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Murray International Trust robust recovery from April to end of June 2020

Murray International Trust PLC (LON:MYI) has reported the unaudited results of the Company for the six months ended 30 June 2020.

HIGHLIGHTS

 30 June 202031 December 2019% change
Total assets less current liabilities (before deducting prior charges)£1,535.0m£1,738.8m-11.7
Equity shareholders’ funds (Net Assets)£1,335.2m£1,539.1m-13.2
Share price – Ordinary share (mid market)994.0p1,260.0p-21.1{A}
Net Asset Value per Ordinary share1,031.8p1,190.0p-13.3{A}
(Discount)/premium to Net Asset Value per Ordinary share{B}(3.7%)5.9% 
Net gearing{B}14.2%11.3% 
Ongoing charges ratio{B}0.66%0.61% 

{A} The movement relates to capital only and does not take account of the reinvestment of dividends.

{B} Considered to be an Alternative Performance Measure. Further details can be found below.

PERFORMANCE (TOTAL RETURN) {A}

Performance (Total Return){A}

 Six months ended 30 June 2020Year ended 31 December 2019
Share price{AB}-18.7%+16.5%
Net asset value per Ordinary share{A}-10.7%+12.4%
Reference Index-4.7%+21.1%

{A} Considered to be an Alternative Performance Measure. Further details can be found below.

{B} Mid to Mid

Source: Aberdeen Standard Fund Managers Limited, Morningstar & Lipper.

INTERIM BOARD REPORT

Chairman’s Statement

Background

During the first six months of 2020, the Covid-19 pandemic has spread across the world with the tragic loss of over half a million lives. Emergency responses to the health crisis have caused dramatic changes to the global economic and political backdrop, with widespread recession and unprecedented Government intervention. Enormous monetary and fiscal support has proven to be the norm in most major economies. Under such circumstances, the path of financial markets over the period was always likely to be highly volatile, and so it has proven. Panic and fear prevailed in the three months to the end of March, while renewed hope and expectation powered a robust recovery from April to the end of June. This recovery period has been characterised by significant outperformance by the US stockmarket, in particular the technology and healthcare sectors, and by a pronounced narrowing of the overall market to a small number of large outperforming stocks. The Company’s broad, diversified exposure curtailed total-return depreciation to some extent but performance was unable to match returns arising from these trends.  During this period of intense volatility, attractive investment opportunities did arise and were acted upon, consistent with the long-term investment objectives of the Company.

Performance and Dividends

The net asset value (NAV) total return, with net income reinvested, for the six months to 30 June 2020 fell by 10.7% compared with a fall of 4.7% for the Company’s Reference Index (comprising the return on the FTSE All World TR Index from 27 April 2020 and prior to that the return from the former benchmark which was a composite of 40% FTSE World UK and 60% FTSE World ex UK). Over the six month period, the share price total return fell by 18.7%, reflecting a move from trading at a premium of 5.9% to trading at a discount of 3.7%. The Manager’s Report contains more information about the drivers of performance in the period and the portfolio changes effected.

Two interim dividends of 12.0p (2019: 12.0p) have been declared in respect of the period to 30 June 2020. The first interim dividend is payable on 14 August 2020 to shareholders on the register on 3 July 2020 and the second interim dividend will be paid on 19 November 2020 to shareholders on the register on 2 October 2020.  As I have stated previously, the Board intends to maintain a progressive dividend policy given the Company’s investment objective. This means that in some years revenue will be added to reserves while, in others, revenue may be taken from reserves to supplement earned revenue for that year to pay the annual dividend.  Shareholders should not be surprised or concerned by either outcome as, over time, the Company will aim to pay out what the underlying portfolio earns. The Board currently intends in 2020 at least to match the dividend payout of 53.5p per share in 2019. It is expected this will entail some use of the significant revenue reserves built up over prior years for occasions such as the current crisis. At the end of June 2020 the Balance Sheet revenue reserves amounted to £69.6m.

