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'Buy' Murray International as value comes back in style
Analysts at Stifel slap ‘buy’ on Bruce Stout’s underperforming global income fund which yields 6% but has proved resilient recently.
(Update) Investment trust analysts at Stifel have slapped a ‘buy’ rating on Murray International (MYI ) after Bruce Stout’s underperforming global equity income fund held up well in the New Year sell-off.
Between 1 January and 5 February the net asset value return of the £989 million portfolio was flat although the share price fell 5%, analysts Iain Scouller and Maarten Freeriks said.
While conceding this was ‘unexciting’ the analysts said it compared well to the 8% average decline in the net asset values (NAV) of other global trusts and the 17% plunge in the portfolio of leading global growth fund Scottish Mortgage Trust (SMT ) since the start of the year.
Has trust turned a corner?
Writing in a note to investors, Scouller and Freeriks observed that the trust’s ‘defensive qualities appear to have come to the fore’, leaving them to ask ‘has MYI’s performance turned the corner?’
Advancing their case they wrote: ‘Since the start of the year the portfolio has benefited from sterling’s weakness, given about 90% of assets are non-sterling. The bond portfolio (15% NAV) has performed well and the “defensive-income” type stocks which are dominant in the portfolio have been performing better than many of the “growth” sectors in the market.’
However, the analysts admit the trust has a lot of ground to make up after a tough three years. The bearishness of Stout (pictured) towards developed markets he considered expensive and positive view of emerging markets, which he considered good value, have hurt the portfolio, which has lost nearly 9%. The shares, which once traded on a premium to NAV, have fallen to a discount to their underlying value, leaving shareholders nursing an 18% loss over three years, even after dividends are included.
However, the quarterly shareholder pay-outs are the trust’s saving grace as they support a 6% dividend yield, which the analysts note, is among the highest of equity income trusts.
The analysts also take confidence from the trust’s board restarting share buybacks last month in a bid to prevent the discount widening further.
Aberdeen Asset Management charges 0.5% a year to run the trust plus a performance fee if the trust’s net asset value beats a benchmark made up of 40% FTSE World UK and 60% FTSE World ex-UK.
According to Stifel, which is employed as a market maker in the stock, Stout needs to achieve £22 million of outperformance to make up for the poor returns in 2013/14 before the additional fee becomes payable.
Murray International shares initially added 5p to 784.4p but later fell back, down 2p at 777p.
Value vs Growth
Stifel’s positive rating on Murray International comes amid a growing debate over whether 2016 could see a shift in investment style from ‘growth’ to ‘value’.
Analysis by Morgan Stanley has shown the gap between outperforming growth stocks and underperforming value stocks is as wide as it was in the 'dotcom' bubble at the end of the last century.
James Clunie, manager of the Jupiter Absolute Return fund, said high growth internet stocks like Facebook, Amazon, Netflix and Google, nicknamed 'fang', had proved adept storytellers, convincing investors their shares could support lofty valuations because they were disrupting traditional businesses.
Clunie said Netflix shares traded at 285 times earnings, which was a problem as it left no room for error as it rolled out its streaming on demand programmes. Divorcing share prices from fundamentals left no wriggle space at a time of weakening economic growth either. 'In the absence of growth, these have become overcrowded trades where investors have gathered around a narrow pool of assets,' said Clunie.
Growth investing has done well in recent years as central banks have resorted to ‘money printing’ to support economies and stock markets.
Peter Toogood, investment director at City Financial in London, said the bull market had left growth fund managers ‘party to one of the most extended momentum trades in history – over-priced growth stocks.’
By contrast, ‘value’ investors, who preferred to buy stocks when they were cheap, were exposed to what he called ‘real economy’ sectors such as energy, mining, banks and industrials.
A rotation from growth to value could occur into two ways, Toogood said:
- a complete market ‘washout’ like the 2008 crash when all sectors fell but cheaper value stocks did better;
- or, as in 2005, the current economic gloom transpires to be wrong and economies and markets revive in the second half of the year with value again trouncing growth because the stocks start from a lower level.
This idea has also been picked up by Aberforth Smaller Companies (ASL ), a well-known value fund which in its recent annual report suggested rising US interest rates could be the catalyst for a style shift away from growth.
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by Gavin Lumsden on Oct 23, 2016 at 00:01