Murray International (MYI)has announced its annual results for the year ended 31 December 2016. During the period, the trust provided an NAV total return of 40.3% and a share price total return of 50.5% (the trust moved from trading at a discount to trading at a premium over the period). These are markedly ahead of it’s the company’s benchmark index (a composite index comprising 40% of the FTSE World UK Index and 60% of the FTSE World ex-UK Index), which the company says returned 25.8%. The Trust’s chairman, Kevin Carter, says that the most significant influence on the NAV outperformance of the benchmark was the 15% depreciation in the value of trade weighted Sterling over the year.
The Trust’s manager, Bruce Stout (pictured), says that Latin America provided the strongest regional equity market returns in Sterling terms, up 58.4% over the period. He says that behind the benchmark strength, Brazil excelled against a backdrop of declining bond yields, interest rate cuts, political resolution and currency strength and that MYI’s portfolio benefitted significantly from its Brazilian bond and equity exposure, both in terms of income enhancement and capital appreciation. Conversely, sentiment towards Mexico suffered from Republican campaigning in the United States. Bruce says that portfolio holdings were not unduly affected but progress was unequivocally constrained. He says that, somewhat surprisingly, North American equity markets surged to record highs despite further declines in corporate profits. In his view, momentum eclipsed fundamentals, particularly during the final six week, post-election rally. Looking elsewhere, Bruce says that rising protectionism fears and associated weakness in Chinese equities slightly restrained what otherwise proved exceptionally strong returns from Asia ex Japan. Portfolio performance returned +32.1% in Sterling terms from Asian equities, plus healthy double digit total returns from selective Asian bonds. He says that Japan, although fundamentally deteriorating from ineffective monetary policy and structural economic malaise, kept pace with most global markets. Sterling returns of +41.9% from the Japanese portfolio were well above average. The UK market clung onto historical highs set towards year end, but, In Bruce’s view, conviction investing remained absent from a fragile environment of rising tensions and increased nationalism. Europe’s total return of +19.7% proved almost entirely a consequence of Sterling weakness against the Euro. 2016 also provided powerful positive returns from the portfolio’s emerging market bond portfolio. Bruce says that a total return of 49.3% in Sterling terms over the period came from a combination of yield compression and currency uplift. He says that this more than justifies the relative underperformance “cost” of establishing such exposure over the 2014/15 period and that improving domestic fundamentals remain supportive of this asset exposure going forward.
Looking at individual regions and holdings, Bruce says that, in North America, Portfolio exposure focused on defensive above-average yielding businesses and that these performed well under the circumstances with overall returns exceeding those of the market. All seven North American holdings appreciated over the period, with core telecommunications holdings in Verizon and Telus particularly strong. Profit-taking in consumer staples reduced total exposure to 15.0% by year end.
In the UK, Bruce says that an overall underweight position contributed the most to relative returns and that strong stock selection from holdings in Weir Group, BHP Billiton and Royal Dutch Shell enhanced both absolute and relative performance, with only Vodafone disappointing against expectation. A new position in satellite company Inmarsat was initiated, with a long-term view towards its involvement in the provision of internet for global airlines.
Exposure to European equities was significantly reduced during the period (Bruce says to an historical low of 10.3%, down from 18.2% at year end 2015). He says that residual exposure remains defensively positioned towards pharmaceuticals and consumer staples companies with an overweight towards Switzerland. Bruce says that, following on from Brexit, Europe faces an increasingly complex year ahead, fraught with political pitfalls: Elections in Germany, France and Netherlands; Britain’s negotiated exit from the EU; Greece’s simmering debt crisis and Italy’s emerging bank crisis. He says that all of these need to be resolved, managed and defused against an extremely challenging economic backdrop in which corporate profits and dividends remain under pressure.
Looking to Latin America, Bruce says that, despite decent returns from dollar-denominated Mexican bonds, equity exposure within the portfolio struggled to make progress. Positive absolute returns of +14.1% were recorded but positions in Femsa and Kimberley Clark de Mexico constrained relative performance. He says that patience will be required, but solid corporate fundamentals support maintaining long term exposure. In aggregate, when including Chilean exposure initiated and built-up over the 2014/15 period, the total return from Latin American portfolio holdings was +44.3% in Sterling terms in 2016. He says that this was further enhanced by maturing Venezuelan sovereign bonds and Brazilian corporate bonds, which contributed significant capital and income gains. Given the possibility of further fundamental improvements and predominately low consensus expectations, selective opportunities will continue to be pursued.
Within Asia, the large position in Unilever Indonesia contributed positively but, of materially greater significance, were returns from exposures to Taiwan and Thailand. Representing close to 12% of overall assets, solid stock selection produced total returns of 47.5% and 53.8% respectively, adding to both absolute and relative performance. Bruce says that Taiwan Semiconductor and recently initiated Siam Commercial Bank proved standout performers in this respect although further robust stock returns from Coca Cola Amatil, MTR Corp and Public Bank may not have matched the overall regional benchmark. Recent additions to Asian asset exposure, which was increased by a further £77.3m over the period, include Auckland Airport in New Zealand and Tesco Lotus Retail in Thailand. Bruce says that both are relatively small growth companies well positioned to prosper from increasing consumer spending across the Asiatic region.
In terms of outlook, Bruce says that against a backdrop of unfamiliar extended valuations and deeply concerning fundamentals, there are no places to hide. Both bond and equity markets are very expensive on an absolute and relative basis but he says that portfolio diversification, through which exposures reflect preferred investment opportunities, does have the benefit of a wide opportunity set. Bruce says that, despite overall valuation concerns, it is still possible to differentiate between whether a business is cheap or expensive, whether it is quality or not. He says that with an emphasis on capital preservation and maintaining dividends, diversification remains the strategy of preference.
Murray International benefits from sterling depreciation and underweight exposure to the UK : MYI