Martin Currie Global Portfolio Trust — Continuing to do ‘what it says on the tin’

Exhibit 1 (left-hand side) shows the performance of indices over the last five years; investors had to endure an above-average level of stock market volatility in 2022. Supply-chain issues during the global pandemic followed by the war in Ukraine have led to a sustained period of inflation, which is a backdrop that many market participants and corporate executives have not experienced before. Central banks have responded by rapidly raising interest rates; in 2022, the US Federal Reserve raised the base rate from 0.25% in March to 4.50% in December. Growth stocks have been out of favour as higher interest rates reduce the present value of their long-term cash flows and market leadership has shifted towards value names. While inflation rates in developed markets may have peaked as upcoming data points are coming up against high year-on-year comparisons, continued elevated prices may to lead to further interest rate increases. Central banks have a delicate balancing act between keeping a lid on prices and ensuring that higher interest rates do not cause a recession. Hence, further volatility looks likely in 2023 and investors could benefit from a diligent focus on the prospects of individual businesses as, over the long term, stock prices are driven by company fundamentals rather than macroeconomic considerations.

As shown in Exhibit 1 (right-hand side), forward P/E valuation multiples have moderated, as the Datastream World index is now trading at a discount to its 10-year average. However, as the Q422 earnings season and 2023 progresses, there is a risk of more negative earnings estimate revisions given the uncertain economic environment where consumers are facing higher costs of living and corporate margins are likely to be under pressure due to rising input costs, which are exacerbated by tight labour markets. It may be that stocks are more expensive than current numbers suggest.

In September 2022, Osmani increased his estimate for the chance of stagflation (high inflation and stagnant demand) in 2023 from 10–15% to 30%, with the probability of a sharp economic slowdown at 70% for the global economy. He says that the highest risk of stagflation is in Europe (which is more cyclical than other developed markets) due to disruptions from the war in Ukraine, higher energy prices and the rush to secure energy supplies. The manager’s views differ from the consensus, which is forecasting a very high chance of a US recession as a result of the inverted yield curve. He suggests that the swing factor is China, which is the second largest economy in the world. With the move away from a zero-COVID-19 policy, China could dictate the pace of global growth in 2023 and help avert a global recession. However, the situation is not straightforward. The Chinese economy is opening rapidly, but the high level of COVID-19 infections is restricting activity and could temper consumer and business confidence. As a result, China is unlikely to support global growth in the early part of 2023 opines Osmani. (MNP’s exposure to China includes its luxury goods and some of its industrial holdings.)

The manager comments that in 2023, monetary policy expectations will dictate the direction of the stock markets and style leadership. He says that forecast error has been elevated when predicting inflation, including by central banks, economists and market participants. Osmani believes that inflation is still ‘frictional’ (temporary) rather than structural, but could continue for longer than expected. However, momentum will slow due to base effects (monthly data points will face high year-on-year comparisons), which means we could be coming closer to peak monetary policy. Purchasing manager indices have declined for both manufacturing and services.

Central banks are playing a game of chicken suggests the manager, raising interest rates to combat higher inflation but thereby risking economic weakness. His view is that if peak interest rates occur in 2023 rather than 2024, it should be supportive for MNP’s style of investing in quality growth names. Osmani comments that it is important to focus on wage inflation, as if this is persistent there is a risk of structural inflation. Wage inflation has risen by a much greater degree in the United States compared with other developed markets and the consensus view is that the Federal Reserve may not have to hike as aggressively as it has been doing if employment data softens.

The manager highlights that earnings estimate momentum declined during 2022, and there has been an element of stabilisation. However, this stabilisation is due to energy companies’ strong profits. If this sector is excluded, estimate revisions are negative. Osmani expects more profit warnings in the Q422 earnings season, especially from cyclical companies including industrials and technology, which are sensitive to higher interest rates. He believes that consensus global earnings growth estimates of +3–5% for 2023 are too high. The manager considers 0% more realistic for global growth, including -1% in the United States and -5% in Europe. He notes disappointing results from large tech companies in Q322, including from the FAANGs: Meta Platforms (Facebook), Amazon, Apple, Netflix and Alphabet (Google). As a reminder to readers, MNP has no FAANG exposure; Osmani has more confidence in the earnings of luxury goods companies and believes that in line or positive numbers will be received positively in the stock market.

