Bill Jamieson: Stout’s ‘scepticism’ more than justified

The US Federal Reserve. Picture: AFP/Getty
The US Federal Reserve. Picture: AFP/Getty
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Some fund managers are so pessimistic you wonder how they have survived in the investment business. But that is the point about investment management. It is not about riding the waves of an incoming tide but about steering a course through stormy waters and dangerous currents.

Few managers are more apprehensive than Bruce Stout, manager of Murray International Investment Trust, part of the Aberdeen Standard Life stable. After nine years of ultra-low interest rates and relentless quantitative easing, he is sceptical that “increasingly discredited central bankers” (US Federal Reserve pictured) will be able to normalise monetary policy without causing market disruption. Investors could hardly complain about the surge of this incoming tide. Assets worldwide have been flooded by liquidity, driving prices to record highs. The MSCI World Index has more than doubled over the past decade in US dollar terms while the FTSE All Share Index has posted a 96 per cent total return.

Stout has set out his doubts in the trust’s annual report. And it is worth quoting his outspoken remarks at some length to indicate the depth of concerns that will be shared by many investment managers uneasy about the direction of travel and who have been quietly building up cash in recent weeks.

This is what he has written: “Within the minds of increasingly discredited central bankers, theoretical justification has been the constant companion of perfunctory policy and imprudent practice for the past decade. The implicit danger of continuing such a fallacy has never been so acute.

“The reality is inescapable. No comparisons from economic history or chapters in economic textbooks exist that might remotely clarify, demonstrate nor describe the consequences of ‘normalising’ interest rates in a chronically, debt-dependent world. Withdrawing monetary stimulus, shrinking sovereign balance sheets, maintaining confidence and re-establishing positive real savings rates while simultaneously trying to avoid recession and control inevitable credit quality problems is essentially what is proposed.

“The likelihood of achieving such an exceptionally tough balancing act is virtually zero. In the real world, the monumental debt overhang means the more the cost of money rises, be it by balance sheet contraction or by interest rate hikes, the more likely credit-dependent growth evaporates. Against this backdrop, great scepticism is warranted...”

He is no fan of US President Donald Trump or US stocks. But prices on Wall Street have surged in the past nine years, hitting record highs. Yet Stout has given North America a low portfolio allocation – just 14 per cent of the total. US companies, he says, have a bias towards buying back equity rather than paying higher dividends. This, he believes, leads to top prices being paid to cancel stock – a practice that flatters earnings per share numbers over underlying profit growth.

Stout likes the UK market even less, with just 12 per cent of the trust invested here. He cites “our strained political environment” – and exposure here is unlikely to rise until Brexit uncertainties are lifted. He may need great patience.

So where does such a deeply sceptical trust invest? Asia Pacific ex Japan accounts for the largest slice of the portfolio, at 24.8 per cent, followed by emerging markets (17.2 per cent). Europe ex UK doesn’t figure highly, with a modest asset allocation of 10.4 per cent and Japan at just 3.7 per cent. Asian and emerging market fixed interest stocks together account for 13 per cent of the portfolio total.

As for performance, the figures are mixed. According to TrustNet, Murray International trust has generated a 178 per cent total return over the past ten years. This gives it second place in the IT Global Equity Income sector but below the gain made by the FTSE World ex UK index.

However, on other comparisons it doesn’t look so good. Over three years it has gained 37.4 per cent compared with 44.3 per cent average for the global equity income sector, while over five years the gain is just 26 per cent against a 62.5 per cent advance by the global equity income sphere.

The shares at 1224p are standing at a premium to net assets of 4.6 per cent while the dividend yield is just over 4 per cent.

Whether that premium is testimony to the notably higher-than-average dividend yield or market sympathy for the trust’s investment stance, it may act as a disincentive for private investors in these febrile conditions. However, many will quietly concur with Stout’s appraisal of “where we are now”.