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

Martin Currie Global Portfolio Trust (LSE: MNP)

Last close As at 19/07/2024

GBP3.66

−1.00 (−0.27%)

Market capitalisation

GBP245m

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

Martin Currie Global Portfolio Trust’s (MNP’s) relative performance is back on track following a tough 2022, when investors favoured value and cyclical companies rather than growth businesses. Manager Zehrid Osmani has remained disciplined, seeking high-quality, long-term growth companies, and has retained his five- to 10-year investment horizon. Over the last decade, the trust has generated robust double-digit absolute annual NAV and share price total returns of 10.3% and 10.6% respectively. Within the AIC Global sector, MNP’s NAV total returns are above average over the last one and five years.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Martin Currie Global Portfolio Trust

Performance returning to positive historical form

Investment trusts
Global equities

12 July 2023

Price

337.0p

Market cap

£253m

Total assets

£286m

NAV*

340.6p

Discount to NAV

1.0%

*Including income. At 10 July 2023.

Yield

1.2%

Ordinary shares in issue

74.9m

Code/ISIN

MNP/GB0005372411

Primary exchange

LSE

AIC sector

Global

Financial year end

31 January

52-week high/low

358.0p

275.0p

NAV* high/low

357.9p

281.7p

*Including income

Net gearing*

11.6%

*At 31 May 2023.

Fund objective

Martin Currie Global Portfolio Trust’s objective is to achieve a total return in excess of the total return of the benchmark MSCI AC World Index. Prior to 1 February 2020 the objective was to generate a capital return in excess of the capital return of a less broad global index.

Bull points

Portfolio of high-quality, attractively valued global equities.

Manager is committed to MNP’s detailed, repeatable investment approach.

ESG analysis is an integral part of the research process.

Bear points

MNP’s performance is likely to struggle in a market led by value or cyclical stocks.

Relatively concentrated portfolio means that the performance of a single holding can affect the whole fund’s performance.

Annual dividend has held steady for the last seven financial years.

Analyst

Mel Jenner

+44 (0)20 3077 5700

Martin Currie Global Portfolio Trust is a research client of Edison Investment Research Limited

Martin Currie Global Portfolio Trust’s (MNP’s) relative performance is back on track following a tough 2022, when investors favoured value and cyclical companies rather than growth businesses. Manager Zehrid Osmani has remained disciplined, seeking high-quality, long-term growth companies, and has retained his five- to 10-year investment horizon. Over the last decade, the trust has generated robust double-digit absolute annual NAV and share price total returns of 10.3% and 10.6% respectively. Within the AIC Global sector, MNP’s NAV total returns are above average over the last one and five years.

NAV performance versus the benchmark over the last five years

Source: Refinitiv, Edison Investment Research. Note: Osmani’s tenure as lead portfolio manager started on 1 October 2018.

Why consider MNP?

MNP offers investors a high-conviction, relatively concentrated (30 holdings) portfolio of quality global equities. Portfolio companies are profitable, high-return businesses with strong balance sheets, pricing power and attractive structural growth opportunities. This means that the fund should be relatively well positioned in the current environment of weak GDP growth, where corporate margins are generally coming under pressure as investee businesses should have resilient earnings growth at a time of widespread consensus estimate downgrades. It is interesting to note that the fund’s largest holding, NVIDIA, has had significant estimate upgrades and its share price has nearly doubled so far this year.

Since becoming lead manager in October 2018, Osmani and his team have worked diligently to enhance MNP’s investment process. ESG/sustainability is an integral part of the process, and every holding/potential holding is evaluated, measured, and scored on more than 50 individual criteria. For each company reviewed, a proprietary research template is compiled to ensure a consistent approach and includes a rating recommendation between 1 (strong buy) and 5 (sell).

MNP is a straightforward equity fund with no unlisted businesses or derivatives. The board also employs a zero-discount policy aiming to ensure that, in normal market conditions, the trust’s shares trade close to NAV. Hence, despite above-average stock market volatility, MNP is the fund in the AIC Global sector that is trading closest to its NAV.

MNP: A high-quality growth fund with a long-term focus

Style headwinds diminishing and MNP’s relative performance has improved

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.

MNP is well positioned for the current economic backdrop

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.

Finding interesting opportunities around three megatrends

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:

green and alternative energy investment is an important focus as more governments work to decarbonise their economies, while alternative energy sources have been a geopolitical imperative for Europe since the Russian invasion of Ukraine.

greener infrastructure is an element within the decarbonisation theme, including reducing the carbon footprint of buildings, which are a large source of carbon emissions.

electric transportation is an important thematic trend as part of the focus on reducing carbon emissions. There are opportunities in the development of both high-speed railway and electric vehicle infrastructures.

