You can listen to Merryn’s full interview with Bruce on the MoneyWeek podcast
It’s a rare journalist who leaves an interview with Bruce Stout feeling cheered up. And as our meeting last month kicked off, it looked as if it was to be no exception. We started with the horrible build-up of debt across the world – and the monetary policy it has forced. You can divide recent financial history into “before 2008” and “after 2008”, says Stout. Before, a risk-free return was possible (interest rates were higher than inflation). After, it was not (interest rates are at, or lower than, inflation). And if there is no such thing as a risk-free return, everything goes haywire. Everyone with cash feels they have no choice but to “speculate”, even though most simply haven’t the knowledge to do so. Pension freedom has exacerbated this. We are, says Stout, effectively “abdicating responsibility for the pension-fund system to the individual”. That makes little sense: “it’s hard enough for professional money managers to get returns on capital, never mind people who have had no experience of it”. Worse, the core problem (no real interest rate) is unsolvable: with consumer debt and sovereign debt both insanely high, if you raise rates you get a “double whammy” hit to demand.
So what do we do? Stop “agonising”. We’ve been running a massive monetary experiment for so long now that while we know what the “actuality is – huge mountains of debt in all sectors of the economy”, we don’t really know what our “new normality” is.
Best then, says Stout, to stop fixating on “normalising” rates (pushing them up in the full knowledge that our economies are too vulnerable to cope). If we do that, we’ll get depressions. We need to look at how else to manage our troubles (there is, after all, “more to economics than monetary policy”).
Buy at reasonable prices – but what is reasonable?
So we move on – to the trust Stout runs, Murray International (LSE: MYI). Murray is a long-term MoneyWeek favourite. While 2017 and 2018 were not brilliant, it remains a long-term outperformer (an average annual return over the last ten years of around 11.5%, and 20% in the last three years). The aim, says Stout, is to “take advantage of the best opportunities anywhere in the world”, while targeting an “above-average dividend yield” (currently 4.4%). It’s equity-based, holding 50 stocks and 28 bonds, and gearing is actively managed – Stout borrows to invest when valuations are low and de-gears when they are not.
And now? “We’re de-geared from equities and have been for a couple of years.” The equities held are generally outside the UK. That’s not necessarily due to expectations of low growth. “It’s very difficult to make out the correlation between what happens in an economy and what happens in a market.” Look at the “strides that China has made in the last 15 years in terms of its share of global GDP… yet there have been many years where the Chinese market has been one of the worst-performing”. What Stout is looking for, then, is a business that might benefit from, say, growth in China, but not be affected by some of its political or governance issues. An example might be Auckland Airport in New Zealand, which is “benefiting from the growth in the Asian region, and the rise in disposable income in China”; or airport operator ASUR in Mexico, which is benefiting from increased disposable incomes and tourism across the region.
“The most money is lost by people who extrapolate recent growth far into the future”
Stout is interested in value, but not obsessed with it. Murray looks for “growth at a reasonable price, and growth that will support capital investment and dividend growth… We are not deep-value investors, never have been, and never will be”. So what counts as a reasonable price? That, says Stout, depends on the type of business. The most money is lost by people who “extrapolate recent growth into the future, and assume that it can happen in perpetuity”, when in fact the business they are looking at is cyclical. Believe, for example, that the semiconductor industry is a straight-line growth story (it isn’t – it ebbs and flows with the consumer-electronics sector) and you will make huge losses by paying too much at the top of the cycle.
So one key point to think about right now is just where there is unrecognised cyclicality in markets. Take tech, says Stout. Some of the big US tech companies have never been tested in a cyclical downturn. “Maybe people will give up food and still keep the Netflix subscription. Maybe not.” But if, after their initial high-growth phases, it turns out that these firms are cyclical too – that they are just normal companies to be valued in normal ways – “wow, that’s a different ball game altogether”.