The gloomy investor who is one of the few to do BETTER thanks to Brexit fears, we get Murray International manager Bruce Stout's best ideas
- Murray International's share price has risen by 30 per cent year to date
- The trust had just 10% weighting to the UK going in to the referendum
- It has just over 40 per cent of its investments in Asia, emerging markets and Latin America
Many investment trusts are still reeling from the shock of Brexit, but not Murray International.
Bruce Stout, who has been at the helm of the trust for more than a decade, had already turned away from UK equities over concerns about unsustainable dividends and irresponsible policymakers.
In fact, his style - looking for unloved opportunities in emerging markets - has been decidedly unloved in recent years and as a result performance has been patchy.
Strong fundamentals: Stout argues that even problematic emerging markets offer growth
In the three years up until the end of June, the trust's share price grew by just 1.1 per cent, compared with growth of 30.8 per cent for its benchmark, which is a composite of 40 per cent FTSE World UK and 60 per cent FTSE World Ex-UK.
However, in the first half of the year the Aberdeen-run trust's share price has soared by 22.7 per cent, more than double the benchmark as its lack of exposure to the UK insulated it from Brexit uncertainty.
For the Aberdeen manager, the biggest mystery is that the UK economy wasn't derailed earlier.
Stout says: 'We have had the same story for five years so if it was not Brexit that was going to break it, something else was. The current account deficit is huge, real income is at a 20-year low. We have been living beyond our means.
'Why sterling was strong [before Brexit] was a mystery to me but I think people thought interest rates would go up.'
Brexit aftermath: The Bank of England has stepped in to reassure the markets after vote leave
Going into the Brexit vote, the trust had just 10.4 per cent exposure to the UK, driven by the income manager's concern over the sustainability of dividends.
Dividend cover is a ratio defined by profit after tax divided by the amount of money paid out to shareholders - the lower the ratio, the less likely the dividend is to be sustainable.
Stout says: 'We have been reducing the UK for years so Brexit does not change anything for Murray International. We had our lowest exposure in years because of the dividend cover situation - a lot of companies are paying out too much and not investing.
Evolution: BAT has developed e-cigarettes
'There are quite a few companies in the UK that have not been able to cover their dividends over the last three or four years. If, at some point, they do not reinvest they will not have a business in five years' time.'
The UK companies that survived this cull in the portfolio were those that have international earnings and are not exposed to UK economic fundamentals.
Murray International's biggest equity holding is currently British American Tobacco, a UK-listed company that only derives 2 per cent of its revenue from the domestic market.
It predominantly derives sales from other parts of the world, and this year has seen growth in Russia and Middle Eastern markets. It has also branched out in to smokeless 'vaping' products.
Not only would the tobacco company be barely affected by any potential UK downturn, it has also been a beneficiary of the weaker pound. BAT reports its profits in sterling, meaning that its international earnings will look like more substantial when converted into the pound.
Opportunity: Stout bought government debt of countries such as Uruguay after currency falls
The trust pays out a reasonable annual dividend yield of 4.4 per cent, compared with a 3.7 per cent dividend from fellow global equity Income trusts Scottish American, and 3.8 per cent from Securities Trust of Scotland.
It has just over 40 per cent of its investments in Asia, emerging markets and Latin America.
The manager argues that while emerging markets have their own problems, at least their economic fundamentals are still positive.
'What is going to happen to [UK] growth, gilt yields and interest rates? We have got a global mandate so it makes more sense to invest where there is more certainty and more transparency. In the UK the outlook is very opaque. There is no road map for this - we do not know what is going to happen here.
'Every country has their own problems but the problems in emerging markets are set against a backdrop of positive bond yields and the continuing improvement of fiscal policy. They have rising real incomes and recognisable economic and financial relationships.'
The trust has the capacity to invest in fixed income as well as equities. Stout snapped up emerging market debt at the start of last year after several currencies saw a dramatic fall, including the Indonesian rupiah's fall to a 17-year-low versus the dollar.
Bruce Stout: 'The UK outlook is very opaque'
This included gaining exposure to fixed income from Indonesia, India, Uruguay and Mexico, primarily through government bonds.
It is the first time the trust has had a 'substantial debt' in emerging markets since 2007.
'A lot of the money we recycled went in to emerging market debt. The domestic currency fell to a level against sterling reminiscent of the Asia crisis, but there is no crisis. The fundamentals of India or Indonesia are a lot better than Europe or Japan, and they have a degree of continuity.
'We de-geared the portfolio out of equities into bonds in 2014 and 2015, which did not help performance because the currency kept going down, but now they have become very attractive on a relative basis,' the manager says.
'One of the reasons Murray International had a tough time 13 to 15 months ago is everything was really extreme and we wanted to rate less expensive stocks into the portfolio.
'It was a period where diversification just did not work - it didn't add any absolute or relative value. It went right out of fashion but when that happens you get very interesting prices.
'Nobody was interested in anything in Asia or emerging markets, only in places like the US - the markets became very narrow.
'People are now a bit more interested in markets that have lagged. The companies we couldn't give away two years ago are now being recognised as decent businesses. That always happens in investment management. But you do not change what you do.'
For now, Stout is adopting a 'wait and see' approach - but is ready to pick up stocks at bargain prices if the markets sell off again.
He says: 'At the moment, we are just going to wait until the dust settles on the events of June. We are comfortable with the way the portfolio is positioned, we will continue to recycle some money if we can find good opportunities on the outside, but that demands volatility.
'If we see an increase of volatility in equity markets that is when you get a good price - and I'm Scottish, I want to get things as cheaply as possible.'