Britain's Oldest Investment Funds Are Going Back to BasicsBy
‘There’s going to be a lot of wild cards,’ one manager says
Debt is out and Australian wine or Mexican airports are in
It’s a brave new world in global politics, but it’s back to basics at some of Britain’s oldest investment funds.
Managers of three of them that started more than a century ago have a common message as the U.K. leaves the European Union, Donald Trump completes a year as U.S. president and Angela Merkel tries to form a government in Germany: It’s getting harder to predict the future, so don’t try.
Investors instead should focus on companies that deliver dividends irrespective of stresses and avoid those weighed down by debt, especially as central banks raise interest rates, the managers said in interviews at their offices in Edinburgh. Picks include an airport operator in Mexico, a Chinese athletics apparel company and a winery in Australia.
“There are so many unfamiliar relationships in the world today -- both economic and financial -- that haven’t been witnessed in previous cycles,” said Bruce Stout, who runs the 1.8 billion-pound ($2.4 billion) Murray International Trust Plc. “What we do know is that good companies that deliver good profit and dividends have support” while those based on “the promise of jam tomorrow” are more vulnerable, he said.
The Scottish capital has a history as a money management center going back centuries. Funds in the city that started in the late 19th century invested in everything from U.S. railroads to Latin American utilities and traded through world wars, oil shocks and debt crises.
The most pressing political challenge at the moment comes from Brexit as the U.K. and EU seek a breakthrough in talks next month. There’s also the regulatory backdrop, with January’s introduction of MiFID II rules overhauling the investment industry and potentially creating more competition.
Then there’s the issue of performance. All three trusts have trailed the MSCI World Index this year after strong returns in 2016.
Murray International, overseen by Aberdeen Standard Investments, posted a return of 50 percent in 2016, beating most competitors as stocks and bonds in emerging markets advanced. This year’s performance has been less stellar, with the fund up 10 percent because Stout said he doesn’t hold technology companies that don’t pay dividends.
Stout’s biggest holding is Taiwan Semiconductor Manufacturing Company Ltd., which increased 33 percent this year including reinvested income. Another winner was Mexican airport operator Grupo Aeroportuario del Sureste SAB de CV, or ASUR, which returned 11 percent this year in the wake of Trump’s shock victory as the peso’s slump boosted tourism.
Murray was one of the best performers during the financial crisis a decade ago because Stout sold bank stocks before they collapsed.
The 144-year-old Scottish American Investment Co. Plc also navigated seismic events by focusing on cutting risk, said James Dow, who co-manages the 573 million-pound trust at Baillie Gifford & Co. That enabled it to maintain or raise its dividend every year since 1938, the year before the start of World War II.
“While there’s a certain amount of predicting that you can do, there’s going to be a lot of wild cards,” Dow said. “There aren’t that many people who predicted Brexit, for example. The key is to try to have a portfolio of investments that are going to continue to do well even through those periods.”
Scottish American Investment, founded in 1873 to invest in U.S. railroads, has earned 16 percent this year versus 21 percent for the MSCI World Index.
Dow listed Coca-Cola Co. among his favorite companies because he is attracted by the beverage company’s record of consistent dividend growth irrespective of economic cycles. He also picked ANTA Sports Products Ltd., a Chinese clothing company that has returned about 58 percent this year as its brand gets more popular. "Everyone loves the product and it still got a huge opportunity ahead of it,” Dow said.
Drivers and Drinkers
When it comes to U.K. investments, the trust largely focuses on companies that can withstand a Brexit-induced slowdown in the economy. That’s either because they have an international focus or sell something that people always need, such as motor insurer Admiral Group Plc.
“People are still going to be buying car insurance regardless of the outcome of the Brexit negotiations,” Dow said. “It doesn’t really matter whether the U.K. economy is fantastic or terrible, it will still be a great investment for us.”
It’s the fact that people will always drink that boosted Scottish Investment Trust Plc, which dates back to 1887, the same year the Glenfiddich whisky distillery was completed.
The 845 million-pound fund suffered this year after deciding to forsake U.S technical companies and bet on a recovery by physical retailers, manager Alasdair McKinnon said.
The trust eked out a 12 percent gain this year thanks partly to an almost 50 percent increase for its biggest holding, Treasury Wine Estates Ltd. The Australian company, known for its Penfolds Grange and Lindeman’s brands, has been growing profit worldwide and had a particularly good year in the U.S.
“Every age has its challenges and this age is no different,” said McKinnon. “The times when you think it’s easy are probably the times when you are making a mistake.”