Investment process: High quality and reasonable price
The manager follows Aberdeen Standard Investments’ house style of investing on a bottom-up basis in high-quality companies that are trading at a reasonable price. The quality of a company is assessed in terms of its management team, the business focus, strength of its balance sheet and its corporate governance track record. Aberdeen Standard Investments stresses the importance of meeting a company’s management team prior to making an investment. In terms of determining a firm’s valuation, the investment team considers key financial ratios, peer comparisons and an assessment of a company’s business prospects. Aberdeen Standard Investments employs a team-based approach to investing, and is unconstrained by index geographic and sector weightings. There is a key focus on risk management; Aberdeen Standard Investments’ portfolios are regularly monitored by an independent performance and risk team.
Stout is a member of Aberdeen Standard Investments’ 10-strong global equities team, which is based in Edinburgh. He draws on the resources of five regional teams – pan-Europe, Asia Pacific ex-Japan, North America, Japan and emerging markets – and is able to invest in any company that is held in any of these teams’ regional portfolios. Every company held in a regional fund is visited at least twice a year, and findings are documented and shared across all of the investment teams. Stout’s emphasis is on investing in defensive businesses where he has a high degree of confidence in a company’s ability to deliver earnings and dividend growth. MYI’s portfolio typically contains around 50 equity holdings, across the market-cap spectrum. This provides sufficient diversification by sector and geography, which acts as a risk control, but is a small enough number to ensure that the manager is able to understand all positions fully. Stout says that the investment process is straightforward and he is essentially ‘buying good companies that are doing good things’. He maintains c 50 names on a watch list that may be considered for inclusion in MYI’s portfolio in the future. The trust also has the flexibility to invest in fixed income securities. The process for identifying, selecting and monitoring sovereign and corporate bonds is the same as for equity investments, with the total exposure, as well as the geographic and sector allocations, a function of the relative value and future prospects of each position. The weight of each holding in the portfolio does not reflect Stout’s level of conviction; he says that he has ‘no favourites’. Instead, the position size reflects how well an investment has performed since purchase. Initial equity investments are generally between 1.0% and 1.5% (while fixed income positions are generally smaller). Once a holding reaches 5% of the portfolio it will be trimmed within 30 days to ensure there is not an undue level of company-specific risk. The manager is also required to sell a holding within 30 days if it is no longer included in Aberdeen Standard Investments’ regional funds.
Current portfolio positioning
At end-August 2018, MYI’s top 10 positions made up 32.9% of the portfolio, which was a modestly lower concentration than 34.3% a year before; eight positions were common to both periods. The fund contained 51 equity and 28 fixed income holdings, compared to 50 and 27 respectively at end-August 2017. The trust’s breakdown by security type and geography is shown in Exhibit 4. There has been very little change in the structure of the portfolio over the last 12 months, reflecting the manager’s buy-and-hold investment approach. More than 40% of the portfolio is made up of Asia Pacific ex-Japan and Latin American and emerging markets equities, although Stout stresses that MYI is a global, not an emerging market, investment trust.
Commenting on the relatively low UK equity exposure in the portfolio, the manager notes that many of the larger dividend-paying UK companies have payout ratios above 100%, and Stout believes that a c 4% dividend yield on the UK market compared to a 1.3% UK gilt yield is unsustainable. He says that many UK investors have never experienced a cycle of dividend reductions, and if there is a dividend cut outside of the volatile commodity sector, the effect could snowball. The lack of dividend growth and of solid growth opportunities available in the UK explains the low exposure in MYI’s portfolio.
Within the bond holdings there is a mix of sovereign and corporate debt (mainly local currency, but also US dollar denominated), such as in Brazilian miner Vale and Mexican oil company Petróleos Mexicanos (Pemex). The manager explains that credit spreads have widened as a result of the US’s protectionist policies and MYI’s bond holdings are offering very good value. However, he considers that a c 15% fixed income exposure within the portfolio is sufficient given available opportunities in global equities.
