Murray International tops up while others struggle

Few fund managers can genuinely say that they have come out of the credit crisis in better shape than they went in, but Bruce Stout, manager at the Aberdeen Asset-run Murray International Trust may be the exception.The fund has been the top performer in a grouping of overseas and international growth and income trusts over the past five years according to broker Collins Stewart, posting a gain of 170% and outstripping many growth only trusts.He also called the current global turmoil pretty much spot on, building up cash in 2007 and buying again heavily at the end of 2008.Buy cheap and holdHe ascribes this prescient piece of portfolio shuffling to his straightforward philosophy that valuations are king."The valuation of individual companies throughout 2006 and 2007 started to get very expensive. The first half of 2007 was the peak of M&A activity. Companies were buying each other for ridiculous multiples, banks were changing hands at 4 times book value," he says."As rule of thumb, life has a great habit of making you humble and if you pay too much for anything you always lose your money. Buy things cheap and hold and you normally make money".True, last year had its ups and downs as equity markets struggled, but the share price is up by a quarter since the end of October, while the dividend, which was held for three years between 2001 and 2004 prior to Stout's arrival, rose by 10.5%. That hike raised the average increase for the past four years to 9.2%. "We are owned by retail shareholders and it is very important to grow the dividend in the current environment and to make sure the revenue stream is very healthy," he says.Enjoy the turmoilStout concedes that he has actually enjoyed the recent turmoil, something that is borne out by a surge in buying activity as he has raised the fund's equity gearing from 89% at the end of 2007 to 107% currently."We've done a lot. The last 15 months has seen the highest amount of activity by Murray International for five years. That 18%, or 1% per month, swing from 89% to 107% is huge for Murray." "This environment throws up so many interesting opportunities to upgrade the quality of the portfolio at a cheaper price," Stout says to explain this burst of activity."We find ourselves in a position where have bought a lot of quality assets at low prices. But the market is still not reflecting their true value, therefore we can sit and hold for 3-5 years," he says."I've no idea what markets are going to do. I don't ever try to predict that. On a 12 month time frame fundamentals do not move stock prices, sentiment and confidence move stock prices. Over a 3-5 year period the fundamentals of a company will move a stock price." Operational gearing to kick inStout says he is still finding many firms that meet his fundamentals criteria, despite the recent rally in share prices."The key element is that operational gearing into cyclical recovery, especially for companies in Asia and Latin America, is now much higher than before the credit crisis. So much competition has been decimated and gone out of the market, for the survivors, it's very positive. You will see that at some point when things start to move ahead again.""Asia, Latin America, and parts of Europe, have only suffered a cyclical downturn. There's no debt there and lots of savings in the government, private and household sectors.""Growth in these economies is determined by demographic growth. Fiscal stimulus works and so the implication for profit and dividend growth is very, very good, especially relative to the developed, indebted world."UK and US grim for yearsStout's prognosis for the UK and US is not so encouraging. "The UK and US face structural problems of over-indebtedness that will take years and years of sub-trend growth to solve.""This is inevitable when you have such a high debt overload and has implication for lower profit and dividend growth," he adds.It means that Murray's focus is now almost fully on the developing world. "In terms of growth, we are still going to get 6% in India, 7% in China and also in other emerging countries where there is healthy domestic demand."Stout adds that Murray's global mandate gives him the scope to take advantage of these opportunities, wherever they may be.Look to new marketsThere are still some big, recognisable US and UK household names in the portfolio but Stout says though these companies may be listed in developed markets, the growth is coming from the emerging world. "The companies don't necessarily have to be domiciled there. Intel in US, Schlumberger, Procter & Gamble have huge parts of businesses in the developing world as do Standard Chartered and Rio Tinto.""We were able to buy good positions in Rio Tinto and in Rio's corporate bonds - yielding 12% and selling for 67% on the dollar. He cites Schneider, PetroChina and QBE Insurance as other examples where he has recently added to the Trust's holdings."The fact that you can buy more of the quality growth assets at a cheaper price is what always makes period like the last 6 months so interesting - and ultimately so rewarding for long term investors." The key is valuation. "If stock markets fall and prices get more attractive, we will have more equities. It is always a case of being focused on that fundamental."