Why the unconventional approach to global income can pay dividends

FOR a manager of a billion-pound global fund that is more than a century old, Bruce Stout, fund manager for Murray International Investment Trust and a senior portfolio manager on the global equities team at Aberdeen Asset Management, holds few conventional views about the markets, the economy, and stock-picking.

For a start, at a time when every analyst is getting excited about a new mergers and acquisitions (M&A) cycle, Stout warns: “Nine times out of 10, an acquisition deletes value for the shareholder in the acquiring company. The return of M&A is a negative sign for the market; it gives us the creeps.” Furthermore, he doesn’t hold much store by market predictions either: “We have no idea what the outlook is for stock markets, it has always been impossible to predict.”

But this unconventionality appears to have served Stout rather well. Murray International has seen its share price grow by 107.7 per cent in the five years to the end of July compared to a gain of just 25 per cent in the benchmark, which is 40 per cent FTSE World UK and 60 per cent FTSE World ex UK. The trust, which aims to maintain an above-average dividend yield, has been persistently trading at a premium to its net asset value (NAV) for the past two-and-a-half years – currently 8.1 per cent – and delivers a yield of 3.2 per cent.

Scottish-born Stout, who is based in Edinburgh along with the rest of Aberdeen’s global equities team, consolidated the trust’s holdings from 220 companies in 2003 to just 62 stocks today and eschews asset allocation in favour of bottom-up stock picking: “You need to work with a number that you feel you can get to know well. The more you know about a company, warts and all, the better.”

His bottom-up approach means that Murray International and the Aberdeen World Growth and Income Fund, launched last October, both have a rather eclectic mix of stocks with little geographic or sector bias. For example, some of the largest equity positions include UK-listed Standard Chartered, which is predominantly exposed to emerging markets, Kimberley Clark de Mexico, a manufacturer of toilet paper and tissues in the central American country, and tobacco giant Philip Morris International. Stock market volatility over the past few years will have had no effect at all on demand for toilet paper in Mexico, says Stout.

A decade ago, it would simply not have been possible to get dividend income from a global portfolio, Stout says. But while Murray International has more concentrated holdings, it has completely diversified its income stream over the past seven years or so. In 2003, it had 40 per cent exposure to the UK. Now it has just 13 per cent as the trust was able to refocus towards emerging markets, thanks to “companies embracing the attitude that shareholders should be rewarded”.Stout says it is important to take a rational, long-term view of the markets, which he says are ruled by sentiment and emotion. “You can’t overpay for things,” he says, adding that sometimes he will never get the chance to buy a stock that he really liked, simply because it never traded at a cheap enough price. “You don’t always have to be buying and selling, sometimes you are better off doing nothing,” he adds. The turnover in the names in the fund is low, since Stout prefers to add to and reduce positions as stocks become cheaper or more expensive respectively.

Equity income is back in vogue thanks to a backdrop of low interest rates, falling bond yields and high inflation. But Stout cautions against blindly going after yield: the yield means nothing – it can, and often does, disappear, he warns, adding: “Just buying yield is a very dangerous thing to do and you have to make sure that companies can sustainably pay dividends.”

For him, dividend yield growth and free cash flow are important indications of a company’s capacity to continue paying out. His approach has seemingly paid off: Murray International has consistently grown its dividends and has ensured they have always been fully covered by net earnings.

While there are UK companies that offer good dividends and exposure to overseas markets, Stout reckons that this approach lacks true diversification and highlights the deteriorating quality of dividends paid in the UK: “A lot of companies have been cutting corners to maintain their dividends.”

For a slightly dour Scot, Stout assures he is relatively optimistic about the outlook for global income over the next three to five years. Investors just need to broaden their outlook to beyond the borders of the developed world.


Born: 1958

Lives: Edinburgh

Education: BA (Hons) in Economics from the University of Strathclyde

Career: Stout joined Aberdeen in 2000, when it acquired Murray Johnstone, where he had worked since 1987.
Prior to his career in the asset management industry, he worked for both BT and for General Electric as a graduate.

Interests: Football