Exhibit 4: Portfolio breakdown by security type and geography (% unless stated)
|
Portfolio end-August 2018 |
Portfolio end-August 2017 |
Change (pp) |
Equities |
|
|
|
Asia Pacific ex-Japan |
26.3 |
24.0 |
2.3 |
Latin America & emerging markets |
15.3 |
18.0 |
(2.7) |
North America |
14.8 |
14.1 |
0.7 |
Europe ex-UK |
12.1 |
9.5 |
2.6 |
UK |
11.5 |
11.9 |
(0.4) |
Japan |
4.0 |
4.0 |
0.0 |
Africa |
0.6 |
0.9 |
(0.3) |
|
84.6 |
82.4 |
2.2 |
Bonds |
|
|
|
Asia Pacific ex-Japan |
4.9 |
4.8 |
0.1 |
Latin America & emerging markets |
8.3 |
9.3 |
(1.0) |
North America |
0.0 |
0.0 |
0.0 |
Europe ex-UK |
0.6 |
1.8 |
(1.2) |
UK |
0.5 |
0.5 |
0.0 |
Japan |
0.0 |
0.0 |
0.0 |
Africa |
1.0 |
1.1 |
(0.1) |
Cash |
0.1 |
0.1 |
0.0 |
|
15.4 |
17.6 |
(2.2) |
Total |
|
|
|
Asia Pacific ex-Japan |
31.2 |
28.8 |
2.4 |
Latin America & emerging markets |
23.6 |
27.3 |
(3.7) |
North America |
14.8 |
14.1 |
0.7 |
Europe ex-UK |
12.7 |
11.3 |
1.4 |
UK |
12.0 |
12.4 |
(0.4) |
Japan |
4.0 |
4.0 |
0.0 |
Africa |
1.6 |
2.0 |
(0.4) |
Cash |
0.1 |
0.1 |
0.0 |
|
100.0 |
100.0 |
|
Source: Murray International Trust, Edison Investment Research
The manager gives a historical perspective to MYI’s bond/equity exposure. He explains that in the run-up to the global financial crisis, UK gilt yields were c 5.5%, which compared to UK equity dividend yields of c 2.5%. As a result, he made a significant investment in both UK and US government bonds (all MYI’s investments are made on the basis of relative value). Fixed income exposure was more than 25% of MYI’s total portfolio, with 88% in equities (including gearing) at the end of 2007. Following the financial crisis in 2008, UK gilt yields fell to c 2.5% compared with a UK dividend yield of c 6.0%. As a result, the fund increased its exposure to equities to a 107% geared position by 2009, with c 8% in fixed income. The manager says that by summer of 2013 equities were looking expensive, but MYI’s fixed income exposure remained modest at 7% due to low bond yields. However, in H214 and 2015, emerging market currencies sold off sharply. The policy response was to raise interest rates, but this choked off economic growth and emerging market currencies fell even further, leading to inflation and even higher interest rates. Stout considered this an opportunity, with the best value to be found in local-currency emerging market debt. As at end-August 2018, MYI’s top 10 fixed income holdings included local currency sovereign debt in South Africa, Mexico, Indonesia and Uruguay, at coupons between c 5% and 7%.
Stout highlights some of the larger equity holdings in MYI’s portfolio. He has held a position in Grupo Aeroportuario del Sureste (ASUR) for around 20 years. ASUR is an international airport group with operations in Mexico, the US and Colombia and has benefited from weakness in the Mexican peso, which leads to increased demand for tourist locations such as Cancun and Cozumel. ASUR has grown from one to four terminals and has been increasing its runway capacity, and adding new shops, which are generating royalties and rental income. It offers a dividend yield of c 2%, which the manager believes will increase as the company’s capex wanes. This is an example of a firm providing a product or service that is in high demand and where the manager believes its competitive position will not be eroded as its business expands; Stout says ASUR holds a quasi-monopolistic position.
The manager has held a position in the world's largest dedicated independent semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSMC), for around 15 years. Historically, the company was not in a position to return a lot of cash to shareholders, due to the capital-intensive nature of its business. However, TSMC publicly stated that once it was generating higher levels of free cash flow it would be returned to shareholders. The company has followed through on its promises; the forecast TW$9 dividend for 2019 would represent a five-year compound annual growth of c 25%, and the shares are yielding c 3%. Stout says that this dividend progression is very impressive, especially for a technology company, and means that TSMC is not wasting money on mergers and acquisitions or share repurchases.
Elsewhere in the top 10 holdings list, the manager has a position in another Taiwanese company, Taiwan Mobile. He considers it a less exciting company than TSMC; however, it offers a c 5.5% dividend yield and regularly increases its annual distribution at a low single-digit rate. Stout says that Taiwan Mobile provides ballast in the portfolio to the holding in TSMC, with the two combined positions providing a c 4% dividend yield with double-digit dividend growth.
Daito Trust Construction is another multi-year holding. The company is suffering from a shortage of available workers due to competition from other construction companies ahead of the Tokyo 2020 Olympic Games. Stout will continue to hold a position in Daito Trust as the firm has regularly delivered positive results, while the company also offers a c 4% dividend yield, which is unusually high for a Japanese company.