Interim Board Report – Chairman's Statement
Background
Inflation and interest rates dominated the financial backdrop over the period under review. A further surge in energy and food prices as a consequence of the conflict in Ukraine exacerbated inflationary pressures worldwide, leaving Central Banks the unenviable task of having to raise interest rates at a time of slowing growth and rising living costs. Bond yields spiked sharply higher in response to aggressive monetary tightening in the United States as policymakers came under intense scrutiny and political pressure to be seen to be doing something about the highest levels of consumer price inflation for over forty years. Against such an economic backdrop, the investment landscape changed markedly from that which had prevailed for over a decade. The impact of rising bond yields rapidly translated into higher debt servicing costs for consumers and businesses alike. Higher interest rates squeezed liquidity out of financial markets as investors fled from higher risk assets. Escalating input costs and higher wages negatively impacted corporate margins across most industries, with few businesses able to exert pricing power in fiercely competitive markets. The period proved exceedingly challenging for investors with virtually all broad asset classes declining in value over the six months.
Performance and Dividends
I am pleased to report that, in this challenging environment, the net asset value (NAV) total return, with net income reinvested, for the six months to 30 June 2022 increased by 3.8% compared with a decline of -10.5% for the Company's Reference Index (The FTSE All World TR Index). Over the six month period, the share price total return increased by 9.5%, reflecting a narrowing of the discount at which the shares traded to the NAV. The Manager's Review contains more information about both the drivers of performance in the period and the portfolio changes effected.
Two interim dividends of 12.0p (2021: 12.0p) have been declared in respect of the period to 30 June 2022. The first interim dividend is payable on 16 August 2022 to shareholders on the register on 8 July 2022 and the second interim dividend will be paid on 18 November 2022 to shareholders on the register on 7 October 2022. As stated previously, the Board intends to maintain a progressive dividend policy given the Company's investment objective. This means that in some years revenue will be added to reserves while, in others, revenue may be taken from reserves to supplement earned revenue for that year to pay the annual dividend. Shareholders should not be surprised or concerned by either outcome as, over time, the Company will aim to pay out what the underlying portfolio earns. The Board currently intends to pay a dividend for 2022 of no less than the 55.0p per share dividend paid for 2021. If necessary, the Board will again consider using some of the significant revenue reserves built up over prior years for occasions such as the current pandemic. The earnings from portfolio companies have continued to recover and, at the end of June 2022, the Balance Sheet revenue reserves amounted to £63.3m (June 2021: £58.2m).
Annual General Meeting
At the Annual General Meeting held on 22 April 2022, all resolutions were duly passed by shareholders. Following two years of closed AGMs necessitated by the Covid-19 pandemic, it was pleasing to see such a good turnout and for the Board finally to be able, once again, to meet, to speak to and to hear from shareholders in person. During the period, we were also able to communicate with a significant number of existing and prospective shareholders via an Online Shareholder Presentation held in April 2022. Given the significant turnout at the online event and excellent level of interaction, this is something that the Board will aim to repeat again in 2023.
Management of Premium and Discount
The Board continues to believe that it is appropriate to seek to address temporary imbalances of supply and demand for the Company's shares which might otherwise result in a recurring material discount or premium. Subject to existing shareholder permissions (given at the last AGM) and prevailing market conditions over time, the Board intends to continue to buy back shares and issue new shares (or sell shares from Treasury) if shares trade at a persistent significant discount to NAV (excluding income) or premium to NAV (including income). The Board believes that this process is in all shareholders' interests as it seeks to reduce volatility in the premium or discount to underlying NAV whilst also making a small positive contribution to the NAV. During the period under review, the Company has purchased for Treasury 528,233 Ordinary shares at a discount to the underlying exclusive of income NAV. At the latest practicable date, the NAV (excluding income) per share was 1238.5p and the share price was 1239.0p equating to a premium of 0.04% per Ordinary share.
Gearing
In May 2022, the Company utilised part of its £200m Shelf Facility, of which £50m had already been drawn down, through the issue of a £60 million 15 year Senior Unsecured Loan Note (the “Loan Note”) at an annualised fixed interest rate of 2.83%. The Loan Note is unsecured, unlisted and denominated in sterling. The Loan Note ranks pari passu with the Company's other unsecured and unsubordinated financial indebtedness. The Company used the proceeds of the Loan Note to repay, and cancel in full, the Company's £60 million Fixed Rate Loan with The Royal Bank of Scotland International Limited, which matured on 31 May 2022. Following the drawdown and repayment, the Company's total borrowings remain at £200m, which represents a net gearing level of 11.1% based on the Company's NAV at 30 June 2022.
