Ride the global recovery with a defensive income via Murray International

Equity income investors have had a miserable 12 months, but Murray International Trust’s (MYI) proposed final dividend of 18.5p a share is an encouraging development. This takes the trust’s total dividends for 2020 to 54.5p a share, up 1.9 per cent on the 53.5p a share it paid in 2019 and ahead of the 1.2 per cent increase in the Retail Prices Index in 2020. The trust had an attractive yield of 4.7 per cent according to broker Winterflood, as of 12 March.

Murray International is a high conviction global fund that aims to grow capital and deliver a rising income over time. It is more than double the size of any other global equity income trust listed in London, with assets of £1.66bn on 12 March, according to Winterflood. 

It has been run by Bruce Stout since 2004, a well respected manager who has long banged the drum of emerging markets looking more favourable than indebted western countries. The trust provides income by investing in both equities and bonds, with 87.6 per cent in the former and the rest in the latter at the end of January. The equity exposure gradually increased over the course of last year as Mr Stout thought that equities became more attractive after the sell off last March.   

As a number of Murray International’s holdings cut their dividends over the past 12 months, 15 per cent of the dividend was paid out of the trust's revenue reserves last year. Broker Stifel says that the dividend cover has fallen to 0.86 times from 1.01 times in 2019. But Murray International’s board appears committed to maintaining its progressive dividend policy, given the investment objective.

At the end of January, 30 per cent of the trust was invested in Asian equities, compared with 23 per cent in the US, 16 per cent Europe ex UK, 13 per cent Latin America and emerging markets, and just 4 per cent in the UK. While the UK allocation looks small, it is in line with the investment trust Global Equity Income sector average, according to FE Analytics.  

The market events of 2020 resulted in one of the most active trading periods for the trust in over a decade. Its managers said that this was partially due to necessity, but mostly because of opportunities. Despite 2020 it being a more active trading year, the trust's portfolio turnover was 18 per cent of net assets, according to Stifel, reflecting its managers' long-term 'buy and hold' investment strategy. 

The trust's managers added 10 new holdings last year, including Broadcom (US:AVGO), a company that designs, develops and markets digital and analogue semiconductors. They also added Ping An Insurance (CHI:601318), which Stout says distinguishes itself as one of the world’s most technologically advanced multi-line insurance providers, and Enel (ITA:ENEL), a multinational power company that manages wind, solar, geothermal and hydropower plants in Europe, the Americas, Africa and Asia.

Six positions were divested entirely. These include Bank Pekao (POL:PEO) in Poland and Public Bank (MAL:PBBANK) in Malaysia, due to concerns on pandemic-related damage to longer-term business objectives. Sales of Brazilian equity holdings Ultrapar (BRA:UGPA3) and Wilson Sons (BRA:WSON33) provided capital for increased investment concentration in core Latin American holdings. 

At the end of January, the trust had 54 equity and 24 bond holdings, although it can have up to 150 investments. At the end of last year, the largest 40 investments accounted for 88 per cent of net assets, which means the trust may be exposed to a higher-than-average degree of company-specific risk.

Although the trust has slightly underperformed its peers over the past year, Stout recently commented: “The portfolio remains positioned in companies that are financially strong, have the capacity to increase dividends as uncertainty subsides, and are operationally active in areas of the world less likely to be burdened by post-pandemic debt burdens."

While the trust has exposure to technology, it has a bias to cyclical and essential services in Asia. Stout says that with debt escalating in the US, "the outlook for spending, growth and income looks extremely compromised. At some point, higher taxes and tighter fiscal policy look inevitable. Significant revaluation of the technology sector predicated on the belief that rock-bottom interest rates will persist in perpetuity suggests an inherent vulnerability within the US equity market. [But] relative under performance, attractive absolute valuations and scope for significant sentiment change towards companies that remain productive, profitable and providers of the population's evolving needs, offer compelling future investment opportunities for the company going forward.”

The trust's underweight position in the US and low yielding growth stocks are part of the reason why its performance has lagged some other global funds. However, Stout remains positive about the availability of higher-yielding investment opportunities that also have attractive growth prospects.

And analysts at Stifel say: “It appears that a rotation from large growth stocks is under way and a switch back into defensive income should benefit Murray International.” 

The trust’s largest holding is Taiwan Semiconductor Manufacturing (TAI:2330), a popular choice among global equity income funds and one of Murray International’s best-performing holdings last year. Grupo Aeroportuario (Mex:OMAB) is its second-largest holding, a Mexican company that manages airports in leading tourist resorts and major cities. European pharmaceuticals company Roche (SWI:ROG) is another big holding, as is Samsung Electronics (KR:005930).

Until April 2020, the trust's performance was measured against a composite benchmark comprising 40 per cent FTSE World UK Index and 60 per cent FTSE World ex-UK Index. In April 2020, this benchmark was replaced with FTSE All World TR Index. Stifel says that the trust has an active share ratio – the proportion of holdings that differ from the benchmark weighting to them – of 93 per cent. 

The trust’s largest sector exposure is technology, which accounts for 18 per cent of its assets – a sector generally known for low yields. However, the trust’s exposure is primarily through semiconductor companies in emerging markets, and these have high and growing dividend yields. 

Sector exposure is well diversified, with a further 16 per cent in financials, 14 per cent in each of telecommunications and industrials, 12 per cent in consumer goods, and 10 per cent in basic materials. Murray International’s gearing – debt – is 13 per cent, according to Winterflood, a slight increase year on year and all of which is drawn in sterling. The trust also had a reasonable ongoing charge of 0.68 per cent in 2020. 

The trust is exposed to is foreign exchange volatility, both in terms of its net asset and revenue returns, as about 90 per cent of its assets are invested outside the UK. Its high weighting to Asia may also make it vulnerable to any relative de-rating of Asian or emerging markets.

However, Murray International Trust also has extensive exposure to the structural growth drivers these markets offer. 

Murray International Trust (MYI)

Source: Winterflood, as at 12 March, *Aberdeen Standard Investments.

Performance

Top 10 Holdings 

Source: Aberdeen Standard Investments 31 January 2021.

Geographic Breakdown

Source: Aberdeen Standard Investments 31 Jan 2021

Source: Stifel 31 December 2020