How Murray International has a higher yield than most rivals

Next June, Murray International Ord (LSE:MYI) will have two lead fund managers following the retirement of veteran investor Bruce Stout. One manager jumping into the hot seat – Samantha Fitzpatrick – joins collectives editor Kyle Caldwell to explain that it will be "business as usual" in terms of the investment approach.

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Fitzpatrick runs through how Murray International’s approach to income investing, which results in the investment trust currently having a yield of 4.8%, which is higher than most other global equity funds and investment trusts. Fitzpatrick names some of the highest-yielding stocks in the portfolio, outlines recent changes, and explains why semiconductor stocks are an attractive area to find growth and income.

Murray International is one of interactive investor’s Super 60 investment ideas. It is currently under review given the recent announcement of Bruce Stout’s retirement.

Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me Samantha Fitzpatrick, manager of the Murray International Investment Trust. Samantha, thanks for coming in today.

Samantha Fitzpatrick, manager of Murray International Investment Trust: Pleasure.

Kyle Caldwell:So, Samantha, both yourself and Martin Connaghan will be taking over as fund managers of Murray International from June 2024 following the retirement of Bruce Stout. Will it be business as usual in terms of the investment approach and the aims of the strategy?

Samantha Fitzpatrick: Absolutely. So, we have both worked with Bruce for a long time. For over 20 years, we've been part of the same global equities team and we have both been formally involved in the management of Murray International for several years now. I first attended [a] board meeting, for example, at the end of 2019. I've been attending board meetings, meeting shareholders, doing this sort of thing since that time. And Martin was actually a couple of years before me.

The idea behind that was for Bruce's eventual retirement. Nobody knew at that point what the time frame would be, but it made a lot of sense to prepare for that well in advance and to get people used to new faces, new voices, and also having two people in charge rather than the fund being associated with one name seems to be the way the industry is going, and I think it makes a lot of sense. And so we've been working together for many years, we are well versed in what Murray International is and what it will continue to be going forward, and we're very proud to be associated with the trust.

Kyle Caldwell:In terms of geographical exposure, the thing that stands out is that Murray International has a lot more in emerging markets, Asia-Pacific and Latin America than other global equity income funds and investment trusts. Within that area of the world, are there certain themes that the trust is trying to profit from?

Samantha Fitzpatrick: There's the obvious themes of a better backdrop for some markets in terms of demographics, and urbanisation, [and] all these big themes act as a tailwind rather than a headwind for some of these markets. But to be honest with you, for any investment to make it into Murray international, it's got to be on its own merits, whether it's listed in Brazil or listed in Singapore or listed in the UK. So, it always comes through the companies themselves rather than trying to think of a theme and then fix some way of playing that theme.

What we find quite strange is that Asia and emerging markets are often lumped together and that is just really strange because there's really very little in common, if you look at some of the underlying investments in Asia and emerging markets. So OCBC, which is a Singaporean bank, for example, has really nothing in common with China Resources Land Ltd (SEHK:1109), a logistics company in China, and nothing really to do with a lithium producer in Chile. So, I understand why people look at big categories and sometimes maybe make judgements or want to question these things.

But for us, each of the 50 names in the trust and roughly 50 holdings at present, are all different and they're all there absolutely because we believe in them as companies. And the backdrop for some markets can give you that extra edge.

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Kyle Caldwell:And within those 50 companies are there certain qualities or characteristics that you're looking for?

Samantha Fitzpatrick:One thing we would always look at is the debt profile of a business, because if a company is very highly indebted, its not got the same room for manoeuvre, if circumstances change [and] it has to come to the market for more funding, for example. So, we do absolutely look at balance sheets, we look at cash flows.

We want companies that are hopefully going to be resilient in difficult times. So that's really important, no matter where the company's listed, or what it does actually. We always look for management teams that we can trust. That sounds really simple, really basic and obvious, but you have to believe that the people in charge are looking after shareholders' best interests. You can look at track records, you can see what's happened in the past, and obviously companies that are in industries that we can understand and can value, and that actually is not always a given. And we have to come at it for each and every investment with that approach.

Kyle Caldwell:Murray International has a dividend yield of around 4.5%, which is higher than most other global equity income funds and global equity income investment trusts. So, how do you strike the right balance between delivering dividends and capital growth?

Samantha Fitzpatrick:Yeah, that's a really good question because it's got to be both. We want to grow income and we want to grow capital in real terms, ideally, as that's been tough over the last couple of years given where inflation has been. For each and every investment, you're looking for that stock or that bond to contribute in both, ideally.

So, we look at the income prospects and the capital prospects for every single potential investment we look at. And now it's not the case that they've got to be scoring 10 out of 10 for each. Sometimes a position will be in there because we think it can deliver more on the income side at a particular point in time.

Or we think, you know what, the yield's quite low just now for other investments, but we think there's more capital upside, and we think there's more to go for in future in terms of income growth. So, that balance, it's not the same, it's not always 50/50 between every investment and it can change even with individual holdings.

We have a position in the trust, actually the largest position in Murray International just now, a US semiconductor company called Broadcom Inc (NASDAQ:AVGO). And we introduced that in March 2020 when it yielded 7%. So, that was really attractive at that point in time. We still like the balance sheets, still like the management team, still like the overall prospects for the business. But that was more of a 'look at this yield', that's really attractive here.

Fast forward to now, and it's yielding about 2% because this capital appreciation has been so strong over the past 12 months especially. It's always a changing dynamic and we would say that every single company has to contribute to that yield. So, we wouldn't typically invest in a stock that's just there for capital and doesn't offer something in the yield front. They've all got to earn income in some capacity. But it's not just about looking at a minimum yield, the growth and the potential and the capital upside is equally important.

