Murray International Trust — Three become two – low-risk strategy maintained

MYI’s portfolio is broadly diversified by geography and sector and has a notable c 30% allocation to emerging markets, which have above-average growth potential that is not fully reflected in company valuations. The managers employ an unconstrained stock selection strategy and so performance is likely to differ from that of MYI’s reference index.

At the end of July 2024, MYI’s top 10 positions made up 34.8% of the portfolio, which was a higher concentration compared with 32.8% 12 months earlier. The top 10 is a mix of higher-yielding stocks and companies with lower yields but growing dividends.

The trust generally receives the largest part of its income in the first half of the year as several European companies pay a single annual dividend. In H124, 28 of MYI’s holdings declared dividends with just two reductions and 26 increases. Top 10 company BE Semiconductor Industries reduced its dividend by 25% and China Vanke cancelled its dividend (this position was sold). Notable dividend increases came from TSMC (+30%), Atlas Copco (+22%), GlobalWafers (+19%), Epiroc (+12%; this position was sold) and Siemens (+11%).

As shown in Exhibit 2, the structure of MYI’s portfolio changed very little in the 12 months to the end of July 2024, with the largest differences being a 2.9bp lower weighting in Latin America and a 2.7pp higher allocation to North America. The number of equity holdings declined by four to 46, and there was one less fixed income investment. A total of 59 positions is at the lower end of the required 45 to 150 names.

Some of the sales in H124 were to fund the May 2023 debt repayment. Four holdings exited the portfolio. Epiroc was a 2018 spin-out from Atlas Copco and had performed well. For Roche, the managers had higher conviction in other healthcare names. China Vanke’s investment thesis did not play out and the dividend cut was a red flag. TC Energy was sold, with the proceeds added to Enbridge, which is a similar energy infrastructure company deemed to have lower balance sheet and execution risk.

There was just one addition to MYI’s portfolio in H124. Mercedez-Benz Group, which has less than a 20% exposure to China and a flexible electric vehicle strategy, is seeking to increase profitability by selling a greater percentage of higher-priced vehicles; higher margins should allow greater returns to shareholders via dividends and share repurchases. The company offers an attractive c 9% dividend yield, which the managers consider is well supported.

While the managers employ a bottom-up stock selection approach, they do take the macroeconomic environment into account. Connaghan and Fitzpatrick report that cracks are appearing in the US labour market, with slowing non-farm payrolls and rising unemployment. As economic activity moderates, there is increased concern about a slowdown. However, the managers consider a soft landing is more likely than a recession.

In Europe, economic activity has recovered and inflation has moderated, but there are variations by country. For example, Germany is experiencing an economic contraction. Purchasing manager indices – both manufacturing and services – are volatile and global geopolitical tensions have the potential to swiftly change the inflation outlook.

There is likely to be further stock market noise in the run-up to the US presidential election, with the outcome decided by voting in key swing states. The managers note that during the last Trump presidency, the markets did well in the first 18 months as corporate taxes were reduced but then performed less well as attention turned to talk of tariffs and the associated risks of slowing economic growth and higher inflation.

China is experiencing economic headwinds led by the property sector and Connaghan and Fitzpatrick think that further policy easing is likely. They comment that Asian economies have decoupled from China and emerging markets have some sticky inflation, which has led to a pause in interest rate cuts. The managers believe that investors are currently not interested in emerging markets, overlooking companies with favourable fundamentals, and instead focusing on what unfolds in the US and China.

Exhibit 3 shows the six largest funds in the AIC Global Equity Income sector, all of which follow different mandates. MYI’s NAV total returns are above average over the last three years, ranking third, while lagging over the other periods shown. The trust has the fourth lowest valuation, a competitive ongoing charge and the second highest level of gearing. MYI offers the highest dividend yield in the selected peer group, which is currently 0.7pp above the selected peer group average. The trust’s dividends are paid solely out of income, unlike most its peers, which can make distributions out of capital.

MYI is the only fund classified as a large-cap value fund by Morningstar. Its peers are either large-cap growth funds (Invesco Global Equity Income, IGEI, JPMorgan Global Growth & Income, JGGI, and Scottish American, SAIN) or large-cap blended funds (Henderson International Income, HINT and STS Global Income & Growth Trust, STS).

Morningstar breaks down 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 the joint-highest sensitive exposure (c 49%, which is c 6% above average), an average defensive exposure (c 29%) and the lowest cyclical exposure (c 22%, which is c 6% below average).

MYI has the lowest North American exposure of the selected peer group, which is likely to have been detrimental the trust’s performance. It does not hold any of the ‘Magnificent Seven’ stocks, which have been very important contributors to the US market’s outperformance as they do not fit the trust’s investment brief. However, MYI’s technology holdings have performed well and, according to the managers, are not solely dependent on the growth in AI. Unsurprisingly, given its above-average exposure to emerging markets, MYI has the largest Asian exposure and is the only fund with a meaningful allocation to Latin America.

As noted earlier in the report, in H124, MYI’s performance lagged that of the reference index (NAV +5.5%, share price +0.5% and index +12.2%, all total returns). In terms of geography, the best regional performance was in Asia (+13.2%), while the worst was Latin America (-14.5%). By sector, the standout performer was technology (+40.0%), including positions in Broadcom, Hon Hai and TSMC. Commodity price weakness outside of gold, silver and copper led to materials being the worst performing sector (-22.9%), including positions in BHP, Sociedad Química y Minera de Chile and Vale.

MYI’s cumulative upside and downside capture over the last decade is shown in Exhibit 8. The fund’s defensive nature is highlighted by its less than 100% capture rates, with an upside of 80% and a downside of 84%, suggesting that MYI is likely to underperform by around 20% in rising markets but outperform by around 16% in periods of market weakness. These data reenforce the trust’s strategy, which aims to preserve capital in weak markets and to deliver a broader return for shareholders based on both income and capital, rather than just capital appreciation.