Martin Currie Global Portfolio Trust — Manager ‘sticking to his knitting’; positive outlook

Although MNP’s relative performance has struggled during the latest cycle of higher inflation and rising interest rates, Osmani is ‘sticking to his knitting’, running a high-conviction, concentrated portfolio of quality growth stocks, which he believes will be beneficial for shareholders over the long term. While higher interest rates have put pressure on growth stocks, the manager has a high degree of confidence in the fundamentals of the trust’s portfolio companies.

Referring to his year-ahead predictions at the beginning of 2024, the manager says that his non-consensus call, that inflation would remain elevated for longer, has proved to be correct due to sticky wage inflation. The market is now assuming, as Osmani expected, that developed market central banks are generally unlikely to start cutting interest rates until H224, with inflation targets not being achieved until 2025. As flagged by the manager, 2024 consensus earnings growth at the start of the year has proved to be too bullish and is being revised lower. He notes that while the technology sector earnings are strong, this is being driven by a small number of companies and outside of these, the earnings outlook is less robust. Osmani believes that valuation discipline remains critical and that the three seismic growth themes that we highlighted in our January 2024 review (energy transition, healthcare infrastructure and AI) remain intact.

Given the prevailing market backdrop, the manager continues to seek companies with resilient earnings growth given the risk of estimate downgrades, and that have pricing power. He expects that over the next 24 months, there will be a disparity between companies that can protect their margins and those that will struggle because of higher inflation; hence, the importance of focusing on firms with sound balance sheets and exposure to structural growth drivers.

Osmani considers that AI opportunities are a double-edged sword. While AI is speeding up the pace of innovation across all economic sectors, affecting governments, corporates and households, it can cause major disruption risk to businesses. The manager suggests that 18 months ago, the Google search engine was not seen as being at risk from disruption; however, it is now facing increased competition from AI search engines, illustrating that no business is immune from disruption. Osmani cites a Goldman Sachs report, which forecasts that AI could increase global GDP by 7% over the next decade, which would provide opportunities for investors and could increase productivity by 1.5pp a year, benefiting corporates. However, the manager suggests that whether this outcome generates higher margins for companies, or the savings are recycled into more aggressive pricing, will depend on individual industry dynamics. He comments that AI is expected to displace 300m jobs, with job losses proving a challenge to households, particularly if the speed of change does not allow retraining opportunities. Osmani adds that job losses are a challenge for governments and the geopolitical situation as AI adoption could lead to further migration across geographies.

The manager is excited about the potential benefits of AI for MNP, noting an additional estimated $130bn capex spend from the cloud providers Amazon, Alphabet (parent of Google), Meta Platforms (formerly Facebook) and Microsoft. Osmani believes that it is important to focus on the beneficiaries of AI capex. This is clearly illustrated in MNP’s largest position, NVIDIA, which entered the portfolio in March 2021, and due to continued outperformance has been trimmed to keep it within the 10% maximum holding limit (share price +239% in 2023 and c +150% so far in 2024). The company is well-positioned to benefit from the growth in AI due to its market leadership in graphic processing units. NVIDIA is accelerating the innovation cycle, and its capex is multiple times that of its nearest competitor, Advanced Micro Devices. The company has introduced an integrated hardware and software platform called Blackwell, which should consolidate its market leadership position.

Osmani is also mindful of the potential ‘froth’ in some AI stocks. He cites a basket of global (mainly US) companies that are considered as AI beneficiaries. In the 12 months to the end of April 2024, on a cap-weighted basis, the median share price was +44%, median sales were unchanged and median earnings were just +7%. The manager contrasts these results with those of NVIDIA, which over the same 12 months period delivered a share price +203%, sales +197% and earnings +305%; the company subsequently posted another set of results that exceeded consensus expectations and its stock price has continued to appreciate. Osmani believes that companies that cannot monetise their AI opportunities will suffer over the next 24 months.

At the end of April 2024, MNP’s portfolio had 30 holdings, with the top 10 making up 51.7%, which was not dissimilar to the 52.2% top 10 weighting 12 months earlier. Nine positions were common to both periods. One of the important growth themes represented in the portfolio is companies exposed to what the manager refers to as a ‘semiconductor super cycle’, which has been turbocharged by the growth in AI. The trust’s beneficiaries of this trend include top 10 holdings NVIDIA, ASML Holding and Atlas Copco (an indirect beneficiary).

