An update from managers Bruce Stout and Martin Connaghan
In this podcast, managers Bruce Stout and Martin Connaghan discuss the impact COVID-19 has had on this global portfolio. They discuss the positioning of the Trust heading into the crisis, how they have reacted and what they are doing to prepare for the future.
Recorded on Wednesday 27th May 2020.
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Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at how the Covid-19 outbreak is impacting their portfolios. Today we welcome Bruce Stout, Manager of the Murray International Trust and Martin Connaghan, Deputy Co-Manager alongside Samantha Fitzpatrick. Bruce, if I could start with you, could you give me a short history of the trust through this period? I mean, how were you positioned going into the crisis for example?
Bruce Stout: Yes, sure. I think it would be fair to say that we entered into 2020 in a very cautious frame of mind and not because we anticipated a global pandemic or anything like that, but just towards the end of 2019 global equity markets, particularly the US, looked extremely overvalued to us relative to fundamentals. There’s been a great multiple expansion without really any improvement in earnings. And after 11 years of a business cycle, which was getting pretty long in the tooth, we were a bit concerned that we’d see growth slowdown and maybe a recession in the developed world anyway. So the portfolio was de-geared from equities, we only had 94% exposure to equities because we had 16% in bonds. And within the portfolio, we had quite a high rating - 80% in telcos and 17 in consumer and 15 in tech and 11 in pharma and things. So you can see we were well positioned in terms of focusing on quality and what we felt was sustainable earnings. And I guess the other thing you might add is that there was quite a significant Asian exposure towards year end as well.
Interviewer: And have you made any changes to the portfolio as the crisis has unfurled or did you generally find it was kind of resiliently positioned as it was?
Bruce Stout: No, I mean, there was quite a few surprises. As I say, we've never managed money in a global pandemic, so we didn't anticipate the way different business models would respond. But what we did find is that some very interesting opportunities started to present themselves as the crisis unfolded. Particularly during the third week of March, when we saw a lot of real volatility in markets and the breakers on during the day in various stock markets to prevent losses. We sold a lot of our short dated Brazilian and Indonesian sovereign bonds, which had held up very, very well and use those funds to buy a couple of positions in Abbvie a pharmaceutical company in the US and Broadcom, a global semiconductor company, both of which increase the yield - we've got yield pickup and obviously enhanced dividend growth. And then since then we've also had some very interesting opportunities. We've added two new positions in China with a purchase of Ping An Insurance and China Resources Land, two companies that we've been monitoring and watching for some time and just waiting for the opportunity. So having the money to move from bonds to equities during this particularly volatile time was advantageous for us and it's the first time really in five years that we're close to being almost geared into equities, but not quite.
Interviewer: Okay and Martin, this has obviously been a challenging time for dividends. How have the companies in Murray International held up generally? Are you seeing cuts on a similar magnitude to those seen in the UK?
Martin Connaghan: I mean, we’ve really seen everything to be honest. In terms of across the globe, we have not seen them cut to the same magnitude as we have in the UK, but we have still, we’ve seen cancellations from businesses where the business model is under pressure given the environment. The airlines, for example, not that the portfolio invests directly in them, but we do have some exposure to airports for example, via Auckland Airport. We've seen cancellations as a result of the business model and we’ve seen cancellations as a result of the regulatory or government pressure in the case of European financials, for example. Then we've also seen reductions in dividends, and again, for example, from certainly oil and gas industries where stocks including Schlumberger and Royal Dutch Shell have cut their dividends by 75% and 66% respectively. On the other side of that, we've seen companies that have already paid their full dividends for the year. Examples of that would be healthcare companies, pharmaceutical companies such as Roche and Novartis whose business models have just thus far seeing far less of an impact. And companies like these two have paid their dividends in full during the first quarter. Then we've also seen companies in Asia for example where there hasn't been the same government or regulatory pressure to act on dividends. So again, for example, Siam Commercial, a financial in Thailand, which pays its dividend for the year in full. So we've seen a handful of cancellations, a handful of reductions, and a handful of companies pay in full. The uncertainty is really, you know, what happens with subsequent interim dividends as we move through the year and that, regardless of geography, as a particular fluid situation.
Interviewer: Okay, so that's the outlook - it's still not clear, it's not like we can say we're kind of through this dividend cycle and we've got all the bad news out there.
