Bruce Stout, manager of Murray International Trust, explains how its high-income approach is taking on more importance with inflation running at a 30-year high. He names a couple of inflation-proof stock ideas and gives his take on the tech sell-off that’s played out over the past few months.
The trust is a member of interactive investor’s Super 60 list.
Kyle Caldwell, collectives editor at interactive investor: Hello. Today I'm speaking to Bruce Stout, fund manager of the Murray International (LSE:MYI) investment trust. So Bruce, it's been a painful start to the year for investors in certain high-growth shares, such as technology stocks. What are your thoughts on the sell-off and the market rotation towards value shares?
Bruce Stout, fund manager of Murray International Trust: Yeah, it's certainly been painful and there's been a lot of volatility, hasn't there? I mean, I guess it's been coming in many ways because valuations have become so stretched particularly in some of those shares, and the last two years really was a real purple patch for multiple expansion and for fund flows. So we're not really surprised actually that we've had this sell off.
Kyle Caldwell: Have you made any changes to the portfolio in light of the sell-off in January?
Bruce Stout: No, we haven't actually, Kyle, because we did a lot, as you know, a couple of years ago when we had the big sell-off at the beginning of the pandemic and moved quite a lot of bond money into equities. So that positioning was quite an active year for us. Last year, we didn't do as much, and so we've not felt any real compulsion to do anything at the moment. And we must remember the sell-off has been in a lot of types of businesses and companies that wouldn't really deliver the mandate for Murray International anyway, so there's nothing we see at the moment particularly attractive.
Kyle Caldwell: And could you run through what changes were made following the sell-off in the first quarter of 2020 to the trust?
Bruce Stout: Yeah, well, I mean, I think we may have outlined it before in previous communications, but as you know, we did have quite a lot of emerging market debt and these bonds held up incredibly well during that high volatility period in February, March and April of 2020, and that gave us the opportunity to buy some really attractive equities and enhance the dividend yield characteristics of the trust and the dividend growth characteristics as well, because the sell-off was so severe.
And we also managed to buy quite a diversified group of different types of businesses, everything from things like Broadcom (NASDAQ:AVGO) in the States, or AbbVie (NYSE:ABBV), a pharmaceutical company in the States, and again, they were all yielding over 6% at the time, a good dividend growth. So that really was a terrific opportunity and it's one that we, you know, we think will deliver, particularly on the income side of the trust, you know, for the next few years to come because of such an attractive entry point at that time.
Kyle Caldwell: One of the reasons behind the sell-off in January was investors repositioning towards an environment of higher interest rates. What’s your view on interest rate rises? Will they achieve what central bankers are hoping for, which is to cool down inflation? So, in other words, do you think inflation is temporary or will it prove to be more sustained.
Bruce Stout: Well only time will tell, I guess there, Kyle, but it is a fascinating dilemma for policymakers because let's remember what they actually said, and they said that they would tolerate moderately higher inflation until economies got back to full employment. And then the rhetoric was that inflation would be temporary, it would be transitory and then it would disappear once the supply side issues had resolved themselves. But we can clearly see that that is not the case. This is more than just supply side issues causing inflation. This is inflation all over the place led by strong demand and also by wages now going up.
So the policymakers don't have much credibility here because having said that they would tolerate higher inflation for a couple of years, we now see them trying to play catch up with interest rate rises, and we've already seen that in the UK. So it's very, very difficult to tame wage inflation through interest rate rises, because what you do with interest rate rises, at some point you slow the economy down, and history is littered with examples of policymakers trying to catch up and being too late. So the economy is already naturally slowing as they start to ratchet up interest rates. There won't be a lot of angst and anxiety this year as interest rates go up, there always is in a tightening cycle, but it looks at the moment anyway that they're way behind the curve, and there is a lot of interest rate rises to come if they're going to get policy back to some level of neutrality.
Kyle Caldwell: In the trust's half yearly report last August, you mentioned the attraction of real assets to navigate higher inflation. Could you name a couple of stock examples?
Bruce Stout: Yeah, I mean, as you know, we like to have a very diversified portfolio in Murray International and the strategy that we've employed in the last few years is to have a kind of barbell strategy where we have sort of traditional type value businesses, but also growth businesses as well. And the overlying emphasis on real assets or things like Enbridge (NYSE:ENB) or TC Energy (NYSE:TRP) in Canada, which are pipeline businesses, which can push through prices if gas prices go up they will just push them through.
If we look at some of the digital networks that we own now in companies such as Telecom Indonesia, you know, coming off five years of high capex, where the capex now starts to moderate and that's a real asset having a digital network all around the country in order to deliver broadband and fast services, and as the volumes increase, it just flows straight down to the bottom line. And if they need to put up prices, then they should be able to do it because they're in a kind of monopoly type position. So a real asset in an inflationary environment really just means that you've got something tangible that hopefully you can pass pricing through with.
Kyle Caldwell: With the current high inflation levels do dividends, and for those that can, the reinvestment of investments of dividends, become more important for private investors to try and keep their returns above inflation?
Bruce Stout: I think if you were to talk to any Murray International shareholder that's been in the trust for a long period of time, then dividends are always important. We've kind of been through a phase in the last couple of years where many people have tried to argue that capital growth is the only thing that's important, and as long as you grow the capital, you can sell some of your stock every year and use that as income, which is all very well if markets go up every single year.
But if they start to go down for two or three years, then that is a completely different proposition so for Murray International shareholders, income has always been very important. And as you know, we are the highest yielding trust in the sort of global income sector. So it's always important. It probably takes on even more importance when inflation is running at 5% or 6%, if you're already starting with a yield of 5%, then you know that's a decent position to be in.
Kyle Caldwell: What other risks or concerns do you have that could potentially derail stock markets in 2022?
Bruce Stout: Well, I think I mean, we've highlighted the two main ones, which are interest rates and inflation. As always, geopolitical conflict is always a worry, and the other thing that's become even more concerning, I think, is the protectionism that started to, you know, be seen in different parts of the world. It's getting harder for labour to be mobile across continents and across countries, which again puts upward pressure on wages if you just can't get people to work in specific jobs or specific industries.
So these are sort of, you know, longer-term concerns that we have, that some of the really ideal conditions that helped with the disinflationary environment where there was complete freedom of trade and complete freedom of movement of capital around the world, movement of labour around the world, that was all very disinflationary. If those trends are now in the period going forward are going to reverse where it's going to be harder to move capital, harder to move labour around the world and we'll have more protectionism then that is an inflationary environment, and that requires a different set of investment skills and a very different sort of portfolio than the one that has, you know, dominated performance in the last two or three years.
Kyle Caldwell: Bruce, thank you very much for your time today.
Bruce Stout: Thanks very much Kyle.
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