The manager stresses the importance of remaining selective. There has been a rapid increase in interest rates and there is a lag before they feed into economic activity and corporate earnings. He says that high-end product demand remains robust, but the increased costs of living could mean that mass-market and lower-end products are struggling. Osmani comments that inflation increases the risk of margin pressure in 2023, which can be mitigated for MNP given his focus on companies with pricing power. The manager believes that valuation discipline is critical, that companies need to have strong balance sheets if we are heading into recession and firms also require structural growth opportunities if growth is scarce.

At the end of December 2022, MNP’s top 10 holdings made up 52.0% of the fund, which was a modest increase in concentration compared with 50.5% a year earlier; five positions were common to both periods.

As a reminder, MNP’s regional and sector weightings are a result of bottom-up stock selection. The trust’s geographic breakdown is shown in Exhibit 3. In the 12 months to end-December 2022, the notable changes are a 6.5pp lower emerging markets exposure with higher weightings in North America (+3.5pp) and Pacific ex-Japan (+2.4pp). The largest active weights remain Europe including the UK (+25.0pp) and North America (-16.3pp).

MNP’s sector weighting changes in the 12 months to end-December 2022 have generally been modest, with the largest being materials (+3.5pp) and communication services (-2.4pp). Compared with the benchmark, the trust has notable overweight positions in healthcare (+13.6pp) and technology (+10.6pp) and a below-index weighting in financials (-11.1pp).

Osmani emphasises the need to be very stock specific with regards to portfolio activity; there were no new positions or complete disposals between May and September 2022. In October 2022, the manager initiated a position in UK speciality chemicals company Croda International, a name that had been on MNP’s watchlist. The firm is upgrading its portfolio via acquisitions and disposals to become a more focused materials company with higher growth and returns potential. According to Osmani, Croda has 8% revenue growth and stable 13% earnings growth, and he forecasts its return on invested capital (ROIC) will increase from 12.0% to 15.5% over the next five years.

During October 2022 there were two complete disposals. German sportswear manufacturer Adidas has had a series of profit warnings. The company has also cancelled its collaboration with Ye (formerly Kanye West), which previously made a higher contribution to Adidas’s profit pool than expected; the manager believes that the discontinuation could reduce its earnings by 35%. Osmani had been reducing MNP’s Chinese technology exposure in 2021 and 2022. He sold the trust’s Tencent Holdings position as there is ongoing regulatory uncertainty around China’s ‘common prosperity’ initiative.

In November 2022, Zoetis was added to MNP’s portfolio. It is an animal health specialist that was formerly part of major US pharma company Pfizer. A sell-off in Zoetis’s share price following weak Q322 results, which the manager considered to be an overreaction, provided an attractive entry point for a stock that had been on MNP’s watchlist. Osmani has modelled 9% annual sales growth and 12% earnings growth, and he forecasts its ROIC to increase from 27% to 36% over the next five years.

MNP has a new position in US sportswear manufacturer Nike, where a profit warning due to excess inventories in the United States, Europe and China provided an attractive entry point. The manager has modelled 8% sales growth and 22% earnings growth, and notes that Nike has a higher ROIC than Adidas. He anticipates a depressed 27% ROIC in 2023, due to destocking, rising to 34% in 2024 and 42% in 2028. Nike’s stock price is recovering well from its October 2022 low.

In December 2022, Osmani sold MNP’s very small holding in British-Portuguese online luxury fashion retail platform Farfetch. This position had been a detractor to the trust’s performance and the manager was waiting for the company’s capital markets day for further information. There was disappointing mid-term growth guidance and Osmani had concerns about the loss of licensing agreements, which would increase Farfetch’s balance sheet risk. Now this holding has been sold, 100% of MNP’s portfolio is made up of profitable companies.

MNP’s difficult performance over the last 12 months has negatively affected the trust’s longer-term record and it is lagging its benchmark in both NAV and share price terms over the last three, five and 10 years. On a brighter note, it is worth noting MNP’s meaningful outperformance versus the broad UK market over the last five and 10 years, illustrating the potential benefits of investing overseas.

Osmani explains that over the last 12 months, in general, investors have been selling long-duration stocks and switching into value names, which are not represented in MNP’s portfolio; energy stocks have performed particularly well in response to higher oil and gas prices, and the trust has a zero weighting to the sector. Holdings that have made positive contributions to MNP’s performance include Linde (the world’s largest industrial gas producer) and CSL (an Australian multinational specialty biotechnology company).

