Martin Currie Global Portfolio Trust — Performance returning to positive historical form

While central banks are still in tightening mode, as investors considered that peak interest rates are getting closer, the market environment became more favourable for MNP. A return to a focus on company fundamentals and the long-term benefits of quality growth stocks, rather than concerns about the risk of a major monetary surprise, has led to an inflection in the trust’s relative performance.

The trust focuses on companies with resilient earnings, pricing power and strong balance sheets, which should be more important in the current weak operating environment. Osmani highlights the benefits of investing in structural growth opportunities, especially when there is an absence of corporate earnings growth.

From company meetings, the manager reports that operating outlooks vary markedly between sectors. Some areas are disappointing, such as materials, selected industrials and construction companies where higher interest rates are starting to bite. The consumer space is mixed, with economic conditions negatively affecting mass-market players but demand for high-end goods remains very strong, which is positive for MNP’s luxury goods holdings including Kering and Moncler. Before the pandemic China represented 50% of the consumption of high-end goods, which should support product demand as its economy ultimately recovers.

Osmani believes three thematic megatrends: demographic change, the future of technology and resource scarcity, are providing attractive investment opportunities that will span multiple decades. Within these three areas, he has identified eight mid-term thematic opportunities:

The trust’s sector and geographic weightings are all as a result of bottom-up stock selection. In the 12 months to end-May 2023, the largest sector changes were a 5.9pp higher financials exposure and a 3.1pp reduced technology weighting. Compared with the benchmark, notable deviations were overweight positions in healthcare (+9.6pp) and technology (+8.6pp) and zero exposure to four sectors, which collectively make up 17.4% of the index; the largest of which is communication services (7.6pp).

Below in Exhibits 3 and 4 we have analysed the trust’s regional geographic exposure. In the 12 months to end-May 2023, the largest increase was a 3.5pp higher North America weighting and a 4.0pp reduction to MNP’s emerging market exposure. The trust has a very large 28.4pp overweight position in Europe including the UK, with a 17.3pp below index weighting in North America. Europe is a more economically cyclical region than other developed markets and should benefit from a Chinese economic recovery. If Chinese data remain weak, the government is expected to launch measures to stimulate the economy.

At the end of May 2023, MNP’s top 10 holdings made up 54.5% of the fund, which was a modest increase in concentration compared with 53.3% a year earlier; six positions were common to both periods. The trust’s largest holding, by quite some margin, is graphics chip designer NVIDIA. Osmani explains that the evolution of AI is causing much excitement, and AI tool ChatGPT has been the fastest adoption of a new technology in history. NVIDIA is well positioned to benefit from growth in AI. The company’s Q123 results exceeded consensus expectations and led to upward estimate revisions for 2023 of 40% in sales and 100% in earnings. AI requires faster semiconductors and NVIDIA has research & development and scale advantages; the manager comments that the company has an estimated five- to seven-year competitive lead, suggesting it has a quasi-monopolistic position, like ASML had 10 years ago. Osmani believes that we are ‘only seeing the tip of the iceberg in terms of AI demand’, noting that engineers are working on projects to explore AI’s potential, which should lead to accelerating growth two to three years out.

MNP has a new position in Pernod Ricard, which had been on the manager’s radar due to favourable industry fundamentals. The company is benefiting from the trend of increased eating and drinking away from home, and premiumisation, and is well positioned to benefit from higher growth in China. Osmani forecasts sales growth of 8% per year over the next five years, earnings growth of 11% per year and return on invested capital (ROIC) increasing from 8.5% in 2022 to 11.5% in 2027.

Another new holding is Dutch payment company Adyen, that allows businesses to accept mobile, e-commerce and point-of-sale payments. The firm is a beneficiary of higher transaction volumes and has very low capital requirements and hence a very high ROIC. Osmani considered that Adyen’s valuation was prohibitive, but its share price pulled back in Q223 due to a negative reaction towards the company’s plans to accelerate its geographic expansion, which will mean higher costs and lower earnings. The manager forecasts sales growth of 30% per year over the next five years, earnings growth of 26% per year and ROIC moving from 122% to 217%. Adyen’s name means ‘rebirth’ and the management team is ex-Worldpay, which was taken out in July 2017; Osmani has confidence that the company is well positioned from a competitive standpoint.

Estée Lauder was added to the portfolio in June 2023 after significant share price underperformance following a profit warning in the prior month. The manager and his team consider that in the medium to long term, Estée Lauder’s growth and returns potential will outweigh short-term headwinds. These are due to operational problems in the Hainan province in China, where there has been an inventory overhang and weak consumption trends. Starting in 2024, Osmani forecasts four-year sales growth of c 10% per year and earnings growth of c 31% per year, with a ROIC recovery from c 9% this year to more than 22% in 2027. The manager says that Estée Lauder’s profit warning highlights the importance of stock picking, given that its key peer L’Oréal (also in the portfolio) has been performing strongly and is navigating China more effectively. Osmani funded the Estée Lauder position from the proceeds of the sale of the AIA Group holding, which further reduced MNP’s direct China exposure as AIA is quoted in Hong Kong. The holdings in Tencent and Alibaba were sold in 2022 and 2021 respectively on regulatory concerns; the manager prefers indirect exposure to China such as via the trust’s luxury goods positions.

Earlier this year, the small position in Dr Martens was sold after a profit warning in Q123. While the company’s brand and product demand remain intact, an operational misstep in its US distribution highlighted concerns about the quality of its management team. The proceeds were used to increase the Moncler position, whose share price has performed very well, helped by its strong brand management and greenfield business expansion opportunities.

