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£1bn fund chief's warnings may again prove prophetic

Edinburgh's £1 billion fund manager Bruce Stout raised eyebrows last autumn when he predicted "a lost decade" ahead for Western economies and said there could be no double-dip in the UK because "we have never been out of recession".

vision: Bruce Stout saw the opportunity to diversify away from the UK and target other markets across the globe to boost earnings and dividend growth. Picture: Stewart Attwood
vision: Bruce Stout saw the opportunity to diversify away from the UK and target other markets across the globe to boost earnings and dividend growth. Picture: Stewart Attwood

But the long-serving manager of the 105-year-old Murray International investment trust has commanded growing respect since taking over eight years ago. The fund is now being held up as a model by managers at Aberdeen Asset Management in their bid to wrest control of the undeperforming Alliance Trust.

In January 2007, Mr Stout told The Herald prophetically: "We are fearful about the levels of consumer debt in the UK and US combined with the latter's ballooning twin deficits." Both economies were "likely to experience protracted economic downturns within the next five years".

His latest warning, in the trust's factsheet, is that "deflating unwarranted enthusiasm usually involves widespread stock market declines".

On the hopes for economic recovery he adds: "Our insight is not worth more or less than anybody else's. We are working with the evidence we have in front of us, which is that in the main consumer-led economies of the world the consumers have no money and no credit left and the public sector is maxed out on debt."

Mr Stout, 53, embodies the kind of rational, hard-headed Scot you might trust your £1bn with. Born in Dundee into one of Fair Isle's four families, he worked as a BT engineer for six years before going to Strathclyde University to study economics, and later worked for GEC.

After joining Glasgow's then premier manager Murray Johnstone in 1987 at the age of 28, Mr Stout spent six years investing in the US, six in Latin America, two in emerging markets while MJ was swallowed in 2000 by Aberdeen Asset Management, and the last 12 globally.

He recalls: "In 1999, all the investment community wanted to know was 'what is your weighting in tech?' We told them 'this is a global growth and income fund, tech companies don't pay dividends', but the market wasn't interested and the discount was 15% or 20%. You don't change your process and the way you manage money, you just ride it out."

In the new era, Murray International is a private investor's dream: it preserves capital and grows it when possible, but focuses on securing a sustainable, growing dividend, paid since 2007 entirely out of earnings, not reserves. By then Mr Stout had already cut the trust's UK exposure from 40% to its present 14%, tapping into the rise of dividend-paying companies in Asia and Latin America.

The trust's shares, out of fashion in the boom years, began selling at a premium (now over 5%) in 2008, since when £220 million of new shares have had to be issued to meet demand and protect existing investors.

The last two years have seen funds old and new proclaiming the discovery of international income, but Mr Stout's fund, with just 53 stocks, is the model.

While its world index benchmark lost 4.6% last year amid intense volatility, Murray International lost just 0.1%, made a share price total return of 1.3%, and raised its dividend by a whacking 15.6%. It is one of the handful of funds to win a gold accolade in the first tranche of investment trust rankings by Morningstar, with 59% growth in asset value over five years against 14% for its benchmark.

The opportunity to diversify away from the UK has led to "really strong earnings and dividend growth for the last eight years", Mr Stout says, adding: "The market didn't believe this in 2004 to 2006 and in 2007 and 2008 it definitely didn't believe it, because banking dividends disappeared... but what impact did the banking crisis have on toilet roll sales in Mexico, detergent sales in Indonesia or tobacco sales in Brazil? None, so Murray International kept growing, and the market finally accepts that it is possible to get income growth from an international portfolio."

But Mr Stout observes that newly launched copycat funds will have to get it right first time, with no room for manoeuvre. "Whether people can adjust expectations in a low-growth, low interest rate environment remains to be seen – if you over-promise and under-deliver, you are punished."

Two of the fund's top four holdings are tobacco stocks including BAT, one of only two UK holdings in the top 20, the other being Weir Group. Also in there is Royal Dutch Shell, but Mr Stout looks askance at many of the other big staples of UK income funds. "Many companies become trapped by the dividend-hungry institutional shareholders and feel they can't cut their dividend in order to grow the business – that is when the tail starts to wag the dog.

"In the UK today, 55% of income in the FTSE comes from six companies where the tail is wagging the dog, they are becoming increasingly slaves to income-hungry investors which reduces their flexibility to take a long-term view of growing the business."

The trust's stocks may not be on the biggest yields now – but they are picked primarily for the company's ability to drive and sustain them over three to five years. Five years ago he demonstrated this by showing his investment audience the profile of two anonymous banks.

"I asked would they invest in Bank A, which offered 115% mortgages on five times salary and charged only 1% more for self-certified mortgages, in a very mature market swamped with competition, or Bank B, which offered mortgages on two times salary and a 20% deposit with a full five-year salary history, and with very low competition," he recalls.

"Everybody said Bank B, they wouldn't touch Bank A... until I revealed Bank A was in Scotland and Bank B in India, when they all changed their minds."

At the time, Bank A was paying a dividend yield of 5% and claiming to be making a 25% return on equity. Mr Stout didn't believe it. He says: "No matter what any chief executive tells you, have a look at it yourself and see what you make of it."

But he is still angry at the idea that the Scottish banking crash was understandable and has passed unnoticed around the world. "How many countries in the world have had a bust banking sector? It's the sort of reputational damage that is going to take a long time to improve."

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