Healthcare infrastructure is a major opportunity, as governments focus on the need to upgrade systems following the pandemic. Also, ageing populations are driving demand for more bespoke healthcare and targeted therapies, including the use of genomics.

Geopolitical and technology fragmentation are occurring due to tensions between the US, China and Taiwan. Recently, China banned the use of US Micron Technology’s semiconductors in Chinese infrastructure projects. Taiwan Semiconductor Manufacturing will have to diversify its production capacity outside of Taiwan, which is inefficient but should benefit ASML Holding.

Cloud computing trends in the medium term are very supportive for technology demand, as more companies migrate their businesses online. This trend is also driving an increased need to invest in cyber security.

Robotics and automation, and in particular artificial intelligence (AI), is an important structural growth opportunity. Following the pandemic, corporates are realising the need to make their production lines more robust and their supply chains more resilient, leading to investment in robotics and automation. Trends towards onshoring or nearshoring of production bases should also accelerate this thematic trend.

Nascent, but promising and fast-growing opportunities exist in the metaverse and quantum computing fields. Given the sizable investments that big tech companies are making in this area, there are opportunities for metaverse enablers.

MNP’s sector breakdown

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).

Exhibit 1: MNP’s sector weights versus the benchmark

Source: MNP, Edison Investment Research. Note: Rebased for cash and gearing.

Exhibit 2: Portfolio sector changes and active weights versus benchmark (% unless stated)

Portfolio
end-May 2023

Portfolio
end-May 2022

Change
(pp)

Active weight
vs index (pp)

Information technology

30.7

33.8

(3.1)

8.6

Healthcare

21.8

23.3

(1.6)

9.6

Consumer discretionary

13.6

13.3

0.3

2.9

Financials

9.6

3.7

5.9

(5.8)

Industrials

9.5

11.6

(2.1)

(0.8)

Consumer staples

8.1

5.8

2.3

0.6

Materials

6.8

5.8

1.0

2.3

Real estate

0.0

0.0

0.0

(2.3)

Utilities

0.0

0.0

0.0

(2.8)

Energy

0.0

0.0

0.0

(4.7)

Communication services

0.0

2.7

(2.7)

(7.6)

100.0

100.0

Source: MNP, Edison Investment Research. Note: Rebased for cash and gearing.

MNP’s geographic breakdown

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.

Exhibit 3: MNP’s geographic weights versus the benchmark

Source: MNP, Edison Investment Research. Note: Rebased for cash and gearing.

Exhibit 4: Portfolio geographic changes and active weights vs benchmark (% unless stated)

Portfolio
end-May 2023

Portfolio
end-May 2022

Change
(pp)

Active weight
vs index (pp)

North America

47.2

43.7

3.5

(17.3)

Europe (inc UK)

44.8

42.8

1.9

28.4

Pacific ex-Japan

6.2

7.7

(1.5)

3.3

Emerging markets

1.8

5.8

(4.0)

(7.6)

Middle East

0.0

0.0

0.0

(1.3)

Japan

0.0

0.0

0.0

(5.6)

100.0

100.0

Source: MNP, Edison Investment Research. Note: Rebased for cash and gearing.

MNP’s top 10 positions

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.

Exhibit 5: Top 10 holdings (at 31 May 2023)

Company

Country

Sector

Portfolio weight %

31 May 2023

31 May 2022*

NVIDIA

US

Information technology

8.8

5.3

Microsoft

US

Information technology

6.7

6.8

Linde

US

Materials

5.7

6.4

ASML Holding

Netherlands

Information technology

5.5

5.4

Moncler

Italy

Consumer discretionary

5.3

4.3

ResMed

US

Healthcare

4.7

5.5

Ferrari

Italy

Consumer discretionary

4.5

N/A

Atlas Copco

Sweden

Industrials

4.5

N/A

Mastercard

US

Financials

4.4

N/A

L'Oréal

France

Consumer staples

4.3

N/A

Top 10 (% of portfolio)

54.5

53.3

Source: MNP, Edison Investment Research. Note: *N/A where not in end-May 2022 top 10.

Recent portfolio activity

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.

Osmani’s insights on the macroeconomic backdrop

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:

Inflation – there is a risk that it remains elevated and prolonged, having been stickier than investors expected, partly due to geopolitical tensions. Although inflation rates should ease in H223 due to base effects, wage inflation in the US and Europe plus ongoing supply chain disruptions suggest that the inflationary environment will continue. Osmani believes that central banks will not hit their inflation targets in 2023 or 2024.

Interest rates – the manager suggests that with elevated inflation, it is premature to expect central banks to pivot on their monetary policies, and interest rate reductions are more likely in 2024 than in 2023.

