Murray International still on a tear

In 2016 much of that performance was due to the outperformance of foreign currencies against sterling, which devalued 15 per cent throughout the calendar year following the UK’s decision to leave the EU. With 98 per cent of MYI’s revenue in overseas currencies, sterling weakness was a boon to the trust.

But in 2017 it has continued to outperform even as sterling has strengthened. "In the first half of 2017, sterling has marginally appreciated against most currencies apart from the euro, so that’s been a slight headwind. But stock selection in Asia and Latin America has more than offset any headwind from currency," says Mr Stout.

Top-performing stocks include formerly unloved companies such as Chilean miner Sociedad Quimica Y Minera de Chile (SGM-A:SGO), which Mr Stout added to when global mining stocks took a nosedive in 2014 and 2015. "Two years ago you couldn’t give that stock away," he says. "And now it’s a lithium growth stock."

Brazilian bank Banco Bradesco (BBDC4:SAO) is another former laggard now riding high, following Brazil’s emergence from  its worst-ever recession, starting in 2015. "Brazil’s economy contracted at 7.5 per cent two years ago and the banking sector consolidated when the country was having a terrible time," says Mr Stout. "Now there are three banks left, so it is a fascinating and highly profitable, high return on equity, market." With Banco Bradesco trading on less than two times book value Mr Stout says it remains good value.

Emerging markets mining stocks and Latin American banks may sound high risk, but Mr Stout says developed market stocks are the really scary things.

"Some of the valuations in the developed world give me a nosebleed," he says. And few offer the characteristics he is looking for – low valuations, a commitment to investing in the business and potential for future dividend growth. 

"A lot of developed market companies are so big that they cannot grow and get any more top-line growth," he says. "So instead they are delivering earnings per share growth through a lot of balance sheet manipulation where they are borrowing money to buy back stock and other dark practices." 

The trust now has just 14.4 per cent invested in US equities and 9.4 per cent in European equities – its lowest ever level. But Mr Stout does hold companies such as BHP Billiton (BLT) and last month bought Intel (US:INTC), which he says has grown unfashionable in the US but is a good income stock and a solid business.

"When companies in the US start ramping up their dividend people think the company has gone ex-growth and that is viewed very negatively. But Intel has a lot of intellectual property and a lot of good products, so from an operational point of view it's interesting. It is very much viewed as a hardware supplier that is not part of the new [technology] genre and that is fine by me," he says.

"We are not interested in companies that can grow earnings per share by playing around with the balance sheet, we are interested in businesses with genuine growth ahead of them."

His "concerns about equities are the worst they’ve been in 10 years". He is worried about the rising risk of recession and has brought down his equity exposure to levels not seen since 2007. The largest equity allocation is now to Asia Pacific ex Japan, at 24.4 per cent, and Latin America and emerging markets, at 16.7 per cent.

That sentiment means Mr Stout has been scaling up emerging markets bond exposure in the past three years. In 2014 the trust made the move to de-gear away from equities and towards fixed interest and now, according to Stifel, fixed income exposure stands at 19 per cent of assets (including 11 per cent leverage).

That exposure has helped boost the income stream and capital growth of the portfolio. Emerging markets bonds have been standout performers in the year to date and their yields are far higher than developed market bonds. Holdings include South African government bonds, yielding 7 per cent, debt of Brazilian mining company Vale and Indonesian sovereign bonds, which both yield between 6 and 7 per cent.

MYT is currently yielding 3.83 per cent and over 10 years has grown its income by 150 per cent. Although that dividend was uncovered in 2014 and 2015, it was covered last year and is today. At 30 July 2017, the revenue reserve amounted to £73m – equivalent to 1.23 times the trust’s 2016 dividend. By taking his income from a broad mix of stocks and bonds, Mr Stout spreads the risk of cuts to his income.

As such, the trust limits its exposure to any one holding to 5 per cent and has been forced to trim positions in Tawian Semiconducter (Tai:2330) – the second-largest position – and Mexican airport company Grupo Aeroportuario del Sureste (Mex:ASURB) in recent months in order to prevent those stocks breaching the limit.

MURRAY INTERNATIONAL (MYI) 

Source: Morningstar, as at 24.08.17

Performance 

Source: FE Analytics, as at 24.08.17

Top 10 equity holdings as at 31/07/17 (%)  

Source: Murray International, as at 31 July 2017

Equity Allocation (%)

Fixed income allocation (%)

Source: Murray International, as at 31 July 2017