Podcasts

Welcome, everyone. And thank you for tuning in. I'm Cherry Reynard, with me today our Bruce Stout and Martin Connaghan of the Murray International Trust to give an update on performance and the outlook for the months ahead. Welcome both of you. Bruce, can we start with you and just give an overview of the trust performance over the past six months.

Over the last six months, when we actually look at the net asset value of the trust, it's been relatively stable is pretty much unchanged. That's despite the fact that the markets been up and down risk aversion has been on and off all the time. And but we have been relatively stable. What has been noticeable is that the Trust has gone from 5% Premium around about April, March to a 5% discount today. So that's affected the share price, although, as I said, the net asset value has been relatively stable.

And is there a highlight in terms of areas that have performed well, or areas that have performed badly?

Yeah, I mean, it's been, it's been quite an up and down period, we had a lot of strength in sort of miners and cyclical businesses, as people became more hopeful that the pandemic was easing. And then there's been quite a lot sell off in those areas when the Delta variant came along in the so July, August, September period. So sentiment really moving around all over the place. But as I see on a on a point to point basis, the net asset value has been relatively stable. Okay, thanks, Bruce.

Looking under the skin a bit, Martin, if we could so what's been the picture on kind of earnings and dividends for the companies in the portfolio? And also how does that compare to the wider market?

With regards to the dividends, first of all, in the trust and in the market, the story is one of recovery, and improvement, dividends have been coming back most strongly where there was most disruption last year, and that was in the UK and Europe. Dividends in the second quarter went up over 60% in both the UK and Europe year upon year and the second quarter and that really just been driven a huge amount of that growth being driven by the reinstatement of cancelled and delayed dividends from the prior year. In addition to some quite large special dividends coming from the miners, and other parts of the globe, you know, dividends have been solid, but we were left with less growth just as a result of there being less disruption now, the prior year so dividends went up 5% in the second quarter in North America and we're basically flat in Japan again just struggling by the resilience there from the prior year. So that's fed through into the trust and I guess in earnings that too has seen a recovery story I guess the main question mark that we see at the moment is where we really go from here I'm on the earnings front because you know, the market has been about more volatile and a bit weaker more recently. And the market quite rightly has some concerns around you know, where revenue growth and earnings go towards the end of the year into next year as these you know, supply chain constraints etc. seem to be you know, weighing on market sentiment for perhaps longer than was initially anticipated. So earnings and dividends improving in a certain way, perhaps a question mark over earnings from here.

Okay, great. And sticking with you, Martin, if we could have you made any notable changes to the funds positioning over the past six months?

Past six months, we have made some changes to the positioning but not as many as the prior year. We sold out of Auckland Airport in the early part of the year it had rebounded quite nicely but it also faces uncertainty with regards to travel, and its a business where today the dividend hasn't come back. So we did sell out of that stock. We also sold out of Japan tobacco earlier in the year, continuing the theme of reducing that tobacco exposure and trust. And we sold out of buyer there the German pharmaceutical and specialty chemical company. I just started concerns that roundup and the litigation surrounding the weed killer roundup was going to continue to weight on the stock and distract management. On the other side of those we initiated position and the Canadian midstream company Enbridge transports you Huge amounts of natural gas all over the continent of North America a fairly solid business model, very solid revenues and very attractive levels of dividend and attractive levels of growth and that dividend so Enbridge was one of the new businesses that we put in. And then just before the end of the year, we put in two new pharmaceutical holdings. We put in Bristol Myers in the United States, and Sanofi in France, just really attracted by the valuation of both companies. But again, both of them having an attractive level of yield and solid growth and dividend. So that would be a summary of the activity during the first six months for the trust.

Okay, thank you, Bruce, if we could turn back to you. Where do you see as the most kind of exciting areas of growth in the global economy today, you know, whether that's sectors or regions, how are you seeing it?

I think the so called developed world has already enjoyed quite a bit of a bounce in anticipation of this pandemic is, our pandemic problems are easing, certainly seen that in Europe, North America, and to some extent in the UK. But I guess we're more focused on Asia for next year, I think he just been delayed slightly because of the Delta wave. And because of a resurgence of cases, which of course, further isolation and lock downs. But that really just postponed it to next year. And we think next year, should be good for earnings and dividends in Asia and emerging markets next year, and the year beyond in terms of sectors, we're going to come on to the issue of inflation, I think shortly, but we have been really focusing more on real assets. Because we do believe that there are some developments on the inflation front, which may not be pleasant for some of the sectors in the areas that have done well over the last 10 years. So real assets for us are things like pipelines, property, industrials, and even into the minerals such as iron ore, lithium, oil and gas, and we'd also, you know, telecom networks in there as well, because a lot of investment has gone in those businesses over the last few years. And they're really beginning to benefit or will benefit from an uptick in demand, especially for data. So real assets have become increasingly a focus of the portfolio.