Within credit cards there was a switch from Visa to Mastercard. Generally, there is a close correlation between the performance of these two stocks, but the relative outlook for Mastercard improved on valuation grounds. Osmani forecasts a five-year ROIC improvement of 78% to 136% for Mastercard compared with 31% to 78% at Visa. Mastercard has more international versus US revenues compared to Visa and is better positioned to benefit from a Chinese economic recovery.

The manager believes that forecast risk and prediction error is high and the wide range of potential outcomes mean volatility will remain elevated at both the stock level and in terms of market leadership between growth and value stocks. Osmani comments that although markets have rallied so far this year, it can be attributed to a narrow range of stocks and many fund managers were defensively positioned at the beginning of 2023 in anticipation of a recession, so have struggled to outperform in H123. The manager offers his perspectives on four important market drivers:

MNP is one of the smallest funds of the 13 peers in the AIC Global sector. Osmani reports that the trust’s shareholders are prepared to tolerate short-term performance volatility in pursuit of the potential benefits of MNP’s concentrated high-quality growth strategy. The trust has a straightforward portfolio of listed equities, all of the portfolio companies are profitable. MNP also differentiates itself from its peers by its ESG focus, which has been used for many years, and its active zero-discount policy.

The manager comments that there has been ‘turbulence’ in the AIC Global sector as those funds that were overweight technology have struggled. Osmani and his team conduct very in-depth analysis to understand how MNP is exposed by end user on both a level one and level two basis. He suggests that the trust’s portfolio is more balanced than some of its peers.

Our last MNP review was published on 2 February 2023, at which time the fund’s NAV total return rankings had deteriorated as investors had favoured more cyclical and value names. Out of 14 funds, the trust ranked 11th, 10th, ninth and eighth over one, three, five and 10 years, respectively. Contrasting this performance with now, MNP’s NAV total returns are meaningfully above average over one and five years, ranking second out of 13 funds over the last 12 months and fifth over the last five years. Its rankings have also improved over three and 10 years. As a reminder, the trust only restarted using gearing in November 2020.

On 11 July 2023, MNP had the highest valuation in the sector, helped by its zero-discount policy. Its ongoing charges are in line with the peer group average and no performance fee is payable. The trust had the third highest level of gearing and, unsurprisingly given its focus on capital growth rather than income, MNP has a below-average dividend yield.

As shown in Exhibit 9, MNP’s very strong relative performance over the last six months has returned its one-year results into positive territory; the improvement is not due to a change in portfolio structure. Osmani stuck to his guns despite suffering a period of poor performance; he has high confidence in current portfolio companies. In 2022, China lockdowns negatively affected the share price performance of the trust’s luxury goods companies such as Kering and Moncler; these stocks have since recovered strongly. MNP’s technology stocks declined, including Adobe, Microsoft and NVIDIA, in line with the rest of the sector.

Over the last six months the trust has benefited from its overweight Europe and underweight North American exposures; the manager is finding better opportunities outside of the US. Luxury good stocks have done well and MNP’s semiconductor exposure has been beneficial, including ASML and NVIDIA, which together are approaching 15% of the fund. Stocks that have detracted include Kingspan, which is interest rate sensitive due to its construction exposure. Osmani still favours the company as it benefits from the trend of more energy-efficient buildings. Kingspan is a leader in insulation and to fulfil the UK’s 2030 net-zero targets, companies will have to accelerate their moves to reduce carbon emissions.

MNP makes quarterly distributions in July, October, January and April. The annual dividend has been 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 FY13, MNP had c £186.5m in realised capital gains and c £1.7m in revenue reserves. Combined, these distributable reserves equate to c 50x the last annual dividend payment. So far in FY24, one quarterly dividend of 0.90p per share has been declared, which is in line year-on-year.

MNP’s shares are trading at a 1.0% discount to cum-income NAV, which compares with a range of a 2.2% premium to a 4.7% discount over the last 12 months. Over the last one, three, five and 10 years, the trust has traded in a 0.3% to 1.2% range of average discounts.

MNP’s board has used 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.

In FY23, c 10.5m shares (c 12.1% of the share base) were repurchased and held in treasury, at a cost of c £32.7m; no shares were reissued from treasury. As shown in Exhibit 13, so far in FY23, share repurchases and reissuance have been modest.

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 nine-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-April 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 (96.4% at end-May 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.

MNP did not use gearing between 2008 and 2020, but 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. 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. Given the 15-year high level of UK base interest rates, if the trust’s debt facility is rolled over in November 2023, it is extremely likely to be at a higher interest rate. However, the board is confident that the manager can generate annual returns above the trust’s cost of debt over the long term, meaning that the use of gearing should contribute positively to MNP’s results.

With effect from 1 July 2022, the investment management fee was amended to 0.45% of ex-income NAV per year (previously 0.50% per year of the first £300m of ex-income NAV and 0.35% of ex-income NAV above this level). Also, there is no longer a separate company secretarial fee (£56k + VAT in FY22, and subject to an annual increase at 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%, which was 7bp lower than 0.68% in FY22.

MNP is a conventional investment trust with one class of share – there are c 74.9m ordinary shares in issue, with a further c 23.7m 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 120k shares.

Having served as one of MNP’s directors for more than 10 years, Gillian Watson stood down following the 1 June 2023 AGM and was replaced as chairman by Christopher Metcalfe. Mindful of the trust’s size and cost base, the board has decided not to recruit another director and will continue with four non-executive board members.