Murray International scraps performance fee after disappointing year

Murray International had a poor year in 2015. The Chairman said he was disappointed to report that the NAV not only underperformed its benchmark in 2015 but also declined in absolute terms. He says a NAV total return of -7.8% inclusive of a 3.3% dividend increase (46.5p vs. 45p in 2014) compared unfavourably with a benchmark total return of +2.6%.   The Chairman says the benchmark total return was positively affected primarily by the performance of United States equities and to a lesser extent by Japanese equities.  The Company is underweight in both these relatively lower yielding markets. Beyond that, numerous global equity markets declined in Sterling terms with particularly severe corrections in companies exposed to the energy, commodities, utilities and industrial sectors.  Many of the portfolio holdings are in countries and stock markets which were especially affected by these trends.  In addition, performance also suffered from a number of specific stock developments.

The performance fee is being discontinued and the annual management fee will now be charged on the net assets on a tiered basis. Previously the base level of the annual management fee was set at 0.5% of “net assets including borrowings for investment purposes” – which most people would call “gross assets”. From 2016 onwards the annual fee will be charged at 0.575% of net assets up to £1.2bn, 0.5% of Net Assets between £1.2bn and £1.4bn, and 0.425% of Net Assets above £1.4bn. They say that, at present levels of gearing and net Assets this is a small fee reduction, but the reduction becomes greater once net assets exceed £1.2bn. They are also changing the termination notice period of the management contract from 12 months to 6 months, more in keeping with market practice. The above arrangements will take effect from 1 January 2016.

The NAV total return for the year to 31 December 2015 with net dividends reinvested was -7.8% compared with a return on the benchmark of +2.6%.  A full attribution analysis is given in the Annual Report, which details the various influences on portfolio performance.  In summary, of the 870 basis points (before expenses) of performance below the benchmark, asset allocation detracted 670 basis points and stock selection a further 200 basis points.  Structural effects relating to the fixed income portfolio and gearing, net of borrowing and hedging costs, deleted a further 180 basis points of relative performance.

In North America, portfolio exposure, focused on defensive consumer staple and telecommunication businesses, performed well in the United States, but the Canadian holding in Potash Corporation of Saskatchewan continued to restrain overall North American performance. Excess supply and below trend demand meant the global potash market remained painfully out of equilibrium.  A further 13% appreciation of Sterling against the Canadian Dollar merely accentuated difficulties.  They believe, with numerous negative influences now arguably discounted, the outlook for this industry, and Canadian exporters in general, should improve.

Performance of the Trust’s UK portfolio proved particularly disappointing both on an absolute and relative basis. Stock price declines at Standard Chartered, Royal Dutch Shell, Weir Group and BHP Billiton all proved problematic. They say, whilst compelling value is deemed to exist in these companies, patience will likely be required before their full potential can be reached.  In Europe, despite positive defensive contributions from 7% exposure to Switzerland, individual stock weakness in emerging market focused French retailer Casino and oil services company Tenaris, deleted portfolio value on both an absolute and relative basis.

A seven per cent total return decline from portfolio exposure to Latin America also added to constrained overall performance. Significant gains in Mexico proved insufficient to offset stock and currency weakness in Brazil. In Mexico, perceived vulnerability to international capital dependency kept investors fearful and created downward pressure on the Peso.  The Mexican stockmarket return of -9.2% bore testimony to this, but portfolio exposure fared much better. Large holdings in Grupo Asur, Femsa and Kimberly Clark de Mexico delivered solid profit and dividend growth, leading to a strong positive total return of 15.7%. Unfortunately, offsetting such resilience were negative contributions from Brazil.

In Asia, whilst positive stock selection enhanced relative performance, overall capital depreciation still occurred. Absolute strength in Indonesia and Taiwan contributed welcome positive returns in both capital and income. Defensive stock selection in Singapore mitigated overall market declines whilst having no exposure to China and Korea avoided potential negative returns.

MYI : Murray International scraps performance fee after disappointing year