And you mentioned inflation there. I mean, is that likely to be kind of the key determinant of the direction of markets in the year ahead, or do you think, interest rates, the dollar, the virus, all these other things may come to the fore?

Yeah, I mean, all these things that you mentioned, are very important in terms of the direction of financial markets, but the thing that is quite interesting at the moment, is that a lot of policymakers and politicians are maintaining the view that the inflationary pressures that we're seeing at the moment are transitory, although there's no actual evidence for that. It's probably more wishful thinking. But we do have in reality, there's a significant increase in things like energy prices of oil and gas. And that's before the world has actually emerged from a pandemic, because there's still lots of areas that are struggling. So the reasons for those things are under investment over the last few years as supply disruptions, as Martin's already mentioned. But we also have a changing geopolitical climate where less globalisation more tariffs and more rigidity in the flow of goods and services, and these are all actually inflationary. The question is, if the retail price index stays above 4% or 5%, in the UK, for the next six months or so what starts getting factored in to wage negotiations? And I think that may be one of the biggest challenges for markets or certain sectors of the market anyway over the next year, or year and a half. And that is how it digests some rather unpleasant inflation numbers.

And how are you handling that in the portfolio? Is that a question of looking for companies that have pricing power, for example?

Well, again, companies that have pricing power is always advantages. And companies will tell you companies have got pricing power, but you're never really sure if they do or not until the event. But it goes back to the issue of real assets that we talked about earlier. Because companies that have real assets, tend to be in a relatively strong position in an inflationary environment. The other issue about inflation is what happens to very expensive growth stocks that have valuations or current valuations that are kind of based on the perpetuity of low interest rates and low inflation that we've seen for the last decade and should that change then, perhaps, we have to be very careful about some sectors of the market that look overpriced. So yeah, I mean we we look through businesses on an individual basis. But you know, when you get a general rise in inflation, it's difficult to avoid input costs or labour costs, if you can pass them through great, but you know, it will be a much, much tougher business environment probably in the next year or two years then than we've had in the previous five.

Okay, thanks. Uh, one final question for you, Bruce, which is about the gearing on the trust. So what level is that at today? And what does that say about your sort of relative optimism or pessimism?

I'm not really sure that is a barometer of optimism or pessimism in terms of the gearing and we use bonds to de-gear, the trust when equities are expensive, and when bonds are expensive relative to equities, we go back the other way. So it's more a function of what is the most attractive asset. And last year, I think, as you know, Martin and myself and Sam divested quite a lot of bonds during the difficult period, because we could get yield and dividend growth, uplift from reinvesting back into equities. So the trust went from 94% yield at the beginning of last year, and there's now 101% into equities who were more geared into equities, there's probably more a function of bonds looking less attractive than equities, rather than seeing equities are really attractive. But we're always looking for opportunities and some of the bonds that we owned had got very expensive, then that's why we divested them.

Okay, thank you. And then just finally over to Martin to talk a bit about the outlook for the next 12 months, you know, any key themes you see in markets and sort of running through the portfolio?

I guess given all the risks that we've already, you know, highlighted, I think the outlook is the is the trickiest part as always is I don't think anybody would really be overly comfortable giving a detailed outline with any degree of certainty. I mean, we are, we are comfortable that we and are hopeful that we can continue to, you know, to repair on the income side as it relates to the trust and that ultimately, the best way for us to, you know, try and negotiate the uncertainty as we go forward. As via the diversification in the trust. So, you know, there's been new companies that have came in this year, there was a lot of new companies out there last year and as we as we move forward, we will always continue to look for those opportunities, regardless of where the companies are listed. Because at the moment, you know, they're in the best place to be is very, very difficult to soar and our means diversification is the best way to manage that for shareholders.

Great. Okay, thank you both so much for those thoughts today. As always, there's more information about trust at www.murray-intl.co.uk. And thank you so much for tuning in.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of Aberdeen. The companies discussed in this podcast have been selected for illustrative purposes only, or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.

Podcasts from abrdn Investment Trusts, invest in good company.

Cherry Reynolds: Hello and welcome to the latest in our abrdn Investment Trust podcast series.

With me today are Bruce Stout and Martin Connaghan, managers of the Murray International Trust. We're going to be discussing where they're seeing opportunities today as the economic recovery begins in earnest, welcome everyone.

Bruce let's start with you. The last year has been unusual to say the least, let's talk a little bit about how the Trust has fared over the past 12 months.

