The team behind Murray International, the global equity income investment trust, has long warned about the perils of “delusional” central bank policy, which they believed would stoke high inflation.
Managers Martin Connaghan, Bruce Stout and Samantha Fitzpatrick say central banks have spent too long supporting stock markets at any cost, causing them to veer away from their stated objective of managing inflation. Finally, this goal appears to be back in focus.
Murray International has enjoyed a strong 12 months thanks to a share price rise of 17pc, compared with 7pc from rivals. The £1.6bn trust yields a healthy 4.5pc.
Mr Connaghan tells The Telegraph why investors should be cautious about oil and gas prices. He also explains why he is bullish about the turnaround story at Danone, the food and drinks giant.
How do you pick stocks?
We aim to pick stocks that help us to achieve our investment objective, which is to deliver an above average dividend yield.
We have to earn that dividend first and foremost and then we aim to grow it, as well as the capital, in real terms above that dreaded thing called inflation.
We look for companies that have a solid, defendable market share and a strong balance sheet. These businesses tend to generate better “returns on equity” than their peers. Return on equity is the money the company generates relative to the investment received from shareholders.
We also look for companies that benefit from nice structural trends, have an attractive dividend that is covered by profits, good cash generation and the potential to grow the dividend.
You have said central banks lack credibility. Why?
Central banks were set up to manage inflation and currencies, but since 2008, their primary function has been to support stock markets. Any time stock markets have had a wobble, central banks have ridden to the rescue with support and quantitative easing. However, they are not meant to artificially distort capital markets.
Stock markets are supposed to go up and down, based on the economic environment and the profitability of companies.
They are not meant to be driven by the rhetoric from a central bank – and this is what they do now.
What has driven the trust’s returns over the past year?
Performance has been robust. The trust has a sizeable allocation to oil and gas via Shell, TotalEnergies and Woodside Energy in Australia.
We have exposure to North American pipeline companies such as TC Energy and Enbridge, which have performed well in this environment. We also have decent exposure to metal and mining companies.
Businesses such as BHP and Vale, the Brazilian mining giant, were very robust in the early part of this year, generating huge cash flow and dividends.
There are businesses we cannot invest in as a result of our investment objective. These are high-growth technology, software or media companies that pay little or no dividend. There is nothing wrong with them, they just don’t satisfy our mandate. The lack of exposure to these businesses over the past 12 months has been a positive in light of the tech sell-off.
What do you think will happen to energy prices?
Typically when they are elevated, it is wise to be very cautious, especially if there is a recession on the horizon. I guess the market is grappling with what the supply-demand balance is at this point.
We would never try to predict oil and gas prices. Quite frankly, the chief executives of these companies have no idea – and they know far more about the industry than we do. Nevertheless, experience tells us that when any cyclical area of the market is experiencing elevated prices and a buoyant time, it is wise to be cautious.
Have you cut back on oil and gas?
We have taken our exposure down slightly. For example, we sold out of Schlumberger, the North American oil drilling services company, as we did not see it as a beneficiary of the current environment, given the financial discipline that the oil majors have been showing. It had performed quite well this year, so we sold out.
What was the last stock you bought for the fund?
Danone, which has been a serial underperformer over many years. We think there is a potential turnaround story. It has been quite sensible in terms of targets and interactions with investors so far, and we like the areas it is exposed to, such as water and specialised nutrition.