The economy – Martin Currie places a 30–35% probability on a US and world recession versus a 60–65% probability of a sharp slowdown. While going into 2023 the consensus view was that there would be a recession, investors are now less bearish.

China – as the world’s second-largest economy, its reopening should ultimately provide an important impetus to the global economic cycle. Osmani expects a Chinese economic recovery with the country contributing 40–50% of global growth in 2023. He says it is important to take a broad perspective and not get caught up with month-on-month data points. While Chinese manufacturing (c 27% of the economy) purchasing managers’ indices (PMIs) are rolling over, services (c 54%) PMIs are strong.

Corporate earnings cycle – according to the manager, we are heading towards an earnings recession. Osmani says 2023 estimates are US -1%, Europe -5%, Asia +5% and world 0%.

Performance: Meaningful six-month improvement

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.

Exhibit 6: AIC Global sector at 11 July 2023*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(ex-par)

Ongoing
charge

Perf.
fee

Net
gearing

Dividend
yield

Martin Currie Global Portfolio

252.6

12.0

7.7

43.3

147.6

(1.7)

0.7

No

111

1.2

Alliance Trust

2,850.0

8.5

30.2

42.0

150.1

(6.4)

0.6

No

105

2.4

AVI Global Trust

877.1

3.4

37.0

36.5

122.2

(10.5)

0.9

No

106

1.8

Bankers

1,218.8

2.4

15.2

33.6

140.2

(11.5)

0.5

No

107

2.4

Brunner

438.7

8.1

36.3

48.8

139.4

(13.1)

0.6

No

106

2.1

F&C Investment Trust

4,376.0

2.6

26.7

39.9

160.1

(10.6)

0.5

No

109

1.6

Keystone Positive Change Inv

131.0

9.4

(11.3)

(29.7)

(2.0)

(16.4)

0.9

No

109

5.3

Lindsell Train

200.4

1.5

2.8

49.0

321.0

(2.4)

0.9

Yes

100

5.1

Manchester & London

168.0

24.0

(8.8)

19.0

119.6

(23.2)

0.7

Yes

100

3.3

Mid Wynd International Inv Trust

423.9

1.3

16.8

49.3

199.3

(2.9)

0.6

No

100

1.0

Monks

2,212.0

2.1

1.3

33.4

163.7

(13.6)

0.4

No

106

0.3

Scottish Mortgage

9,106.4

(7.9)

(10.1)

55.8

382.5

(22.3)

0.3

No

113

0.6

Witan

1,444.0

6.5

25.6

19.1

113.6

(9.8)

0.8

Yes

116

2.6

Average (13 funds)

1,823.0

5.7

13.0

33.8

165.9

(11.1)

0.7

107

2.3

MNP rank in peer group

10

2

8

5

7

1

8

3

10

Source: Morningstar, Edison Investment Research. Note: *Performance data to 10 July 2023 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared).

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.

Exhibit 7: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

Benchmark*
(%)

MSCI AC World
(%)

CBOE UK All Companies (%)

30/06/19

18.9

18.3

10.4

10.3

0.3

30/06/20

11.6

12.6

6.2

5.7

(13.6)

30/06/21

29.7

26.3

25.1

25.1

21.1

30/06/22

(28.3)

(25.6)

(3.7)

(3.7)

2.2

30/06/23

22.3

20.9

11.9

11.9

8.3

Source: Refinitiv. Note: All % on a total return basis in pounds sterling. *MSCI AC World since 1 February 2020, previously a less broad global index.

Exhibit 8: Investment trust performance to 30 June 2023

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Exhibit 9: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to benchmark

(1.1)

(0.6)

9.8

9.3

(15.6)

(4.5)

(7.3)

NAV relative to benchmark

(0.4)

(0.8)

10.0

8.0

(15.8)

(4.4)

(9.8)

Price relative to MSCI AC World

(1.1)

(0.6)

9.8

9.3

(15.6)

(3.9)

(6.2)

NAV relative to MSCI AC World

(0.4)

(0.8)

10.0

8.0

(15.8)

(3.8)

(8.7)

Price relative to CBOE UK All Companies

0.9

3.5

15.9

12.9

(15.1)

30.1

52.5

NAV relative to CBOE UK All Companies

1.6

3.3

16.0

11.6

(15.3)

30.3

48.4

Source: Refinitiv, Edison Investment Research. Note: Data to end-June 2023. Geometric calculation. Note: Benchmark is MSCI AC World since 1 February 2020, previously a less broad global index.

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.

Exhibit 10: NAV total return performance relative to benchmark over 10 years

Source: Refinitiv, Edison Investment Research

Dividends: Regular distributions since FY17

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.

