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UK returns go up in smoke for Stout at Murray International

11 March 2019

Poor UK stock selection and a big fall in British American Tobacco punished Murray International last year as the popular global equity income index underperformed its benchmark for a third year out of five.

Poor UK stock selection punished Murray International (MYI) last year as the popular global equity income index underperformed its stock market benchmark.

Although the £1.5 billion investment trust holds 12% of its assets in the UK, well below the 40% of its composite FTSE World UK and FTSE World ex-UK benchmark, this part of the portfolio slid 20%, more than the 9.5% decline in the FTSE All-Share, with British American Tobacco (BATS) its worst performing stock.

The disappointing UK performance offset the defensive and pro-Asian bias of fund manager Bruce Stout who had nearly 32% in the region, excluding Japan. The absence of any China stocks shielded the portfolio from its stock market slide, and the Asia allocation provided a 1.4% return. 

Overall, however, even including dividends, net assets fell 7.5% while shareholders lost 6.8%, compared to the benchmark which shed 5.2%.

Chairman Kevin Carter said the income portfolio ‘struggled initially [but] held up strongly in the sell-off’ in the fourth quarter and was ‘small comfort’.

However, it may not be enough of a comfort for investors who have seen the trust underperform over one, three, and five years when compared to its Association of Investment Companies (AIC) peers.

It has reported a NAV total return of 41.3% over three years versus 43.2% for the AIC Global Equity Income sector and 48.9% versus 56.9% from the sector over five years.

Last year was the third year in the past five that the trust, a 4.4% yielder whose shares trade at a small premium above NAV, has lagged its index. It underperformed in 2014 and 2015 but stormed back with a massive 50.5% jump 2016 and in 2017 also grew NAV although the share price slipped behind that year.

‘Out of favour despite supportive yields and cashflows, the [tobacco] sector failed to deliver defensive support,’ commented Stout. ‘Patience will be required until sentiment improves.’

Stout sees little opportunity in the US, as he had just over 19% of the trust invested at the end of December, well below the benchmark weighting of nearly 38%.

The fund manager believed the ‘propensity for parsimonious payout ratios still prevails within corporate America’ and will limit the potential for dividend growth.

He was negative on the UK saying any ‘meagre’ growth would rely on credit and savings and the ‘already exhausted debt-ridden consumer cannot extent borrowings indefinitely’.

Although Stout focused on investing in UK companies with a high proportion of overseas earnings the shares proved ‘extremely disappointing’.

‘Only BHP Group (BHP) and Royal Dutch Shell (RDSA) delivered above market returns despite neither conforming to typecast defensive businesses,’ he said.

‘For British American Tobacco (BATS), Weir Group (WEIR), and Vodafone (VOD) it was a year to forget and move on.’

Stout said the future of UK corporates relies on ‘intangibles’ and only when Brexit is ‘done and dusted can the damage be truly assessed’ but ‘from a global perspective, the argument to invest has seldom been so uncompelling’.

‘The market repricing of late 2018 is unlikely to be the end of this corrective phase. Consequently, from a portfolio management perspective, great caution needs to be exercised,’ said Stout.

Investment company news brought to you by Citywire Financial Publishers Limited.


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