Annual General Meeting

At the Annual General Meeting held on 27 April 2020 all resolutions were duly passed by shareholders.  In addition to the usual business shareholders approved the Board’s proposals to amend the Company’s investment objective and to adopt a new Reference Index which both became effective from the date of the AGM.  I would like to thank shareholders for their support and forbearance, given that we were required to hold a purely functional AGM in light of the Covid-19 pandemic.  The Board remains very keen to have an opportunity to meet shareholders and will consider whether there is any possibility of holding an investment presentation in London later in the year in lieu of the AGM.  In any event we plan to return to London for the AGM on 23 April 2021.

Management of Premium and Discount

The Board continues to believe that it is appropriate to seek to address temporary imbalances of supply and demand for the Company’s shares which might otherwise result in a recurring material discount or premium. Subject to existing shareholder permissions (given at the last AGM) and prevailing market conditions over time, the Board intends to continue to buy back shares and issue new shares (or sell shares from Treasury) if shares trade at a persistent significant discount to NAV (excluding income) or premium to NAV (including income). The Board believes that this process is in all shareholders’ interests as it seeks to reduce volatility in the premium or discount to underlying NAV whilst also making a small positive contribution to the NAV.  During the period under review, the Company has issued 80,000 new Ordinary shares under the Company’s blocklisting, all at a premium to the underlying inclusive of income NAV.  Subsequent to the period end, the Company has purchased for Treasury 126,389 Ordinary shares at a discount to the underlying exclusive of income NAV. At the latest practicable date, the NAV (excluding income) per share was 995.4p and the share price was 977.5p equating to a discount of 1.8% per Ordinary share.

Gearing

In May 2020 the Company agreed a new £50 million revolving credit facility with the Royal Bank of Scotland International Limited, which was drawn in full at an initial all in annualised rate of 0.83875% and used to repay a maturing £50 million fixed rate loan, also with the Royal Bank of Scotland International Limited.  The new facility will expire on 13 May 2021.  At the period end the Company had net gearing of 14.2%.

Ongoing Charges Ratio (“OCR”)

The Board remains focused upon delivering value to shareholders and regularly reviews the OCR.  During the review period the OCR has increased from 0.61% to 0.66% reflecting the decline in net assets caused by market weakness which outweighed reductions seen elsewhere in administrative expenses. A full breakdown of the OCR calculation is provided on pages 23 and 24 of the published Half Yearly Report for the six months ended 30 June 2020.

Directorate

On 24 April 2020 Mr Peter Dunscombe retired from the Board. I would like to reiterate the thanks that I expressed to Peter at the time of the Annual Report for the assistance that he provided to me as Senior Independent Director, and for his enormous contribution to the Company’s affairs.

On 1 May 2020 we welcomed Mr Simon Fraser to the Board as Chairman designate ahead of my scheduled retirement at the AGM to be held in April 2021.  We are focused on a smooth transition ahead of that date and I am pleased to confirm
that the Board is already enjoying the benefit of Simon’s extensive experience.

Outlook

Against the fluctuating backdrop of clinical, political and economic events, proffering a credible near-term outlook is arguably even more problematic than usual. Without greater clarity on how the pandemic evolves and ultimately impacts health and recovery trajectories throughout the world, most forecasts are merely speculative. The longer term implications for the global economy, capital markets, future dividends, and even normal day to day living, are also largely unknowns at this stage. However, some potential financial consequences must be considered now ahead of events.  Current widespread economic contractions will likely produce credit defaults, bond rating downgrades, equity capital raisings, on-going profit warnings and dividend cuts.

The Manager’s investment approach seeks companies which offer stable long-term earnings and dividend growth prospects in combination with management teams focused on shareholders’ interests. During the adversity of the last six months opportunities have been taken to reallocate assets from defensive fixed income holdings into equities with these long-term earnings and dividend growth characteristics, all within the diversified global nature of the Company’s portfolio. Such repositioning increases confidence in the delivery of the long term income and growth investment objectives of the Company.