Martin Connaghan: No, I mean, where we go from here is really the trick question. I mean, we believe that a number of the core holdings within the Trust that are from more resilient sectors via technology or healthcare, communication services, consumer staples could very well have the strengths of balance sheet and the resiliency of cash flows to maintain incentive payouts for the remainder of the year. The uncertainty comes from, management teams, for example - they may just take the opportunity, the free pass if you like, to reduce, delay or cancel dividends over the next quarter or two, just to preserve cash and see what happens and visibility improves. The other uncertainty is there could still be subsequent government or regulatory pressure on dividends in certain geographies or industries that we haven't seen yet. Then finally, there’s massive uncertainty around whether we see a second or third wave of this virus, or even a deterioration in the current situation of countries that may have been too slow to initiate restrictions, or countries that have lifted them too quickly. So it's still really too early to say where we are with this – those are the three main factors that will drive what happens, we believe. The difficulty comes from the fact that only one of them are really in the control of the management teams in which we invest.
Interviewer: And Bruce, where companies have cut dividends, do you have a policy that you would automatically sell out or is it much more nuanced than that? How are you assessing whether that dividend might come back?
Bruce Stout: Yeah, I mean, the short answer here is no. We haven't just automatically sold out. You have to assess the fundamentals of the business. I think a good case in point there is Martin’s already actually alluded to it, within transportation, we own the two airports, Auckland Airport in New Zealand and Grupo Asur in Mexico. Auckland immediately cut its dividend, not surprisingly, I guess because because all flights to and from New Zealand were stopped, and it maybe some time before they come back, but that doesn't actually detract from the long term attractiveness of the airport. It's a unique asset that it owns in the business model with growth opportunities longer term, because at some point in time, travel will be resumed . We don't just divest immediately and then conversely Asur which owns airports in Mexico and the Yucatan Peninsula and Cozumel in Cancun, it's maintained its dividend. The interesting thing here I think is that the company has previous experience of business interruption where business has suddenly stop, by hurricanes affecting the Gulf of Mexico, or swine flu in 2009. And in previous periods, it's weighted to assess the longer term implications of what actually went on at that time. That gives you confidence because the management has actually been through that before. But I guess the final point is, when assessing whether companies might bounce back, that poses a much more difficult question because of the timeframes that may or may not be involved. Thankfully, we’ve no exposure to some of the more challenged sectors, such as bricks and mortar retailing or developed market, banks and insurance companies and deep cyclical consumer discretionary type companies, such as autos. So the very simplistic business models that we own, it gives us some degree of comfort there.
Interviewer: Markets have come back a long way, particularly in, in places like Asia which seems to be kind of further through the pandemic. How much, or to what extent do you think they reflect the risks? Or is there a danger that they've got ahead of themselves?
Bruce Stout: There's a real dichotomy here. The market prices really reflect the risks. You look down any screen of markets, and you will see markets in Asia that are down 20%, as many are in Europe, and the UK is not far off there too. Any then you get other markets such as the Nasdaq which was up yesterday and the S&P not that far off it either. So there's obviously some real diverse opinion here. I think the important thing is, the consensus view, I think is probably because of the global financial crisis experience of 2008/2009, believes that the deeper recession, the steeper the recovery. And we're in a really deep recession at the moment, but we're not so sure about that view. I mean, normally it's the cause of the recession that dictates the pace of recovery. Previous recessions because of inventory builds or property collapses or banking crises have been monitored in the past. But we don't know exactly what happens when you voluntarily shut down a substantial portion of society and business. We know of absolutely no parallel to the current conditions, so the range of possibilities of economic outcomes are still extraordinary wide, as are potential clinical developments as Martin said. So we suspect there are many tough obstacles still that lie ahead as we go back to work and it proves to be a long, small protracted return. But that's why we'll maintain great caution, but we'll also need to capitalize on the opportunities when mispricing occurs along that way.
Interviewer: Okay, and Martin, what feedback are you getting from the companies you're talking to? I mean do they believe that the economic fallout will be as calamitous as some are suggesting?
Martin Connaghan: Again, it really depends on the end market conditions that they’re facing. I mean, most of the companies that we have met with aren’t -- or simply really can't say too much in that regard. The vast majority of companies have actually removed guidance altogether for this year, for the reasons mentioned earlier in terms of what's driving the uncertainty. I mean, some of the communication services stopped – Murray International typically has around 15% exposure there, Horizon in the US for example - they have removed revenue guidance for this year, because they have absolutely no idea what the base sales are going to look like for the rest of the year. But they have given earnings per share guidance of between being down 2% and up 2% on last year, so there is a degree of visibility and stability in a business like that. Again, some of the healthcare stocks have also managed to affirm guidance for the year. Murray International’s core holdings from within healthcare is Roche and at their Q1 earnings back in April they maintained their 2020 guidance which was to grow earnings per share in line with revenues and that would be low to single digit growth. So again, some business models allow management teams that luxury so far. In terms of some of the negatives, some of the large international oil companies for example have seen unheard of demand disruption with regards to their downstream operations. In terms of demand for petrol and diesel at the pumps for aviation fuel, some markets have seen 90% to 100% in terms of demand disruption. In some geographies that has begun to come back but again that still remains a pretty fluid situation. Some of the airlines have said that it could take years for the level of travel to return to where it was previously, if indeed it ever does subject to the change that we're going to see in behaviours and in terms of our approach to travel for business and for leisure. In some areas it remains quite stable and some areas it remains quite weak, but the vast majority is uncertainty and that's just due to the lack of visibility. The only point and the final point that I would make on that is Q1 earnings season or the period of reporting only really included a snippet of the period where lockdown which really have started to bite. So even though we have thus far seen guidance meetings, we could see management teams walk that rhetoric back, depending on what we see in terms of the second quarter. So again, the overriding thing is uncertainty.