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Kyle Caldwell: Could you name a couple of the highest-yielding stocks in the portfolio today? 

Samantha Fitzpatrick: Sure. It's interesting when you look at that and take a snapshot at any one particular point in time because it might throw up names that you are not maybe thinking would be there. And the highest one, if you just look at Bloomberg today, is a Chilean lithium company. It produces other things as well. But lithium is the thing that's got the market so excited given its links to electric vehicle batteries, and that's yielding about 14% just now. That's a cyclical business. It had a very strong year last year on the capital front, and it also had loads of cash. So, it was able to pay back to shareholders. That's not something that you could see is going to be repeated year after year after year, but that's currently the highest-yielding stock.

Some of the other, more cyclical names in the trust have also got really high yield right here, right now. So some of the energy companies and materials companies, for example, would be in that category. Now that does change. Obviously, we're not expecting that to continue necessarily this year.

There are other types of companies that do offer more reliability on that front. So that's why there is still a place for some of the consumer staples names, tobacco companies, which can be quite controversial. But British American Tobacco (LSE:BATS), for example, has a very high yield compared to other companies. And it's there more for that reason and more for that consistency of income that it delivers.

So, because we've got British American Tobacco in there, we can afford to have something that's not as reliable, that's going to be more up and down on the income front. So, there's more to it than just looking at a ranking of stocks to see if this is a high yield, or this is a low yield. It does change quite markedly over time.

Kyle Caldwell:You mentioned Broadcom. You've got two other semiconductor companies in your top 10 holdings. Why is it that you're finding that area so attractive?

Samantha Fitzpatrick:Most of our tech exposure is involved in semiconductors, something that we are wary of, actually, and we've been trying to think about how we could maybe spread that a bit better. But we're happy with the companies that we do have within semiconductors. Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) is the biggest producer in the world, we've got really quite nice exposure there, even in smaller market-cap names as well.

One of the more recent introductions into the trust last year was a company called BE Semiconductor Industries NV (EURONEXT:BESI). It's a Dutch business, relatively small in the market-cap size. Unlike something like TSMC, it was about a €10 billion market cap and although it operates within semiconductors, it doesn't do exactly the same thing. It's more involved in the actual piecing together of the chips and doing that more efficiently, and it sells machines to the likes of TSMC. So, it's not necessarily replicating the same thing. And certainly the long-term demand for these things is just not going away anytime soon.

You think of everything that you have in your life that you need to plug in. It's electronic and that's only going one way. So, we're happy to talk about themes - that's a theme, certainly, and we're happy to have exposure to it. Again, it's cyclical, so you have to be mindful of that. It's not always going to be going one way, plain sailing. But I think in terms of the long-term potential for these companies, it's looking pretty promising right now.

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Kyle Caldwell: You’ve just mentioned a holding that you bought last year. For the portfolio this year, has there been many changes made at all since the start of 2023?

Samantha Fitzpatrick:You would look at a half-year report and think: what have you been doing? We've not done a lot in terms of the first six months of the year. A couple of sales, no purchases. But since the end of June, to this point in time, there has been a bit more activity on both sides.

One stock we have introduced recently is Walmart de Mexico. So, this is the company associated with the US parents Walmart Inc (NYSE:WMT). And we were interested in this business for a few reasons. Unlike in the developed world, like the UK, food retail and other types of retail in parts of emerging markets is positioned very differently. It's actually quite an attractive place to be in terms of the margins it generates, the dominance that some of these companies have. And just in terms of general incomes rising, that potential for increased sales is very different from what we are used to here in the UK.

Walmart de Mexico has no debt, so it has great control in that sense, and it can tap into its parent for things like purchasing and just general know-how about how to run this kind of business, so we like that. One thing that prompted us to do the trade right here, right now, is the situation in Mexico with regards to inflation. Inflation had been ramping up very high and Walmart de Mexico took that on the chin a lot of the time, it didn't pass it all through to its customer base - it sat back. But because of that, it hasn't lost customers. Those customers are still there, still shopping with them. And now as inflation has come back down again, they will certainly benefit on the other side from their costs coming down. And so we think that it's an attractive business, it's looking pretty reasonable and valuation also contributes to the dividend yield that we're trying to achieve as well.

We funded that partly from selling out of another Mexican holding it, Kimberly-Clark de Mexico, which produces a lot of nappies, tissues and things like that in Mexico. And this has performed so well, it's really defied all expectations in terms of getting not only pricing increases but volume increases. And that's where a lot of the consumer staples companies have struggled. They've all increased prices. But as people feel the pinch, they pull back on just how much they spend in terms of volume. It's managed to achieve both, but it doesn't owe us a thing up here, it's performed so well that we thought recycling that money into, in some ways, a similar business. But we think right here, right now, what going forward makes sense.

Kyle Caldwell:And, finally, a question we ask all fund managers we interview. Do you have skin in the game?

Samantha Fitzpatrick:I do, yes, and so does Martin. So does Bruce. If you asked them the question, you would get the same answer. And this is a strategy I absolutely believe. Hopefully that comes across when people hear this talk. We are really committed to this way of managing money and this long-term approach to investing. We've, the three of us, only ever managed money in this way. So, we've not flipped in and out of different types of strategies, and so I'm very happy to be a shareholder also.

Kyle Caldwell:Samantha, thank you for your time today.

Samantha Fitzpatrick:Thank you very much.

Kyle Caldwell:So, that's it for this episode of our Insider Interview series. You can check out the rest of the series on our YouTube channel. You can like, subscribe and comment, and hopefully I'll see you again next time.