Is your global fund truly diversified?

• US dominance of global stock markets is at an all-time high

• Donald Trump will return to power in January

• Murray International strives for a more geographically and sector-diverse portfolio

The US remains the largest and most liquid stock market in the world. It has been the birthplace for a number of the world’s most innovative companies and remains one of the faster growing developed economies. However, it is now a huge weight in many major global indices, and this may be a risk for investors – whatever thoughts they may have on the emphatic results of the recent presidential election.

After what had been a bad-tempered contest, Donald Trump declared victory in the early hours of November 6^th with what he termed “an unprecedented and powerful mandate”. The President Elect has a fully formed plan of action for when he returns to the White House in January, with material policy changes lined up. The recent period of US political uncertainty is now at least over and global leaders have rushed to congratulate Trump on his emphatic victory. However, no one yet knows what the impact of the forthcoming US policy changes will be on relationships between the US and its overseas partners.

Burgeoning debt backdrop

While politics may not always have a direct bearing on the fortunes of individual companies, the recent political fragility in the US needs to be set against the backdrop of burgeoning debt in the US. The US debt is currently $35.7 trillion, 10x that of the (also highly indebted) UK. It is taking up an increasingly vast share of government revenues. Trump will likely cut taxes, implying that he has no plans to address this deficit.

This appears a precarious backdrop, and one that could dent sentiment towards the US market. Yet US dominance of global stock markets is at an all-time high. The MSCI AC World is now 64% weighted to US stocks. Within that US exposure, there is also high concentration in technology companies, and the Artificial Intelligence (AI) theme in particular – Apple, Microsoft, Nvidia, Amazon, Meta and Alphabet comprise around 18% of the MSCI AC World index.

This also creates risks. The US technology sector has been a superb place to be invested over the past decade for capital growth, but the circumstances are different today. Interest rates are structurally higher, which typically creates a less favourable environment for high growth companies. Valuations are also higher. Apple, for example, has seen its price to earnings ratio double over the past five years. Nvidia’s price to earnings ratio is also double its level since October 2022. These companies are growing fast, but if that is already in the valuation, they may not make good investments.

A concentration issue

This concentration is an issue for passive funds, but also for any global fund where the starting point is the index. These funds are likely to contain similar biases and will focus on the same handful of US technology companies. This argues for introducing greater diversity into a portfolio. Given the distinct investment objective of Murray International, we believe in a ‘blank slate’ approach, paying far closer attention to a company’s ability to grow its capital and dividends over time, than its weighting in an index which would not actually deliver the investment mandate.

This creates a more geographically and sector-diverse portfolio. We do find opportunities in North America, but it is 29% of the portfolio and there are no holdings in the mega-cap technology companies which pay little or income. We hold similar weighting in Europe (24%), Asia ex Japan (24%), and the rest of the world, with significant holdings in areas such as Latin America, which barely feature in the MSCI AC World index. The sector mix is also broader, with around 16% in technology, but also 17% in financial services, another 16% in consumer-facing companies, and around 13% in healthcare.

The AI theme is still represented in our portfolio: we recognise its long-term growth potential – but we are investing in it through companies where valuations are more compelling and income is also available, including Taiwan Semiconductor Manufacturing (TSMC). TSMC makes the majority of Nvidia chips, and yet trades on a far lower valuation.

AI is also a new technology, which brings risks, which is why our portfolio is balanced across a range of ideas, many of which are only lightly represented in a typical global equities portfolio. Our aim is to have a range of different moving parts, with different factors contributing to performance. The trust has always looked distinct from the index and continues to do so. We would worry if all the portfolio started to move in unison.

This is also important in fulfilling our income objective. Growing the income on the trust year in, year out, means having a diversity of income sources. We cannot be reliant on a single sector, country or type of company for income. We draw income as widely as possible.

Every position counts

Unlike an index-focused portfolio, we try to ensure that every position counts, holding a minimum of 1% and maximum of 5% in each position. While the MSCI AC World index has some exposure to Latin America, it is less than 1%. This means it is often neglected by investors. Not only is this an oversight – Latin America has been the best-performing region in 11 out of the previous 26 years in Sterling terms – it creates mispricing that can be exploited. We hold around 9% of the trust there, spread across six holdings.

Our ‘go anywhere’ approach gives us real flexibility to exploit mispricing when markets are temporarily derailed by factors that are unlikely to matter in the long term. For example, in Mexico, market confidence has been knocked by the uncertainty surrounding the new President, and her reform agenda. We don’t believe her accession will significantly impact holdings such as Mexican airport operator Grupo ASUR. The company has just paid a large special dividend, which has helped cushion short-term volatility in its share price.

We are long-term in our time horizon, which helps us navigate volatility. For example, our new holding in Mercedes has been volatile since initiation: the company has undergone some restructuring, and the car industry is difficult. However, we can wait for its value to be recognised by the market, and in the meantime, the company is paying an attractive and growing dividend, well-supported by cash flows.

The US is important, but it has become a very large part of global stock markets and there are potential growing risks. We believe it is important to have more balance in a global portfolio, looking beyond the US for growth and income opportunities at the individual stock level.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.

• Past performance is not a guide to future results.

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.

• The Company may charge expenses to capital which may erode the capital value of the investment.

• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.

• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.

• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.

• With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘sub-investment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.

• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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