Bruce Stout: Well, I think first of all you can say that nothing really prepares you for a year like last year because we've encountered things last year that we've never seen before, so I think to sum it up it was really a year to try and negotiate, to get through without losing any money and we did that just about. In terms of the net asset value, total return was roughly flat, and we did manage to increase the dividend ahead of the rate of inflation which is the investment objective of the Trust. And I guess the final thing was that through the adversity, we did manage to take advantage of many of the opportunities that presented themselves particularly earlier in the year when we switched a lot of bond money into Equities and enhanced the yield and dividend growth characteristics of the Trust.

Cherry: Great now Martin, there's been a notable change in market mood over the past few months. Could you talk a bit about how that's manifested in the portfolio and whether you've made any changes as a result?

Martin Connaghan: Yeah well, there's not been a change in Bruces’ or my own mood but there has been the yeah, the much commented on you know, rotation within the market, you know a little bit from growth, towards value since the end of October into November.

I mean how that's manifested itself in a portfolio and a geographic perspective, we've seen exposures to Latin America and emerging markets in Asia begin to you know perform quite well. I've seen exposures from the energy sector, from materials, industrials you know also begin to perform quite well. We’ve made changes in the portfolio during that time but not as a direct result of the rotation you know, we've reduced some of the airport exposure - for example we sold out a Auckland airport, we reduced AZURE Airport in Mexico at the margin, just because those stocks had rebounded quite well and there's still uncertainty around air travel. You know we've been adding to elements of consumer staples or utilities, pharmaceuticals as well which have been a little bit weaker. So you know, we've been taking advantage of the market environment but that's far more driven by opportunities that we're seeing at the stock level rather than us trying to play any theme that the market might be focusing on from one quarter to the next because the direction of travel is quite difficult to gauge as is the length of time that the market might be focusing on it.

Cherry: Okay great, thanks Martin and Bruce - how confident are you about the emerging economic recovery and does it really make any difference to your portfolio positioning?

Bruce: Yes, gauging the economic recovery is going to be very difficult I suspect, none of us have tried this path of recovery from a pandemic so I daresay there'll be quite a few pitfalls along the way. But what's of prime importance to ourselves is not so much the economic recovery but more the business prospects for the companies in which we invested and have in the portfolio. For some of those companies that suffered last year from lack of social mobility of people is a welcome relief that things will get back to normal, we'll start to see the businesses pick up again and a lot of them have done a very good job of protecting their assets during a tough period and it will be very interesting to see what operational leverage they have to recover as we go forward from here in some of the companies that we own.

Cherry: Okay and Martin, what other big themes would you highlight from the portfolio at the moment?

Martin: I guess the only thing that we would really only ever point to would be the one of diversification. You know we're just really always trying to buy, well-run, well-managed businesses, that they do, different things in different parts of the globe because you know last year that certainly helped with regards to securing the revenues that we need to generate for the Trust. And given the uncertainty going forward, we feel that that's probably the only theme that's ever really prevalent in the trust is one of being a globally diversified investment trust.

Cherry: And Bruce, dividends were obviously one of the casualties of the pandemic though less so for the kind of global markets in which you operate. But even with that in mind, are you seeing dividends come back and if so are there any patterns to where they've been strongest, you know, in terms of geography or sector?

Bruce: Well, dividends are absolutely key aren't they for an income trust and it's something that Martin and I have been obviously paying a lot of attention to. I think the key here is to be able to have geographical and business diversification and the last time we really had a full-blown dividend recession in the UK, you have to go back 20 years and it lasted for about five years and even if you take the dividend recession of 08/09 in the global financial crisis, it was quite concentrated in the banks, many of these banks are still not back to what they had before. So, I think the key to recovering dividends is to keep the diversification throughout the portfolio. If there is one trend that we kind of see is that the strongly financed companies particularly in Asia have been far less hit than some of the businesses in the more developed world, where we've seen dividends decimated particularly in the UK, I think the UK dividends were down over 40% last year, so it's all about diversification from here and strong balance sheets.

Cherry: Okay and Martin, you've talked about diversification just then but what does the geographic mix of the portfolio look like today? I mean clearly there are areas where it's easier to get dividends than others where dividends have been stronger, I noticed you've reduced your Japan weighting a little bit and increased your U.S waiting I think - can you talk us through what the, what the portfolio looks like today in those terms?

Martin: Yeah, certainly, I mean if you look at the sort of more recent additions to the Trust over the last you know 12 to 18 months, they have been from everywhere. We've put, you know, U.S tech companies in, we've put European insurance companies in, we've put Asian and Chinese focused real estate companies in, so the recent additions to the Trust have been from all over the globe as we would expect.