Kevin Carter,
Chairman

13 August 2020

INTERIM BOARD REPORT

Manager’s Review

Background

Unlike previous financial market dislocations, the underlying root cause of the past six months crisis – a global health pandemic – was interpreted by policymakers and politicians as a “nobody’s fault recession”. This allowed for unopposed, proactive intervention by the Authorities, unleashing a flood of liquidity into financial markets through interest rate cuts. Fiscal policy responses have also been unprecedented, with governments stepping in to underwrite wages for furloughed workers and providing emergency loans to support businesses.  Capital controls are likely to tighten as the International Monetary Fund has been inundated with requests for aid, with many emerging economies facing the additional pressures of under-resourced health systems, soaring debt levels, and policy and de-globalisation challenges. Designed to prevent systemic economic collapse, such measures also had significant implications for the performance of stocks and bonds.  Fixed income yields collapsed across the board, and numerous technology stocks, deemed to be beneficiaries of “social isolation”, soared to unparalleled heights. The severity of dividend cuts from companies tackling evaporating revenues and profits has been the deepest on record. For global income funds, the backdrop could scarcely have been more difficult.

Asia

The Company’s significant exposure to Asia proved relatively robust with positive capital appreciation from technology holdings, including Taiwan Semiconductor Manufacturing Company and South Korea’s Samsung Electronics. This offset some of the weakness from investments in Indocement and Siam Commercial Bank, from the more consumer-driven markets of Indonesia and Thailand. Dividends from Asian holdings were generally less affected than those in the West, with banks, insurance and telecom companies mostly delivering in line with expectations.

The region’s swift and pragmatic response to the Covid-19 pandemic, combined with lower levels of debt and strong corporate balance sheets, augers well for recovery as economic restrictions ease. The volatility experienced in the first half of 2020 presented an opportunity to increase the Company’s exposure to the region by introducing two new investments in China. Financial services conglomerate Ping An Insurance and real estate developer China Resources Land together drive further levels of diversification within the portfolio and offer attractive levels of dividend growth.

North America

The US economy ground to a halt in April, with 95% of citizens locked down as the virus took hold. The Federal Reserve announced unlimited quantitative easing and the intention to keep interest rates near zero to 2022. US unemployment reached record highs of 14.7% in April before declining to 11.1% in June. Some corporates gained marginal relief from the fall in labour costs, helping offset the losses of weaker consumption. US corporate earnings were delivered with considerably fewer companies providing forward guidance. This resulted in downward revisions to consensus numbers broadly expecting further contractions in 2020 before a recovery in 2021, albeit still below pre-Covid-19 levels. Leveraged share buybacks are now likely to get more questions than support and many programmes have been suspended.

Two new investments were made in the United States amid the market sell-off; AbbVie, the Chicago based pharmaceutical Company fresh from its recent acquisition of Allergan, and Broadcom, a designer of semiconductor and infrastructure software products.  Both afford the Company enhanced levels of income and have impressive, attractive growth in their dividend distribution. The portfolio’s defensive exposure to North America delivered in line with expectations. There were no dividend cuts from Canadian holdings and material dividend increases from recent additions in AbbVie and Broadcom.

Europe

Europe began to emerge from lockdown as infection levels fell, but still faced OECD forecasts of 9.1% GDP contraction for 2020. The European Central Bank increased its asset purchase plan by 12% of GDP, with rates already negative. More recently, they signalled a pause in policy action as markets began to stabilise, and consideration of further expansion of the emergency bond purchase scheme. Swedish industrial holdings Atlas Copco and Epiroc, Swiss pharmaceutical exposures including Roche, and Norwegian telecom company Telenor all held up very well under the circumstances and remain core portfolio exposures.

UK

Low exposure to the UK proved insufficient to protect overall capital and income from this “region”. Emerging from lockdown towards the end of June, facing 2020 OECD forecasts of double-digit GDP contraction, the market has been brutally impacted by significant capital losses and the largest dividend declines of any global stock market. Ongoing uncertainty over future profit growth and dividend prospects as well as fraught post-Brexit trade negotiations provide a compelling case to remain cautious of the UK.

Latin America

Latin America endured a more torrid time as growth concerns weighed heavily on commodity dependent economies such as Brazil and Mexico. Significant oil price weakness and the reality of impending recessions worldwide initially prompted investors to rapidly exit numerous emerging markets. With stability now re-established, the portfolio’s Latin American exposure has begun to recover, but patience will be required before global confidence towards the region is fully restored. Scepticism towards emerging market equities was not replicated in the asset class’s corresponding debt markets. Portfolio exposure to emerging market bonds experienced some days of intense volatility, but over the period, these bonds contributed very positively to relative capital performance and income accrual. Improving fundamental dynamics of favourable demographics, healthy savings and long term investment objectives in the emerging world continue to support and justify maintaining exposure to this attractive asset class within the portfolio. Exposure to the asset class was marginally reduced over the first half of the year. The initial resilience of the Company’s investments in short-dated Brazilian Government bonds made them an ideal candidate for disposal, with the proceeds being rotated carefully back into equities, taking advantage of the weak market environment.