Interviewer: And Bruce, I think I might know your answer to this question, but it's obviously been a very difficult time for some of the major UK dividend players. To your mind, does this environment strengthen the argument for investing globally, particularly for those who need an income from their investments?
Bruce Stout: Yes, I mean, I think there has always been an argument for investing in global income even more so over the past 20 years when particularly companies in Asia have embraced the concept of returning cash to shareholders through dividends, which they didn’t do 20 years ago. But, I think the key to future income will lie in the orthodoxy or not that prevails in the countries in which companies do business and are domiciled. By that I mean that in the developed world where we have such incredibly low bond yields, I think the 10 years gilt today is 20 basis points, and such huge debt loads, it suggest that dividend yields of the past may prove pretty difficult in the future when we’re talking about nominal levels. When we look at more orthodox areas of the world such as Asia and some areas of the emerging world, then we have economics of broken yield curves and rising savings and everything that suggest that a dividend level of 3% or 4% is totally in line with prevailing fundamentals of the countries. Therefore that emerging dividend culture that is there, we think will just develop further from here. And from that respect we're optimistic about the income prospects from various parts of the world going forward.
Interviewer: Martin, have you changed the way you assess risk in the portfolio at all? I know that elements like balance sheet strength and cash flow have always been important, but I wonder if there are a number of tweaks you've made just to reflect the new environment?
Martin Connaghan: Not really at the moment. I mean risk for us, quite simplistically perhaps, has always really been at the stock level. As you say, getting a firm understanding of what we really are exposing the shareholders to in terms of what any business does and where it does it. You know what its key markets are, the currencies involved, the regulatory environment, and what the government situation is, the management team and what their policy has been historically towards shareholder returns, how the financials look in terms of cash flows and balance sheets. So we've always looked at those things and we'll certainly continue to do so. How we look to manage risk by looking at those things is to drive levels of diversification within the portfolio, and if anything, we will just continue to do that. That may well increase as a result of the environment that we'll find ourselves in. And at some point there will be a pandemic scenario for us to have a look at within our own risks systems to see how the portfolio would, in theory, stack up against it. But right here right now we will just continue to focus on what the business is doing and what we're really exposing our clients to.
Interviewer: Okay, great, and Bruce just finally, this has obviously been a rocky time in markets, even though there have been some recovery. Is there anything you would say to investors just to give them some reassurance about the environment we're facing today?
Bruce Stout: Yes, I mean, it's always very difficult for investors at times of deep uncertainty. Past history and experience has shown it’s normally very prudent to remain calm, humble and unemotional if you can and focused on the long term at times like this. It is very important at times also like this to trust in the management of the quality businesses in which you’re invested. Management that maybe demonstrated the capability to deal with adversity and emerge stronger in the past. And we feel across Murray International’s portfolio we’ve got a lot of that exposure, exposed to various different countries, diverse sectors, diverse businesses throughout the world. Such diversification has served us well in the past in delivering our investment objectives and we believe it will continue to do so in the future.
Interviewer: Okay, great. Thank you so much Bruce and Martin as well for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.murry-intl.co.uk. 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 of Aberdeen Standard Investments. 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.
AGM presentation from the Manager
Bruce Stout, the Manager of the Company, has recorded a short commentary for the year.
Recorded on Monday 27th April 2020
A focus on quality
In this podcast, we focus on 'quality' companies.
It has long been part of the Aberdeen Standard Investments philosophy that returns from 'quality' companies are more resilient over the long-term. We believe quality becomes particularly important in difficult environments, such as those we find ourselves in in today.
In this podcast, we are joined by Bruce Stout, manager of Murray International Trust, Hugh Young, manager of Aberdeen Standard Asia Focus and Ben Ritchie, co-manager of Dunedin Income Growth Investment Trust.
We discuss the theme of 'quality' - why it has formed a core of our investment philosophy and what that looks like in practice.For more information: www.murray-intl.co.uk, www.asia-focus.co.uk and www.dunedinincomegrowth.co.uk.
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