Performance, new stocks, and how we navigate headwinds

In part two of our video interview, Murray International co-fund manager Samantha Fitzpatrick runs through portfolio changes since longstanding fund manager Bruce Stout retired.

The income trust is one of the Association of Investment Company’s (AIC) “dividend heroes”, having a 20-year unbroken record of raising shareholder payouts.

In an interview with interactive investor’s Kyle Caldwell, Fitzpatrick discusses bond exposure, navigating multiple headwinds, and what stopped her from personally buying more shares in the trust.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I have with me Samantha Fitzpatrick, co-fund manager of Murray International Ord (LSE:MYI) investment trust. Samantha, thanks for your time today.

Samantha Fitzpatrick, co-fund manager of Murray International: My pleasure.

Kyle Caldwell: So, Samantha, both yourself and Martin Conaghan took over as co-fund managers of Muddy International last June. You took over from long-standing fund manager Bruce Stout, who retired. You both worked with Bruce for more than two decades and you were working with him on the investment trust as well. It’s been a short time period since you both took over, but could you summarise performance since then?

Samantha Fitzpatrick: Sure, it’s been good. I think partly we’ve been lucky. We came into it and had a period where defensive types of companies like Murray International were being rewarded as there was a lot of volatility, a lot of unknown and the income story has hit people right. [The] kind of consistency of income that we can provide has landed well.

But in terms of the numbers, the NAV returns year to year, so the end of June 24 to the end of June 25, their total return was about 9%. Then in July and August, it’s about 5%, 6% as well. So, I think compared to what’s been going on in the wider world, that does stack up pretty favourably.

The share price performance has been even better because the discount has narrowed. So, the share-price performance has been really quite strong as well.

All we’ve done is just do what we’ve always done when we worked with Bruce, and now we’re working on our own, and that’s sticking with that investment mandate through thick and thin.

But that way of managing money has definitely hit home and it’s rewarded people in terms of both the NAV returns and the share price returns since Bruce retired.

Kyle Caldwell: Have there been many changes to the portfolio since last June when you both became co-managers?

Samantha Fitzpatrick: It’s not changed hugely, even in terms of turnover. At the halfway point, turnover was about 8% of gross assets, which is very typical. So, it’s [not] that we’ve gone in and made sweeping changes. That’s the last thing we would want to do is make people think we were doing things drastically different.

As you say, we’ve worked with Bruce for decades, so that should have been an alarm ringing if we’d come in and done something that was really quite unusual. But in terms of the number of stocks in and out, again, it’s been fairly typical.

In the first half of this year, there was three new names in, about six names out. That was including some bonds that we reduced. So, there have been changes, there always will be changes.

Are they stocks that Bruce would have picked? I don’t know, to be honest. You can’t really know that because you can’t live two different parallels, but in terms of us just hitting the investment mandate, it’s nothing untoward.

We’ve made our own moves, we’ve discussed between ourselves and we’re happy with the changes that we’ve made by and large, but nothing that’s out of the ordinary in that sense.

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Kyle Caldwell: In part one of this video interview, which listeners can check out for themselves, you talked about lots of examples of global businesses within the portfolio. Next, I wanted to turn my attention to bonds. So, Murray International has a small amount of exposure to bonds and you mainly invest in emerging market bonds. Could you explain why?

Samantha Fitzpatrick: Sure, yes, the reason that we have emerging market debt is because, if you look back 10 years ago, when we bought these investments, they were trading, in our view, at very attractive valuations at that time.

They could offer yield, some of them have offered capital upside, but we have been reducing it quite drastically because when we went into these names, they were roughly about 17% of the portfolio 10 years ago, now it’s 3%.

What we found was that during Covid times, so Bruce was still part of the team at this time, those emerging market bonds held up remarkably well. By selling some, we were able to get income uplift from going into things like Broadcom Inc (NASDAQ:AVGO) and AbbVie Inc (NYSE:ABBV), trading at about 7% dividend yields five years ago.

What we’ve seen even more recently is, again, they’ve held up - some of them - really pretty well and we’ve been able to get income uplift in things like Mercedes-Benz Group AG (XETRA:MBG) and Tesla Inc (NASDAQ:TSLA), and names like that that we’ve introduced fairly recently into the trust. So, they’re there, but only to help deliver the investment mandate.

We love the flexibility of being able to go in and out. But to be honest, our greatest strength and the area that we’re more comfortable with is equities.

I don’t think there’s any huge issue to be there if you’re getting similar yields within the equity space. But I wouldn’t want to give up that ability to go in if markets become a lot tighter again from an equity standpoint, and you can pick up better yield by flexing the mandate and going into bonds again.

Kyle Caldwell: As you mentioned, global shares account for the vast majority of the portfolio. I do, however, have one more bond-related question to ask you. That question is, have you considered exposure to UK government bonds, also known as gilts?

The reason I ask is because it’s been a popular area with some of our customers at interactive investor. There are certain UK gilts that are offering yields above inflation. It is being viewed as an attractive area to hunt for income among some of our customers. So, why don’t you have any exposure?

Samantha Fitzpatrick: It’s definitely something that’s available, and we have had them in the past. Going back 20 years ago, we had gilts and we had US treasuries as well because they were offering about 5% in terms of income at that point in time.

However, even if the numbers are the same today, the backdrop in terms of the debt is hugely different. So, we’re a bit nervous around that angle.