I mean in terms of the asset allocation and from the geographic perspective at the moment, you're quite right, we're actually now, since exiting Japan Tobacco, we actually have a zero weighting in Japan at the moment, just as a result of struggling to see companies that we're both happy with that have the sizable and growing and sustainable dividends that we like to see. Elements of the allocation that remain or have remained relatively stable, have been exposed to Latin America and Asia, those have remained where they have been for largely the last few years and yeah more recently the U.S weight has been creeping up, the North American weight is around 25% and if anything that's been, you know, funded from a sort of gradual reduction in the UK weight, the last few years the UK rate at the moment is around about 6%.

So in terms of activity, they've been from all over the globe and new stocks that we've been putting in, elements of stability within the asset allocation being you know Asia and Emerging Markets, but there has been a little bit of a shift from some developed markets in the UK and Japan to developed markets in North America.

Cherry: In 2020, there was marginally higher turnover on the Trust. Bruce, I wonder if you could just talk a bit about why that was?

Bruce: Yeah, this kind of follows on from what Martin was saying. A small part of that was due to necessity, where a couple of business models we owned I think they irrevocably changed because of the pandemic and we sold out a couple of banks, Bank of Pekao in Poland and Public Bank in Malaysia. But the vast majority of the increased turnover was because of opportunity, there's absolutely no doubt about that. And at times to be able to buy high quality, equities, good companies, diversified companies, trading with above six percent yields, double digit dividend growth over one, three and five year periods - it was an opportunity not to miss and we could finance it from particularly emerging market bonds and get yield pickup and dividend growth pick up so that was the main reason for the increase in the transaction activity.

Cherry: Okay thanks and Martin let's turn to the risk side now. I mean what do you consider the main risks in markets today and are you doing anything in the portfolio to kind of protect against those risks?

Martin: Where do you start - I mean it could be you know the risk of another pandemic, there could be a risk a tantrum within markets, if and when there's to be a movement on rates if you believe that, you know, inflation is going to be on the rise for longer. You've got special purpose acquisition companies, anything that labelled ESG ran quite hard last year, we've got heavily oversubscribed IPOs, you get geopolitical risk, you've got climate change - I mean you can come up with a million and one risks if, you know really, really put your mind to it, that could impact on capital markets.

The point I would stress is that if you ask us what our review for last year would have been at the beginning of last year in terms of what the largest risk would have been, we would have probably given you the wrong answer, so you know, what do we do? You know, we focus on the things that we can control - and that's quite simply stocks that we put into the trust, and the stocks that we don't. And in doing that we just ask ourselves, you know really, really, simple questions around the management team, and the business, and the financial strength of it , and the market in which operates, and the strength of cash flows, and the dividends and you know, I just really don't see that changing at all, and again that just brings us back to that session with diversification if you like.

Cherry: Bruce, the markets have obviously run up quite a long way but there's kind of been a lot going on under the surface. What would you say about valuations today? Are they, are they a mixed bag, are you seeing over valuations in some areas and under evaluation elsewhere - I mean what's your big picture?

Bruce: Well, I think Martin and myself, we're very much focused on what we can measure in terms of valuations because what we've seen over really the last five or ten years, is that when there is a scarcity of growth and there has been really during a period of uncertain policy in the world, then people are prepared to pay higher and higher multiples for growth and it's not something that we are prepared to do.

The other thing that we've noticed recently, people moving further and further up the balance sheet to try and justify ownership of businesses and using metrices such as price to sales or price to clicks or whatever and it's not something and that we can get a tangible hold on, but conversely in many of the businesses that were overlooked last year in the broader sense as the market focused on tech and e-businesses all over the place, those valuations look okay relative to what's achievable in terms of earnings and dividends and so that's where our focus you know continues to be as it's always been - we're looking to buy growth at a reasonable price.

Cherry: Great and then Martin, just a final question to you - do you have any sense of what will be you know the big themes for global investors over the next 12 months obviously nobody would have predicted the pandemic but do you think things like interest rates or inflation might dominate?

Martin: Yeah, I mean it would certainly be too, I think you know the market will probably first and foremost focus on the you know the unwind of lockdown and the opening up of economies and trying to speculate on who will be and then subsequently ultimately are the, you know, the winners and losers of that. ESG was a focus last year, elements of that suffered a bit more recently, so it'll be interesting to see what happens there. Growth versus value as we've mentioned, bond yields and yeah definitely then, you know, inflation feeding through too at some point, where and when on interest rates, would be just some of the things that market participants will probably be able to focus on in the next 12 months.

Cherry: Thank you Bruce, Martin for those insights today and to our listeners for tuning in you can find out more about the trust at www.murray-intl.co.uk and please do look out for future episodes.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those ofabrdn. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns. Return projections are estimates and provide no guarantee of future results.