Ongoing Charges Ratio (“OCR”)
The Board continues to focus upon delivering value to shareholders. During the review period the OCR has again fallen, from 0.59% to 0.55%, reflecting a modest increase in net assets over the period combined with the impact of the Board's continuing focus on reducing administrative expenses. A full breakdown of the OCR calculation is provided below.
Directorate
As part of the Board's succession planning, on 22 June 2022 we welcomed Ms Virginia Holmes to the Board as an independent non-executive Director. Virginia is the former CEO of AXA Investment Management Limited and brings significant listed company experience and investment expertise to the Board. She is currently Chair of Trustees at the Unilever Pension Fund, Senior Independent Director at Syncona plc and European Opportunities Trust plc and a non executive director of Intermediate Capital Group plc.
Outlook
The world is in flux, with more unanswered questions shaping the future than for many a year. Will the trend of globalisation be reversed in an increasingly fractious political world, how long will inflation persist and how high will interest rates rise, will energy start being rationed, how deep will economic recessions be, how long before credit quality deteriorates? Negotiating the unchartered and unpredictable path through such a turbulent financial landscape is unlikely to be smooth. However, the strategy of owning quality businesses, real assets and a diversified portfolio has served shareholders well in the past and remains the preferred option for
the present.
Shareholders' views are very important to the Board and I encourage you to email me if you have feedback on the Company at DavidHardie.Chairman@murray-intl.co.uk.
David Hardie
Chairman
11 August 2022
Interim Board Report – Manager's Review
Background
Seldom have economic and financial conditions deteriorated as rapidly as those that evolved over the first six months of 2022. The barbaric Russian invasion of Ukraine dominated the headlines, adding additional humanitarian, economic and political challenges to a world still plagued by problems from a global pandemic.
Continuing lockdowns, supply chain disruptions and widespread shortages combined with upward pressure on wages created a seismic shift in global inflationary dynamics. Central Banks belatedly began to aggressively raise interest rates, their delusional expectations for just “temporary” then “transitory” inflation exposed as woefully inadequate for the negative emerging environment. As numerous global equity and bond markets succumbed to the general liquidity squeeze, identifying pressure points of distress proved painfully straightforward. Growth, inflation, interest rates, corporate profits, incomes and living standards all meaningfully deteriorated in terms of being supportive of prosperity. Yet perhaps most corrosive of all was the tangible change in sentiment. What became crystal clear throughout this turbulent period was an increasingly grudging realisation that there are no easy solutions to issues such as wage inflation, war in Ukraine, wanton interest rate policy, recession risks and the cost of living crisis. For the first time in well over a decade, certainly as regards financial markets, such prevailing pessimism manifested itself in selling into strength rather than buying into weakness. Against such a backdrop, capital destruction was likely to be ubiquitous, and
so it proved.
Asia
The enforcement of zero Covid policy in China proved problematic beyond just the domestic boundaries of Asia's largest economy. Manufacturing integration throughout the region was periodically crippled by complete lockdowns in cities such as Shanghai, aggravating global shortages in numerous electronic components and constraining corporate profitability of several companies dependent on Asia for sourcing.
Financial markets constantly fretted over the stop-start growth trajectory of Asia's pandemic recovery path, a prevailing concern that constrained the region's equity market returns over the period. Widespread selling of global technology was reflected in weakness in portfolio holdings such as Taiwan Semiconductor, GlobalWafers and Samsung Electronics, where, despite very attractive longer term fundamentals, fears over global recession impacted short term performance. Greater resilience was witnessed in defensive Telecommunication holdings such as Singapore Telecom, Telekom Indonesia and Taiwan Mobile where strong cash flow dynamics and above average dividend yields became increasingly attractive to global investors. Notable areas of strength tended to be stock specific, with BHP Billiton in Australia , Hon Hai Precision in Taiwan and China Resources Land all delivering positive capital and dividend growth. Profit taking at the beginning of the period from large positions in Global Wafers and Taiwan Semiconductor meant no additional investment was added to Asia over the six months but, with strong balance sheets, the prospects of solid dividend growth and attractive absolute valuations, the current weighting to the region will be maintained.