Not just those two markets. I mean, France is hitting the headlines for all the wrong reasons when it comes to expenditures and trying to cut that back. And then governments come into all sorts of issues when they try to do so. Again, it’s great to have the ability to do it, but we’re not there yet.

I don’t think we would be comfortable putting a lot of money into gilts right here, right now when we have so many other options.

Kyle Caldwell: You’ve mentioned debt as a risk. Could you talk through all the headwinds that you’re having to contend with at the moment and how you navigate those headwinds?

Samantha Fitzpatrick: Yeah, it’s not been a dull period, it certainly hasn’t. Whether it be tariffs and then that implication on inflation and then the implication on growth. At the same time, as you say, you’ve got huge eye-watering levels of debt in various different markets. So, we are generally quite cautious by nature, which lends it well to us managing this kind of product that’s a bit more defensive, a bit more value-driven, perhaps.

And the way to get around that, we don’t have any greater insight into that than anybody else, but the way to get it around and to mitigate it is being able to be so varied and so flexible.

For example, just now we’re invested in 23 different countries. We only have about 50 stocks, seven bonds, but across those holdings, we’re investing in so many different markets, different currencies. So, what the idea behind that is, is that even if you do get pressures building up, you can have the flexibility to manoeuvre, or you’re not just dependent on one thing happening from a macro standpoint either, because it is looking risky out there, I think, from all different perspectives.

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Kyle Caldwell: Earlier this year, we saw a notable pick-up in stock market volatility in response to US tariffs. We've since seen global markets make a strong recovery over a short period of time. Is there a danger of complacency creeping in? Have stock markets recovered their poise too quickly?

Samantha Fitzpatrick: When you think about all the pressures we’ve just mentioned, tariffs included, and then you see stock markets hitting new highs all the time, something doesn’t make sense there.

With the tariffs, it’s been really interesting because there was so much back and forth and just crazy numbers getting bandied about. About 200% was mentioned for some of the spirits companies at one point. So, I think people have become a bit immune to some of these big numbers and, as we have seen, there’s been lots of deals happen [where], actually, the numbers quoted haven’t come through, or there’s huge amounts of exceptions in there.

So, it’s not a blanket tariff situation. I think there’s a bit of complacency, and what we haven’t yet seen is the implications of those tariffs coming through. So, I think, only once we get six months down the line, for example, and we see evidence of exactly how much the companies are passing on, how much they are having to just suck it up and take the hit on their margins, then we’ll perhaps get a better understanding for the longer-term implications.

But there has been a bit of a complacency set in with regards to some of these things because they could be important and they could be meaningful, even as things currently stand on the tariff side.

Kyle Caldwell: During that period in which stock markets became more volatile, particularly in the first quarter of the year, did you use that as an opportunity to top up existing positions or introduce new holdings?

Samantha Fitzpatrick: We did do some trading in April when markets were really volatile, when the Liberation Day announcements were made. We made some switches in the trust. Now, it [wasn’t] directly because of what was said on tariffs or making any predictions as to how that might fall eventually, but the period of volatility meant that we did do changes.

So, that’s when we introduced Infosys Ltd ADR (NYSE:INFY), for example, an Indian IT company. We funded that from another tech name, GlobalWafers, that had disappointed on the income side. So, again, not linked to tariffs necessarily, but one had performed better than the other.

It was similar when you look at the banking switch we did. In April, we switched from Banco Bradesco in Brazil and we put that into Intesa Sanpaolo (MTA:ISP). So, that one was an interesting switch because Italy had really fallen as the world became concerned about growth implications, and the implications for banking.

But the emerging market stocks had actually performed really well. So, at that time we were getting a chance to switch from one company that is difficult to predict on the income side. You do have more currency volatility, more headwinds potentially with Brazilian reais.

So, we made that switch because of how these stocks had performed relative to each other, and a very turbulent period for markets. So, not really linked to tariffs, but certainly linked to the volatility surrounding that and the bigger picture concerns.

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Kyle Caldwell: We always end by asking our ‘skin in the game’ question. However, it’s a question that I’ve asked you before. So, I know that you have skin in the game. Instead, I wanted to ask, when was the last time you invested in Murray International?

Samantha Fitzpatrick: Not for a while, actually, but I feel as if I have to explain myself. So, this year, who knew it was so expensive for kids to go to uni, right? So I’m dealing with that at the moment, and as my daughter is setting off on that adventure, I’ve been selling a lot of investments to help her out. We’re getting her a flat and that’s all now done.

The timing of it was a bit unfortunate. So, when Murray International hit its kind of worst level in terms of the discount, it was almost 12% discount back in January of this year, I would love to have bought some more, but I couldn’t. That’s when we bought the flat.

So, I haven’t bought any more, but I’ve sold other things and I’m sticking with Murray International. Hopefully, in time, I’ll be putting a bit more money to work there, but more to do with personal circumstances than any lack of faith in the product.

Kyle Caldwell: Samantha, thank you for your time today.

Samantha Fitzpatrick: You’re very welcome. Thank you.

Kyle Caldwell: So, that’s it for our latest Insider Interview. I hope you’ve enjoyed it. You can let us know what you think, you can comment. If you enjoyed it, please hit the ‘like’ button and do hit the subscribe button for future fund manager videos. Hopefully, I’ll see you again next time.