Murray International (MYI ) has reported a first-half investment return of 5.5% in its first results since bidding farewell to 21-year manager Bruce Stout in June.

The returns trailed the 12.2% generated by its benchmark, the FTSE World index, due to an underweight in US mega-cap technology stocks.

Abrdn’s Martin Connaghan and Samantha Fitzpatrick, who stepped up to manage the £1.7bn trust after two decades working on it with Stout, expressed concern over the dominance of the Magnificent Seven, which have provided the bulk of the benchmark’s return.

‘The much discussed “Magnificent Seven” account for a potentially alarming proportion of the earnings growth and index price moves that we have seen thus far. Market participants are rightly becoming more concerned about concentration risk, potentially exuberant expectations for these stocks and the broader market’s underlying health,’ they said.

In half-year results, the pair noted that while there were positive signs of economic recovery and growth in specific sectors, the global economy faced several significant risks and uncertainties.

In true Stout fashion, they pointed to inflation, geopolitical tensions, market concentration and consumer confidence as factors that could derail equity markets, which they believe trade at lofty levels, and lead to increased volatility.

The portfolio’s total income in the period under review fell by £1.8m, or 3.7%, to £46m, which was a result of the relative strength of the pound against most leading currencies and the reduction in gearing by £90m since May 2023.

The managers said selling positions in an equity portfolio yielding 4.5% to repay the debt that would have cost shareholders 6% to renew was deemed the correct course, having considered the potential impact on income generation.

The company repaid its maturing £50m fixed-rate loan, meaning borrowing now stands at £110m, or 6% of net asset value, at a cost of 2.56%.

The portfolio’s underlying dividend picture remains strong, they said, with only two of the 28 holdings that have declared full-year dividend intentions making reductions.

China Vanke, the Chinese property developer, cancelled its dividend, and the position was subsequently sold. The other reduction came from BE Semiconductor'>BE Semiconductor, which cut its dividend by 25%.

AI exposure

Given the trust’s defensive income return profile, many growth-heavy AI companies don’t fit the mandate, but the managers flagged US company Broadcom'>Broadcom – which is the largest holding at 4.7% of net assets – and saw its dollar shares surge almost 50% over the period.  

Connaghan and Fitzpatrick said the company – which, according to Morningstar data, has been in the portfolio since March 2020 – offered a reasonable dividend yield and was unique among peers with a combination of semiconductor and infrastructure software businesses generating predictable and profitable growth and industry-leading gross and free cashflow margins.

Other large AI-related companies include Taiwanese chipmaker TSMC'>TSMC, the second-largest holding at 4.5% of assets, and Dutch chipmaker BE Semiconductor, a 4.1% position.

The pair sold Swedish company Epiroc'>Epiroc, which makes construction and mining machinery, despite performing well since being spun out of Atlas Copco'>Atlas Copco in 2018. They exited Swiss pharmaceutical company Roche as they had higher conviction for other healthcare names in the portfolio.

The portfolio exposure to North American midstream companies was consolidated into one position, with TC Energy'>TC Energy sold and the capital recycled into Enbridge'>Enbridge.

They bought German luxury car brand Mercedes Benz Group'>Mercedes Benz Group as it’s looking to structurally improve profitability by increasing the proportion of higher-priced vehicles it sells, thereby improving margins and shareholder returns via dividends and share buybacks.

The trust’s discount widened from 4% to 8.7% over the period, during which the board spent £18.1m buying back shares.

On Thursday the shares rose 0.7% to 249.64p, having closed on an 8% discount on Thursday.

Over five years, shareholder returns of 37% trail the benchmark’s 62%, while over 10 years, shareholder returns of 86% significantly lag the benchmark’s 212%, according to Morningstar.