Colquhoun is a qualified solicitor and until May 2020 was a partner at international law firm CMS Cameron McKenna Nabarro Olswang. She has advised investment trust boards for over 25 years on advisory and transactional matters and has a thorough understanding of investment trusts and the regulatory and other challenges they face. Colquhoun is a non-executive director of Capital Gearing Trust and Schroder UK Mid Cap Fund and chair of Henderson Opportunities Trust.