Detractors to the trust’s performance include materials firm Kingspan Group, whose share price declined due to the company’s exposure to the construction cycle despite its operations remaining robust. WuXi Biologics is a Chinese company with global operations. The firm was put on a restricted list of unverified exporters by the US authorities and had to wait for its US production sites to be approved. Also, there were increased tensions between the United States and China, which caused widespread weakness in Chinese stocks. WuXi was removed from the restricted list in December 2022, its operations are strong and its stock price has rallied since the end-October low point. NVIDIA has had earnings downgrades due to a weakening semiconductor cycle because of declining consumer spending and lower crypto mining demand, and inventories of gaming products are high. MNP’s healthcare exposure is in medtech companies, which the manager says have been put in the same ‘bucket’ as technology businesses. Large-cap pharma stocks have outperformed, and the trust does not have any exposure to these due to Osmani’s concerns including drugs coming off patent, generic threats and pricing pressure.

Osmani is very happy with MNP’s exposure to structural growth companies with expected high or improving returns on capital, pricing power and strong balance sheets. He continues to invest with a five- to 10-year horizon. Most of the largest detractors to MNP’s performance over the last 12 months are high-conviction positions and remain in the portfolio.

The 14 peers in the AIC Global sector have a wide range of market caps, and MNP is one of the smallest. According to Osmani, clients are very happy with the trust’s process of investing in high-quality growth companies and are willing to tolerate periods of volatility, which comes from MNP’s relatively concentrated portfolio. He says that within the sector, the trust is leading the way in ESG. The manager comments that unlike MNP, some of its peers hold companies that are loss-making, and their share prices have been weak due to recessionary fears. Other differentiating features of the trust are its lack of exposure to any of the FAANGs and its active zero-discount policy.

Funds employing a growth-focused strategy had a tough time in 2022 as investors gravitated towards more cyclical and value names. These include MNP and Baillie Gifford funds Monks and Scottish Mortgage. MNP’s NAV total returns rank 11th out of 14 funds over the last 12 months, 10th over the last three years, ninth over the last five years (all three periods are above the sector averages) and eighth over the last decade. It should be noted that the trust only restarted the use of gearing in November 2020. On 1 February 2023, MNP had the third-highest valuation (in terms of discount to NAV) in the peer group. The trust has a competitive, below-average ongoing charge and its net gearing is above the mean. MNP’s focus on capital growth, rather than income, means it has a below-average dividend yield.

MNP pays quarterly dividends in July, October, January and April. The annual distribution has been 4.20p per share for the last six financial years. So far in FY23, three quarterly dividends of 0.90p per share have been declared, which are in line year-on-year.

At the June 2022 AGM, shareholders approved the payment of dividends from realised capital gains. The board believes that this allows more flexibility, facilitating the payment of an appropriate dividend, without constraining the manager with an income target. There is no intention to change the current dividend policy. At the end of H123, MNP had c £186.5m in realised capital gains and c £1.7m in revenue reserves. Combined, these distributable reserves equate to more than 50x the last annual dividend payment.

Based on its current share price, MNP offers a 1.3% yield.

MNP’s board has employed a zero-discount policy since 2013, aiming to ensure that, in normal market conditions, the trust’s shares trade close to NAV. Renewed annually, the board has authority to repurchase up to 14.99% of MNP’s shares and allot up to 10% of its issued share capital in order to manage a discount or premium. As shown in Exhibit 12, share buybacks have accelerated in FY23; so far c 10.5m shares (c 12.1% of the share base) have been repurchased, and held in treasury, at a cost of c £32.7m. No shares have been issued so far in FY23 reflecting continuing difficult market conditions.

MNP’s shares are trading at a 1.3% discount to cum-income NAV, compared with a range of a 2.2% premium to a 4.7% discount over the last 12 months. The trust has traded at average discounts of 1.4%, 0.3%, 0.4% and 0.6% over the last one, three, five and 10 years respectively.

Launched in March 1999, MNP is listed on the Main Market of the London Stock Exchange. Zehrid Osmani, who has 24 years of investment experience, has been lead manager since 1 October 2018. He was formerly a senior portfolio manager and head of European equities research at BlackRock, with a proven track record in fundamental research and unconstrained investment. He is head of Martin Currie’s global long-term unconstrained (GLTU) team.

Martin Currie is now a division of Franklin Templeton Investments following the acquisition of its former parent Legg Mason on 31 July 2020. The company maintains its autonomy and its investment philosophy and processes remain unchanged.