North America
As broad measures of inflation moved towards double figures for the first time in over forty years, the US Monetary Authorities arguably faced the greatest chasm between perceptions and reality that has existed for many a year. The grotesque distortion created by quantitative easing (printing money) in response to each and every financial crisis over the past twenty years caused prevailing artificially low bond yields and inflated equity prices ill-equipped to deal with the economic disequilibrium that invariably accompanies inflation. The Pavlovian collapse in financial asset prices to the inevitable interest rate hikes was as predictable as it was destructive. Such overall market carnage was not reflected in portfolio returns, a +13.6% positive total return from the 25% exposure a product of defensive and diversified positioning. Canadian pipeline operators TC Energy and Enbridge were standout performers against a backdrop of rising energy prices and relatively inelastic gas demand. Exposures to global healthcare companies Johnson & Johnson, Abbvie and Bristol Myers also delivered solid double digit aggregate total returns, accompanied by strong dividend growth underlining their respective strengths in cash flows and balance sheets. Stable total-returning Telecommunication holdings in Verizon and Telus justified their portfolio inclusions, as did CME Group from which profits were top sliced during the period. The only meaningful weakness was recorded from Technology holdings in Cisco Systems and Broadcom where there was no hiding from the general global revulsion towards the sector. During the period under review, three holdings were sold outright on extended valuation grounds: divestment of Pepsico reflected increasing concerns over margin sustainability as input costs surged higher; the position in Nutrien was sold outright as potash supply constraints from sanctions were deemed to be more than discounted in the company's rich valuation; and Schlumberger was fully divested as its stock price also detached from near term realities within the energy service sector.
Europe and the UK
As the epicentre of Russian hostilities towards Ukraine and in closest proximity to sanction-induced energy supply shocks, Europe felt the full brunt of surging commodity prices. The gravity of ongoing unfolding events should not be over-emphasised, with numerous as yet unquantifiable consequences for the European economic and political landscape. During what proved a turbulent time for the region's financial markets, numerous periods of heightened market volatility provided opportunity to add to existing European holdings plus initiate exposures in quality businesses that were being monitored. Consequently, the largest change to overall net exposure (+4%) proved to be in Europe. Using funds from cash and some Emerging Bond sales, existing positions in Zurich Financial and Nordea were increased, whilst new positions in Dutch semi-conductor assembly equipment manufacturer BE Semiconductor, leading German industrial Siemens and French food processor Danone were all initiated.
Performance from exposure to the region was not unexpectedly muted, with weakness in high quality industrial holdings Atlas Copco and Epiroc reflecting growing recessionary fears rather than any specific company issues. Not surprisingly given the diversification inherent in current European exposure, stronger performance came from eclectic sources, notably French energy stalwart TotalEnergies, Danish insurance company Tryg, French pharmaceutical Sanofi, and the aforementioned Zurich Financial recovered strongly to end the period with positive total returns.
Latin America
As befits one of the world's most overlooked equity regions, the 12% exposure to six high quality Latin American companies delivered way in excess of what conventional wisdom might have expected. Perhaps pre-emptive interest rate hikes last year and the region's inflationary heritage may have dampened global investors' enthusiasm, but the +24.1% total return from portfolio holdings yet again emphasised the benefits of true diversification. Performance from leading global lithium producer Soquimich proved exceptional, prompting further profit taking in what still remains a meaningful position. Mexican airport operator Grupo Asur continued to benefit from record passenger volumes through its airports in Cancun, Cozumel and Colombia, prompting higher than expected cash flows and larger than expected dividends. In Brazil, Telefonica and Banco Bradesco embraced the prevailing 13% interest rate to pass through price increases and fatten lending margins respectively, displaying operational dexterity honed from years of practice managing businesses during periods of higher inflation. Such skills may prove increasingly “transferrable” to the Developed World should current economic circumstances prevail. Existing exposure in Latin America is likely to be maintained around existing levels, with the prospects of improving profits, robust dividends and potential interest rate cuts on the horizon.
Outlook
The schizophrenic nature of supposedly rational financial markets is nothing new to seasoned investors. History is littered with protracted periods where financial markets unreservedly “believe” in something right up until the point where “perception” changes and then suddenly they don't. Perception becomes reality regardless of what the reality actually is. The current interpretation of inflation is reflective of such a subjective change.