MNP’s geographic and sector allocations are the result of bottom-up stock selection; however, an analysis of the fund’s active weights provides an interesting perspective. By geography, the trust had a notable underweight US exposure (13.6pp), although the US allocation increased by 4.0pp over the 12 months to 30 April 2024. MNP has zero exposure to a long tail of countries, which combined made up 22.9% of the benchmark at the end of April 2024. A full year-on-year comparison is not possible due to more detailed geographic information now being available.

In terms of MNP’s sector exposure, in the 12 months to the end of April 2024, weighting changes were minimal. Compared with the benchmark, the trust had a notable above-index allocation to healthcare stocks (+14.1pp) with a smaller active bet in the technology sector (+4.5pp). MNP has a zero weighting in four market sectors, which combined made up more than 17% of the index; the largest of which is communication services (7.7% of the benchmark at 30 April 2024).

In May 2024, the manager initiated a position in Denmark-listed pharma company Novo Nordisk. He took advantage of a modest pullback in the company’s share price due to macroeconomic factors. The company’s shares have performed very well, driven by the use of its diabetes medicines as weight-loss treatments and a trial showing these products reduce negative cardiovascular outcomes. Osmani had been concerned about the company’s valuation and had underestimated the magnitude of its earnings growth. He is encouraged that Novo is addressing the production bottlenecks that have arisen due to high demand for its products.

Switzerland-based private equity firm Partners Group was added to MNP’s portfolio in April 2024. According to the manager, the company has a long track record of value creation from a conservative management team. Partners has a very broad-based exposure to good growth companies with strong balance sheets. It operates in an industry with favourably dynamics, which has high barriers to entry. Osmani says that Partners is a quality company with assets under management growth of 10–15% per year and a return on invested capital (ROIC) greater than 30%.

In February 2024, the manager sold MNP’s position in software company Adobe, which had performed well in 2023 due to the excitement around ChatGPT. However, Osmani believes that Adobe’s business is at risk of AI-led disruption, so he decided to lock in profits.

MNP is one of the smallest of 13 funds in the AIC Global sector. Its NAV total returns are below average in the periods highlighted in Exhibit 7, ranking 10th over the last 12 months, ninth over the last three years, 10th over the last five years and eighth over the last decade. It should be noted that a lack of gearing until November 2020 is likely to have negatively affected the trust’s five- and 10-year results. MNP’s performance has yet to recover from a difficult period between Q321 and Q422 when growth stocks were under pressure in a rising interest rate environment. Osmani is continuing to focus on the historically successful strategy of seeking high-quality companies with long-term growth potential and favourable ESG attributes.

The trust has a straightforward, concentrated equity fund with no unlisted companies or derivatives and a zero-discount policy has been employed since 2013. On 7 June 2024, MNP had the second-highest valuation in a sector where no funds were trading at a premium. The trust has an average ongoing charge (some of the much larger funds have a lower fee structure), and there is no performance fee. MNP has a below-average level of gearing and, in keeping with its capital growth mandate, a dividend yield that is below the sector mean.

In FY24 (ending 31 January), MNP’s NAV and share price total returns of +11.2% and +11.1% respectively were ahead of the benchmark’s +10.9% total returns. The largest positive contributions to the trust’s relative returns were: NVIDIA (+6.6pp – high demand for its products driven by the growth in AI); Adobe (+1.2pp – another AI beneficiary but the position was subsequently sold, locking in profits, due to a heightened competitive environment); and Microsoft (+1.0pp – another AI beneficiary, which delivered results that exceeded consensus expectations). Positions that detracted the most from MNP’s performance were: Masimo (-2.0pp – an activist investor gained seats on Masimo’s board, and the company had operational challenges, so the position was sold); WuXi Biologics (-1.9pp – Chinese equity market weakness and low credibility with investors; this position was also sold to fund better opportunities elsewhere); and ResMed (-1.4pp – competitive threats, which appear to be lifting).

Commenting on MNP’s recent relative performance, the manager says that growth stocks have remained under pressure on the realisation that inflation will stay higher for longer, so interest rate reductions are being pushed out. Some of the trust’s healthcare holdings detracted from performance as the sector has been used as a source of funds for investors’ preferred areas such as large-cap technology. Chinese economic weakness has negatively affected the performance of some luxury goods companies; for example, Kering issued another profit warning in April. Osmani also notes renewed weakness in US consumer spending, highlighted by firms including Nike.

On a more upbeat note, portfolio stocks that have made a positive contribution in recent months include NVIDIA, Mettler Toledo (a relatively recent re-entry into the fund), ResMed (results exceeded expectations), Kingspan and Atlas Copco.

