Bruce Stout’s shareholders have stood by him during his first year of under-performance since taking over the £1.3 billion Murray International investment trust a decade ago, after it was harmed by emerging market turmoil.
Managed by Stout (pictured) since 2004, Murray International's share price total return has fallen by 8.5% in the year to April, trailing the benchmark (composed of 40% FTSE World UK and 60% FTSE World ex UK), which made a 7.7% gain.
Over five years, the trust is still up 102.1% versus a benchmark return of 88.5%, however.
Stout said he was not fazed by the short term dip, which he said was down to the relative underperformance of emerging markets compared with developed regions in 2013.
‘The poor relative performance is because developed markets have done so well – the US is up 30%, UK up 22%, Europe up 25% – but it’s just price-to-earnings expansion,’ he said.
‘Last year, during the relative underperformance of Murray International, there were many companies we owned who did exactly what we expected so in absolute performance there was no money lost, but the share price did not do anything, so from a market perspective it was disproportionate,’ he said.
‘But that does not mean you should change your process, because these periods happen.’
A consistently strong pound has also cost performance. ‘For the last five years, the relentless rise in sterling, which is now close to a five-year high, has been a drag on absolute performance because 87% of our assets are outside of the UK, so that has been a headwind. But currencies don’t go in a straight line forever,’ Stout said.
The manager is also scathing of the financial services industry’s focus on short term achievements.
‘Fund management is like football, you’re only as good as your last quarter. People are all long term until you underperform, then they are all short term. Our shareholders are mainly retail and understand the trust and the majority are in for the long term. The shareholder base is strong, but the industry can look very short term,’ he said.
Aberdeen Asset Management, which manages the trust, has also suffered recently from its exposure to emerging markets, reporting outflows of £8.8 billion in the six months to March.
The region has been blighted by a liquidity crunch as investors reacted to former Federal Reserve chairman Ben Bernanke’s suggestion he would reduce asset purchases, coupled with slowing GDP growth.
But one positive from this volatility is the famously bearish manager is seeing more opportunities in developing economies than before.
‘Emerging markets are more cyclical than they have ever been, so when the cyclical upturn comes then there is the potential to surprise on the upside for earnings, which is different for developed markets, which will see more of a downside in earnings,’ he said.
‘There could be positive surprises in emerging markets now valuations are not stretched, so that is a good start.’
Emerging market debt
For the first time since the financial crisis, Stout is buying into emerging market debt. ‘From a global perspective, we haven’t seen so many bonds below par with such a weak currency since 2008,’ he said.
The manager pointed to debt-to-GDP ratios of up to 100% in developed market countries. By contrast, he thinks countries such as Indonesia and Brazil will experience a ‘J-curve’ as their currencies appreciate, meaning they will be able to cut interest rates.
Stout has recently bought into Brazilian and Indonesian sovereign debt, which he said were cheap and offering a decent yield. Brazilian sovereign bonds are now the trust’s second biggest fixed income holding of 1.2%, while Indonesia is joint fifth with a 0.8% stake.
Finding a good risk-return ratio was crucial in the current financial environment, Stout argued, because developed markets have become so overpriced.
‘There are some really interesting valuations in emerging market debt at the moment. We have elections in Indonesia, Turkey and Brazil, so they are discounting a lot of political uncertainty but we are seeing genuine improvements on the domestic side,’ he said.
‘Valuations always drive where markets ultimately go, and there are so many expensive equity markets that if you buy something and it does not deliver, you are going to get a lot of capital depreciation.’
Another upside to the dip in the trust’s performance, Stout said, is that its ‘ridiculous’ double digit premium has subsided, although the shares are still trading at 5.9% above par.