The trust has raised its dividend in each of the last 15 years, but 2018 has not been easy. Bruce Stout talks predictions, FAANGs and trade wars.
Professionally, Bruce Stout is not in a happy place. No fund manager whose charge bumbles along in the fourth quartile of its peer group could be otherwise, especially one, such as Stout, with an impressive record of past outperformance.
Stout readily predicted that 2018 would be a testing year for his £1.4 billion Murray International, a global income trust that now offers a yield of some 4.5 per cent, and so it has proved. ‘I told shareholders (private client firms that hold stock for some of the trust’s 25,000 investors) that if I got through the year without losing them money, and could raise the dividend, I’d be happy.’
The dividend has indeed grown, but as the shares have fallen from around £13 to £11 since January, Stout will be going some to show share price appreciation on the year. His view for 2019? ‘I’ll be happy if we can again achieve real dividend growth, as we have for the past 15 years. Preservation of capital remains the key.’
A September survey showed retail investors’ confidence in the value of UK equities at its lowest level in 23 years and Stout’s wider perspective of what lies ahead, let alone the severe global shakeout that has taken place this week, will not lift their mood. But contrarian investors – historically among the canniest – will not be discouraged.
Income trusts, by definition, get left behind when the focus is growth, and few investors need reminding that stock market values have grown at a record pace in the past decade. Further, some of Stout’s defensive bets have been hammered. ‘BAT is down 24 per cent – they don’t normally behave like that – and PepsiCo went from $115 (£87) to $85 for no reason at all.
‘We have seen the longest period of business expansion on record and many in asset management have never seen a recession or (until recently) interest rates go up. There seems to be a belief that these growth stocks will grow in perpetuity.’
Stout managed technology funds in the late 1990s and reckons ‘what is happening now is similar to that period. These FAANGS (the US grouping of mega tech stocks) are up 28 per cent on the year, and more people are not looking for active managers. People always go passive at the wrong time. They forget there are cycles. These companies have led the market up for five years, and passive investors will get all the downside when the cycle turns.’
He weighs in on ‘people obsessed with “normal” interest rates – what is that?’ Stout, an economics graduate, says in the 60-year period to the crash of 2008, the average real interest rate was 2 per cent. ‘Since 2008 the normal rate has been zero. We know we can’t go back to normalising rates, despite peoples’ obsession.’ He also implies investor ignorance with regard the implications of monetary tightening.
‘There have been 13 instances of tightening since 1958 and 10 of those caused a recession. The three that didn’t led (in the 1990s) to the Asia crisis, the Brazil crisis, and the Mexican crisis.
‘Tightening monetary policy is not a science. They tighten it [to breaking point] and we have 10 examples of this.’ What is more, removing quantitative easing means a ‘double liquidity hit’. He forecasts a setback in the US ‘pretty soon’. ‘The business cycle is 10 years old and will turn down – that’s why they’re called cycles. Take the UK and Europe. Here we have 1.5 per cent growth and except for Germany, Europe has not grown – Italy has not had growth in 20 years.’ He identifies ‘currency management’ as the spur to German expansion.
Stout accepts there was no alternative to quantitative easing (QE). ‘It’s in the title: Emergency Monetary Policy. It’s a new concept to deal with. I am not criticising it, but to get rid of QE [without damage] is almost impossible. We’ll be caught in a deflationary trap.’
So where does this leave investors? ‘The biggest problem is that there will be no [real] growth. Huge debts have been built up in a drive for growth, but all that does is bring forward consumption. The developed world is all about consumption – it's 70 per cent of economic activity. Now, with no wage growth, there is no potential for credit growth.’ He adds: ‘So we need to go to those areas where the rates of consumption can still expand.’ He points to Brazil, China, India and Indonesia – ‘big centres of population with rising, real income growth. With young people – not like in Europe or Japan; 80 per cent of Mexicans, for instance, are aged under 40.’
The strength of the dollar and other concerns mean that emerging market currencies and equities are under pressure ‘but this weakness is not because of economic fundamentals', he says. Stout’s emerging markets exposure helps explain why Murray International shares have slipped to a tiny discount to NAV. They moved to a premium in 2008, a margin that peaked at 14.7 per cent in June 2013.
Meet the fund manager
Name: Bruce Stout
Position: Senior investment manager, Aberdeen Standard. Manager, Murray International.
Education: Strathclyde University. Economics.
The past: Joined GEC, feasibility studies for telecom opportunities in China. Entered fund management 1987 through Murray Johnstone, now part of Aberdeen Standard.
Home: Edinburgh. Plays football: ‘You’re never too old.’
Finances: In-house funds.