Over the past fifteen to twenty years, “inflation” has been omnipresent in financial markets yet consistently viewed positively by consensus, up until now. Inflating liquidity through quantitative easing was welcomed by markets as a policy option to deal with economic crisis. Inflating government balance sheets of the Developed World from $5 trillion fifteen years ago to $35 trillion today was embraced as a necessary consequence. Inflating Government Bond prices to levels that produced “irrational” negative bond yields was generally viewed as acceptable, despite clear concerns over financial repression. Inflating equity market multiples of unprofitable, cash burning companies was positively argued as evidence of superior, future growth. Inflating property prices to unsustainably high ratios of income affordability in all but a zero interest rate environment, was generally viewed as positive “wealth” creation. Inflating expectations to the point where markets became totally dependent on such a toxic cocktail of distorted reality was probably the most dangerous “inflation” of all. Yet, throughout this long period of inflation, those responsible for managing “price stability” were complicit in managing “market prices” and, thereby, in stoking the flames of future price instability once perceptions inevitably changed. The recent emergence of rampant price and wage inflation leaves those Central Banks responsible for such broader inflation of the past twenty years devoid of any credibility whatsoever. With only limited policy options now at their disposal, the world waits to see if they tighten too much and cause recession or tighten too little and watch inflation spiral out of control.
Against such a backdrop, the investment environment is likely to remain extremely challenging. In addition to “traditional” inflation of prices and wages, the Covid pandemic, war in Ukraine and climate change is prompting companies and governments to scrutinise global linkages for resilience, security and sustainability. The halcyon days of globalisation may well be over, suggesting a return to increasing market rigidity with less focus on just sourcing the cheapest possible price. The portfolio remains focused on geographical and sector diversification, real assets and quality balance sheets for an increasingly opaque outlook where financial risk remains fraught with uncertainty.
Bruce Stout
Senior Investment Director
|
Martin Connaghan, Investment Director |
Samantha Fitzpatrick , Investment Director |
Aberdeen Asset Managers Limited
11 August 2022
Interim Board Report – Directors' Disclosures
Principal Risks and Uncertainties
The Board has approved a matrix of the key risks that, in its assessment, affect the business. The major financial risks associated with the Company are detailed in note 18 of the 2021 Annual Report and the other principal risks are summarised below. These risks represent the principal risks anticipated for the remaining six months of the year. They can be summarised into the following categories:
- Investment Strategy and Objectives;
- Investment Portfolio Performance Risk;
- Operational Risks; and
- Financial Risks.
Details of the management of the risks and the Company's internal controls are disclosed on pages 37 to 39 of the 2021 Annual Report.
The Board also has a process in place to identify emerging risks. If any of these are deemed to be significant, these risks are categorised, rated and added to the Company's risk matrix.
The Board has reviewed the risks related to the Covid-19 pandemic and the on-going War in Ukraine and the resultant disruption to world markets and increased geo-political uncertainty. However, the Board notes the Manager's robust and disciplined investment process which continues to focus on long-term company fundamentals including balance sheet strength and deliverability of sustainable earnings growth. The Board, through the Manager, closely monitors all third party service arrangements and has not suffered any interruption to service. The Board therefore believes that the Manager and all other key third party service providers have in place appropriate business interruption plans and are able to maintain their service levels to the Company.
Related Party Transactions
abrdn Fund Managers Limited (aFML) (formerly Aberdeen Standard Fund Managers Limited), a wholly owned subsidiary of abrdn plc acts as Alternative Investment Fund Manager, AAM acts as Investment Manager and Aberdeen Asset Management PLC acts as Company Secretary to the Company; details of the service and fee arrangements can be found in the 2021 Annual Report, a copy of which is available on the Company's website. Details of the transactions with the Manager including the fees payable to abrdn plc group companies are disclosed in note 11 of this Half Yearly Report.
Going Concern
In accordance with the Financial Reporting Council's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, the Directors have undertaken a rigorous review and consider that there are no material uncertainties and that the adoption of the going concern basis of accounting is appropriate. This review included the additional risks relating to the ongoing Covid-19 pandemic and the on-going War in Ukraine. The Company's assets consist of a diverse portfolio of listed equities and bonds and the portfolio in most circumstances is realisable within a very short timescale. The Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and at least 12 months from the date of this Half Yearly Report. Accordingly, the Directors continue to adopt the going concern basis in preparing these financial statements.
Directors' Responsibility Statement
The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:
– the condensed set of Financial Statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);
– the Half Yearly Board Report includes a fair review of the information required by rule 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year); and
– the Half Yearly Board Report includes a fair review of the information required by 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).
The Half Yearly Financial Report for the six months ended 30 June 2022 comprises the Half Yearly Board Report, the Directors' Responsibility Statement and a condensed set of Financial Statements.
For and on behalf of the Board of Murray International Trust PLC
David Hardie
Chairman
11 August 2022