Exhibit 10 shows MNP’s cumulative upside/downside capture analysis over the last decade. Its upside is 106%, suggesting that the fund is likely to outperform the global equity market by around 5% when share prices are rising. MNP’s downside capture is much larger at 126%, implying that the fund is likely to underperform by around 25% during periods of market weakness. It is interesting to note that the downside capture increased significantly during 2022, a period when growth stocks were out of favour in an environment of rising interest rates. Prior to this, there was a period when MNP’s downside capture was below 100% and its upside capture was modestly above 100%, suggesting that during this time the trust had the potential to outperform its benchmark in both a rising and falling global market.

MNP’s 4.20p per share annual dividend has been maintained for the last eight financial years. There are quarterly distributions of 0.90p per share paid in July, October and January, with a larger payment of 1.50p per share in April. The trust’s total FY24 dividend was c 0.6x covered, which compared with c 0.5x coverage in FY23.

In June 2022, MNP’s shareholders approved the payment of dividends from realised capital gains. The board believes this allows more flexibility, facilitating the payment of an appropriate dividend, without constraining the manager with an income target. At the end of FY24, MNP had 219.98p per share in realised capital gains and 0.88p per share in revenue reserves. Combined, these distributable reserves equate to c 53x the annual dividend payment (combined distributable reserves at the end of FY23 were c 49x the annual dividend).

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 to manage a discount or premium. The trust’s shares are trading at a 2.0% discount to cum-income NAV, which compares with a range of a 3.7% premium to a 4.7% discount over the last three years. Over the last one, three, five and 10 years, the trust traded in a 0.6% to 1.7% range of average discounts.

In FY24, c 5.6m shares (c 7.3% of the FY23 share base) were repurchased and held in treasury, at a cost of c £18.2m, while c 0.7m shares (c 0.9%) valued at c £2.3m were reissued from treasury.

Launched in March 1999, MNP is listed on the Main Market of the London Stock Exchange. Zehrid Osmani, who has 25+ years of investment experience, became lead manager on 1 July 2018, alongside Tom Walker as co-manager; Osmani became sole manager on 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 10-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 the end of April 2024, there were 30 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 (91.6% at end-April 2024); this is a measure of how a fund differs from its benchmark, with 0% representing full index replication and 100% showing no commonality. Portfolio turnover is typically up to 20% per year, implying a holding period of around five years. Compared with the MSCI AC World Index, in aggregate, the trust’s holdings have higher forecast revenue, earnings, free cash flow and dividend growth, higher valuations in terms of forward P/E and EV/EBITDA multiples, a higher ROIC and less leverage based on net debt/EBITDA. These relative metrics reflect MNP’s biases towards growth and high-quality companies with pricing power.

The manager says that the 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.

Martin Currie believes that good ESG practices are a fundamental component of a high-quality company. The firm has been a signatory to the United Nations Principles for Responsible Investment since July 2009. In September 2022, under the new and revised reporting framework, Martin Currie was awarded the highest possible five stars for investment and stewardship policy and for incorporation, and four stars for voting. MNP was the first fund in the AIC Global sector to be awarded the highest Morningstar Sustainability Rating (five globes), recognising the commitment to mitigate the risks that the trust’s investors face in the ESG space. For more information on MNP’s approach to ESG, please see its website.

Osmani strongly believes that including ESG analysis in investment decisions delivers improved returns for MNP’s shareholders and is integrated throughout the proprietary investment process. More than 50 underlying criteria are assessed to capture the complexity of ESG risks facing a company’s long-term growth outlook and sustainability. Each risk is rated on a scale of 1 (lowest risk) to 5 (highest risk). There are a further 20 criteria to analyse social exploitation risk.

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.

MNP did not employ gearing between 2008 and 2020. However, in November 2020 the board announced that it had entered into a £30m three-year 1.181% unsecured sterling term loan facility with Royal Bank of Scotland International. On 23 November 2023, the £30m loan was repaid in full and a new £10m three-year revolving loan facility was fully drawn down for a minimum six months. It has a variable rate of the sterling overnight index average (SONIA) plus 1.55%. At the end of April 2024, MNP’s net gearing was 3.9%.

Since 1 July 2022, MNP’s investment management fee is 0.45% of ex-income NAV per year (previously 0.50% per year up to £300m of ex-income NAV and 0.35% of ex-income NAV thereafter). Also, there is no longer a separate company secretarial fee. In FY24, MNP’s ongoing charges were 0.64%, 3bp higher than 0.61% in FY23.

MNP is a conventional investment trust with one class of share – there are c 67.8m ordinary shares in issue, with a further c 30.9m held in treasury. Over the last year, MNP’s average daily trading volume was c 82.0k shares.