Exhibit 11: Dividend history since FY18

Source: Bloomberg, Edison Investment Research

Valuation: Long-term zero-discount policy

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.

Exhibit 12: Discount over three years (%)

Exhibit 13: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 12: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 13: Buybacks and issuance

Source: Morningstar, Edison Investment Research

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.

Fund profile: High-conviction global equity portfolio

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:

To invest predominantly in listed global equities of quality growth companies with superior share price appreciation potential, based on projected ROIC, balance sheet strength and sustainable business models.

To manage a high-conviction portfolio with typically 25–40 positions, held for the long term.

To spread risk via a portfolio that is diversified by type of company and sources of revenue. No more than 10% of total assets may be invested in a single stock.

To fully integrate ESG criteria into fundamental analysis when assessing business models.

To exclude investments identified through the manager’s proprietary ESG risk assessment as having a high level of sustainability or governance risk.

To potentially use debt to enhance shareholder returns. Gearing will not exceed 20% of net assets at the time of drawdown.

To not invest in other listed closed-end funds.

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

NAV performance versus the benchmark over a rolling three-year period – not achieved in FY23, underperformance of 17.72% (outperformance of 1.62% in FY22).

Top-third share price performance versus the peers in the AIC Global sector over a rolling three-year period – not achieved in FY23, 10th out of 14 funds (fifth out of 17 funds in FY22).

Ongoing charges (excluding performance fees) of less than 0.70% per year – achieved in FY23, 0.61% (0.68% in FY22).

Investment process: Three-step, bottom-up approach

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:

Idea generation: the total universe of c 2,800 listed global stocks is screened down to an investible universe of c 500 companies and then a research pipeline of 90+ names is prioritised to identify companies with a combination of quality, sustainable growth and an attractive valuation. The team believes that companies that can generate a high and sustainable ROIC, above their weighted average cost of capital, can generate above-average total returns over the long term.

Fundamental analysis is based on eight key criteria: industry analysis, a company’s growth drivers, returns, financial strength, accounting, corporate ethos, ESG profile and valuation. Businesses are assessed on a scale of 1 (lowest risk) to 5 (highest risk) across a wide range of measures. As part of the process, there is a systematic risk assessment focusing on industry risks, company risks, governance and sustainability, and portfolio risks. Companies are also assessed against more than 50 ESG criteria and mega-trend thematic analysis: demographic change, future of technology and resource scarcity. Firms considered for inclusion in the portfolio are likely to have a dominant position and pricing power in a market with high barriers to entry. The manager seeks businesses with structural growth prospects, high returns on invested capital, strong cash flow generation and a quality management team with a strong corporate culture. To ensure a consistent approach, a proprietary research template is compiled for companies reviewed, and each is given a conviction rating between 1 (strong buy) and 5 (sell).

Portfolio construction: each position is weighted appropriately, aiming to ensure a meaningful contribution to the fund’s returns. Osmani and his team break down the portfolio by geographic revenue and profit rather than where a company is listed, to understand the fund’s exposure by economic value (it is overweight developed and underweight emerging markets). The portfolio is also assessed in terms of end-user exposure at a tier one level – the consumer, business and government – and then at a more detailed tier two level focusing on individual sectors and industries. Stocks may be sold when they have reached their price target, if they are nearing their price target and there are better risk/reward opportunities elsewhere, or if the high-conviction investment case no longer holds true.

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.

MNP’s approach to ESG

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.

Gearing

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.

Fees and charges

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.

Capital structure

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.

Exhibit 14: Major shareholders

Exhibit 15: Average daily volume

Source: Bloomberg. Note: At 31 May 2023.

Source: Refinitiv. Note: 12 months to 11 July 2023.

Exhibit 14: Major shareholders

Source: Bloomberg. Note: At 31 May 2023.

Exhibit 15: Average daily volume

Source: Refinitiv. Note: 12 months to 11 July 2023.

The board

Exhibit 16: MNP’s board of directors at end-FY23

Board member

Date of appointment

Remuneration in FY23

Shareholdings at end-FY23

Gillian Watson (appointed chair on 1 Feb 2021)

1 April 2013

£41,000

3,329

Gary Le Sueur

1 December 2016

£27,500

31,735

Marian Glen

1 December 2016

£29,938

Nil

Christopher Metcalfe

19 September 2019

£27,500

8,600

Lindsay Dodsworth

1 November 2021

£31,562

2,542

Source: MNP

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.

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This report has been commissioned by Martin Currie Global Portfolio Trust and prepared and issued by Edison, in consideration of a fee payable by Martin Currie Global Portfolio Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Martin Currie Global Portfolio Trust and prepared and issued by Edison, in consideration of a fee payable by Martin Currie Global Portfolio Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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