Since 1 February 2020, MNP’s objective has been to generate a total return in excess of the total return of the MSCI AC World Index (previously a capital return in excess of a less broad global index). Its investment policy is as follows:

The board monitors MNP’s success via three key performance indicators:

Osmani is head of Martin Currie’s nine-strong GLTU team and is supported by a wider group of more than 30 investment professionals who meet hundreds of companies every year. He aims to generate a total return above that of the MSCI AC World Index by focusing on high-quality, undervalued growth stocks with the potential to outperform consistently. The manager has an unconstrained, high-conviction approach and invests with a long-term, five- to 10-year horizon. At end-December 2022, there were 29 holdings in the portfolio. There is a systematic three-step investment process that builds conviction at each stage:

MNP’s portfolio has a high active share (99.1% at end-December 2022); this is a measure of how a fund differs from its benchmark, with 0% representing full index replication and 100% showing no commonality. Compared with the MSCI AC World Index, in aggregate, the trust’s holdings have higher forecast revenue, earnings and dividend growth, higher valuations in terms of forward P/E and EV/EBITDA multiples and a higher ROIC. These relative metrics reflect MNP’s biases towards growth and high-quality companies with pricing power. Portfolio turnover is typically up to 20% pa, implying a holding period of around five years.

Osmani believes attractive operations in three thematic areas (the future of technology, resource scarcity and demographic changes) will span multiple decades. These include:

The manager says that the GLTU team’s approach is to keep in constant touch with portfolio companies, along with other relevant contacts, thereby gaining deeper knowledge. He highlights that the group has great access to senior managers despite having a relatively modest amount of assets under management.

ESG factors have been an integral part of MNP’s investment process for many years. Martin Currie has held a United Nations triple A+ rating for the last five years for strategy and governance, incorporation and active ownership, which are the three categories in the United Nations Principles for Responsible Investment (UN PRI). The company first became a UN PRI signatory in July 2009.

Martin Currie believes that good ESG practices are a fundamental component of a high-quality company. Factors considered by Osmani and his team typically include shareholder rights, accounting standards, remuneration, board structure, supply chain, data protection, pollution/hazardous waste policies, water usage and climate change policies. Their findings may influence important financial assumptions about a company, such as its cost of capital, revenues or costs, and therefore an estimate of its intrinsic value; a poor ESG track record may indicate wider sustainability issues within a firm. Osmani strongly believes that including ESG analysis in investment decisions delivers improved returns for MNP’s shareholders. On a practical level, the manager and his team evaluate, measure and risk assess 60 individual areas for every company that they research. They also focus on an additional 20 assessments related to social exploitation risk, including criteria that examine the countries in which the company operates, the supply chain, gender/age/racial exploitation and working conditions, alongside the firm’s overall momentum in tackling social exploitation.

MNP did not employ gearing between 2008 and 2020. However, on 23 November 2020 the board announced that it had entered into a £30m three-year unsecured sterling term loan facility with Royal Bank of Scotland International. This was fully drawn down the following day at a fixed interest rate of 1.181% pa and equated to c 10% of MNP’s NAV. If the debt facility is rolled over in November 2023, it is likely to be at a higher interest rate but the board is confident that the manager can generate annual returns above the trust’s cost of debt over the long term, meaning that the use of gearing should contribute positively to MNP’s results.

At end-December 2022, net gearing was 11.7%.

With effect from 1 February 2021, MNP’s performance fee was discontinued, and the investment management fee was changed to 0.50% per year on the first £300m of ex-income NAV and 0.35% of ex-income NAV above this level (previously a flat fee of 0.40%), calculated and payable quarterly.

There has been a further change in MNP’s fee structure. With effect from 1 July 2022, the investment management fee was amended to 0.45% of NAV. Also, there is no longer a separate company secretarial fee (£56k + VAT in FY22, and subject to an annual increase at the rate of UK inflation). The effects of these changes on a c £250m asset value fund would lead to a c 14% reduction in annual fees and a simpler cost structure.

In H123, MNP’s ongoing charges were 0.64%, which was 4bp lower than 0.68% in FY22.

MNP is a conventional investment trust with one class of share – there are c 76.0m ordinary shares in issue, with a further c 22.7m held in treasury. At end-FY22, the trust’s equity capital was split as followed: 75.8% banks and nominee companies, 11.2% individuals and trustees and 13.0% other holders. Over the last year, MNP’s average daily trading volume was c 130k shares.