Outlook

Markets are likely to remain volatile for the duration of the year. Expectations are for every major economy to contract, contending with slower growth, record low bond yields and companies struggling to achieve meaningful earnings growth, in the short term.  The exit from lockdown will not be smooth and will be subject to periods of reversal. Portfolio diversification has increasingly proved an unpopular and underwhelming strategy in an investment world with a seemingly insatiable appetite for the ‘Internet of Things’. However, as pandemic fears ease and the reality of redemptive policy actions becomes quantifiable, the risk/reward between portfolio concentration and portfolio diversification appears poised to rotate favourably towards
the latter.

Bruce Stout

Senior Investment Director

Aberdeen Asset Managers Limited

13 August 2020

INTERIM BOARD REPORT

Directors’ Disclosures

Principal Risks and Uncertainties

The Board has approved a matrix of the key risks that affect the business. The major financial risks associated with the Company are detailed in note 18 of the 2019 Annual Report and the other principal risks are summarised below. These risks represent the principal risks for the remaining six months of the year.

Details of the management of the risks and the Company’s internal controls are disclosed on pages 25 and 26 of the 2019 Annual Report. They can be summarised as follows:

·      Investment strategy and objectives;

·      Investment portfolio, investment management;

·      Financial obligations;

·      Financial and Regulatory; and

·      Operational.

The Board also has a process in place to identify emerging risks.  If any of these are deemed to be significant, these risks are categorised, rated and added to the Company’s risk matrix. 

The Board has reviewed the risks related to the Covid-19 pandemic.  Covid-19 is continuing to affect the value of the Company’s investments due to the disruption of supply chains and demand for products and services, increased costs and potential cash flow issues. The pandemic has significantly impacted world stock markets as well as creating uncertainty around future dividend payments. However, the Board notes the Manager’s robust and disciplined investment process which continues to focus on long-term company fundamentals including balance sheet strength and deliverability of sustainable earnings growth. The pandemic has also impacted the Company’s third party service providers, with business continuity and home working plans having been implemented.  The Board, through the Manager, has been closely monitoring all third party service arrangements and is pleased to report that it has not seen any reduction in the level of service provided to the Company to date.

There remains uncertainty surrounding Brexit and potential issues surrounding the certainty and/or timing of future withholding tax repayments following the expiry of transitional arrangements in 2021.  The Board will continue to monitor developments.

Related Party Transactions

ASFML acts as Alternative Investment Fund Manager, AAM acts as Investment Manager and Aberdeen Asset Management PLC acts as Company Secretary to the Company; details of the service and fee arrangements can be found in the 2019 Annual Report, a copy of which is available on the Company’s website. Details of the transactions with the Manager including the fees payable to Aberdeen group companies are disclosed in note 11 of this Half Yearly Report.

Going Concern

In accordance with the Financial Reporting Council’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, the Directors have undertaken a rigorous review and consider that there are no material uncertainties and that the adoption of the going concern basis of accounting is appropriate.  This review included the additional risks relating to the ongoing Covid-19 pandemic and, where appropriate, action taken by the Manager and Company’s service providers in relation to those risks. The Company’s assets consist of a diverse portfolio of listed equities and bonds and the portfolio in most circumstances is realisable within a very short timescale. The Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and at least 12 months from the date of this Half Yearly Report. Accordingly, the Directors continue to adopt the going concern basis in preparing these financial statements.

Directors’ Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

·      the condensed set of Financial Statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);

·      the Half Yearly Board Report includes a fair review of the information required by rule 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year); and

·      the Half Yearly Board Report includes a fair review of the information required by 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).

The Half Yearly Financial Report for the six months ended 30 June 2020 comprises the Half Yearly Board Report, the Directors’ Responsibility Statement and a condensed set of Financial Statements.

For and on behalf of the Board of Murray International Trust PLC

Kevin Carter

Chairman
13 August 2020

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