Stout has long taken a bearish outlook on financial markets, which has hurt the relative performance of his closed-ended fund over recent years.
His primary concern is that there has been far too much central bank intervention via ultra-low interest rates and quantitative easing which has pushed investors into a false sense of security.
Performance of index since Mar 2009
Source: FE Analytics
While the strong gains from equities over recent years has begun to slow in 2014, Stout says there is still too much complacency among investors which is likely to end badly and, therefore, he is maintaining a very defensive portfolio.
“The relentless appreciation of equity markets continues to be based on hope and expectation rather than fundamental improvements in corporate profits or underlying dividend growth,” Stout (pictured) said.He added: “Against such a backdrop, great care must be taken to avoid potentially destructive over-valuations; hence the continued primary focus of portfolio management remains on capital preservation.”
Stout says there are already signs that equity markets are artificially high.
“The latest batch of below-trend inflation data in the UK and Europe highlighted the intensification of deflationary pressures as both regions struggled with the consequences of anaemic domestic demand,” he said.
“With nearly six years having elapsed since the global financial crisis, the prospects for numerous economies in the debt-ridden developed world remain as opaque as ever.”
Stout is one of a number of high profile managers who have voiced their concerns about the state of the current market. FE Alpha Manager Iain Stewart, who runs the £9bn Newton Real Return fund, warned that some of biggest bubbles in history were developing while former Miton manager Martin Gray said the sheer amount of complacency over future returns was only going to end in tears.
Stout has always run his Murray International Trust, which he took over in June 2004, with a cautious mentality and this has worked for him over the longer term.
According to FE Analytics, the investment trust has returned 339.43 per cent since Stout took charge, making it the best performing portfolio in the IT Global Equity Income sector. It has also beaten its composite benchmark – FTSE World ex UK and FTSE World 60/40 split – by 191.92 percentage points.
Performance of trust vs sector and composite benchmark since June 2004
Source: FE Analytics
Stout’s portfolio is skewed towards emerging markets, with Latin America and Asia Pacific ex Japan making up 40 per cent of the portfolio. The manager also holds close to 10 per cent of the trust in emerging market debt.
While the manager has roughly 45 per cent split across the UK, US and Europe, the stocks tend to be multinational defensive companies with reliable earnings such as British American Tobacco, Roche and Verizon.
This positioning, combined with a falling premium, meant Murray International had a difficult 2013 when it returned just 4 per cent compared to its benchmark and the sector’s returns of more than 20 per cent.
However, with emerging markets rallying, mega-caps driving developed markets and a weaker appetite for risk among investors causing a widening premium, Murray International has performed far better this year.
Performance of trust vs sector and composite benchmark in 2014
Source: FE Analytics
The ever-popular portfolio is trading on an 8.75 per cent premium to NAV. While that looks expensive and is above its one and three-year averages, it had been on an 11 per cent premium at times over the past 12 months, according to the AIC.
The trust yields 4 per cent, has gearing of 14 per cent and has ongoing charges, plus a performance fee, of 1.08 per cent.
One of the major caveats to Stout’s outlook, according to certain managers such as Old Mutual’s Stephen Message, is that though equities have had a stellar run they still aren’t overly expensive.
However Jeremy Lang, manager of the Ardevora UK Income fund, says current valuations are slightly misleading.
“The thing is, the market valuation is the average valuation of all the stocks in the market. Once you get into the market, there is an enormous amount of devil in the detail and the stuff that tends to make the market look cheap doesn’t look very nice - like the mining sector.”
“It is on a very low valuation and these are big, big companies so they drag the overall valuation down. That’s not a good thing, because you may think the market looks cheap, but when you actually look to see why it is cheap, would you really want to invest in the mining sector? No, not really.”
Nevertheless Lang, like a number of experts, says he isn’t running away from equities and hiding in cash because there isn’t a sense of “mania” in the market; a phenomenon which usually acts a precursor to a significant downturn.
“For me, it’s always been about whether there are enough interesting opportunities in the market,” Lang said.
“It’s fine, as far as I can tell. The opportunity for me is: what is company management behaviour like? Because sometimes, they can all end up acting like hooligans and that’s when you don’t want to be there, like 2007-2008. But actually, there is still enough trauma in the world which makes enough company managements fairly careful about what they are doing.”
“As long as that holds, that’s fine.”
“You can see that the risk-taking appetite is beginning to build-up because corporate activity is picking up, so the risks are rising, but there are still lots of anxiety and nerves.”
According to FE Analytics, Lang’s £240m Ardevora UK Income fund has been a top quartile performer in the IMA UK Equity Income sector since its launch in January 2011, beating the sector average by more than 15 percentage points.
Performance of fund vs sector since Jan 2011
Source: FE Analytics
Lang takes an unusual approach to UK equities as his strategy is based around cognitive psychology. In a recent FE Trustnet article, he explained how he implements that strategy.
Ardevora UK Income has a yield of 3.82 per cent and has an ongoing charges figure of 0.93 per cent.
