Murray Intnl Trust – Annual Financial Report

1.    STRATEGIC REPORT – COMPANY SUMMARY AND FINANCIAL HIGHLIGHTS

Financial Highlights

2.    CHAIRMAN'S STATEMENT

Performance

Global equity markets experienced a difficult twelve months to 31 December 2018. Four rises in short term interest rates by the US Federal Reserve took their toll on equity markets, particularly affecting emerging market assets. In addition, negative geopolitical events, notably the progressively escalating trade war between the US and China, also served to weigh on market sentiment.  Brexit related volatility presented constant challenges for both capital preservation and income accrual in a year that witnessed the largest equity market declines in a decade.  Despite a diversified defensive strategy, protecting capital proved unsuccessful in a period of widespread weakness.  Solid stock selection in Asia, North America and Europe positively impacted relative performance as did portfolio exposure to emerging market bonds.

The Company's net asset value (“NAV”) posted a total return (ie with net income reinvested) of -7.5%, a disappointing performance in absolute terms and somewhat below the total return of -5.2% from the Company's benchmark (40% FTSE World UK Index and 60% FTSE World ex UK Index).  The share price posted a total return of -6.8% reflecting a slight increase in the level of premium to NAV. 

The Manager's Review gives further details of performance including an attribution analysis.  What such statistics fail to illustrate is the magnitude of volatility experienced over the period.  An opening six months of upward momentum accompanied by positive sentiment peaked in August, and then reversed into steep declines towards year end.  For the Company's more income focused portfolio, relative performance, which struggled initially, held up strongly in the sell-off.  In an otherwise unsatisfying period for total returns, this represented a small comfort.

Dividends and Dividend Policy

Three interim dividends of 11.5p per share (2017: three interims of 11.0p) have been declared during the year. Your Board is now recommending a final dividend of 17.0p (2017: 17.0p) which, subject to the approval of shareholders at the Annual General Meeting, will be paid on 17 May 2019 to shareholders on the register on 5 April 2019.  If approved, the total Ordinary dividends for the year will amount to 51.5p, an increase of 3.0% from last year (2017: 50.0p). After accounting for the payment of the final dividend, there will be a small transfer of approximately £2.5 million from the Company's revenue reserves.

This small transfer from reserves is in line with the policy that I have advised shareholders of in previous years.  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.

Management of Premium and Discount

At the Annual General Meeting held in April 2018, shareholders renewed the annual authorities to issue up to 10% of the Company's issued share capital for cash at a premium and to buy back up to 14.99% of the issued share capital at a discount. During the year, no Ordinary shares were purchased for Treasury or cancellation; however, we sold 357,665 shares from Treasury at a premium to NAV. The Board will be seeking approval from shareholders to renew both authorities in 2019.  As in previous years, both new shares and shares from Treasury will only be issued at a premium to NAV and shares will only be bought back at a discount to NAV. Resolutions to this effect will be proposed at the Annual General Meeting and the Directors strongly encourage shareholders to support these proposals.

During the year, the Ordinary shares have traded at an average premium to the NAV (including income) of 0.3%.  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.  From the year end up to 7 March 2019 the Company has sold a further 406,531 Ordinary shares from Treasury and issued 196,500 new Ordinary shares under the Company's blocklisting, all at a premium to the underlying inclusive of income NAV.  At the latest practicable date, the NAV (including income) per share was 1125.65p and the share price was 1180.0p equating to a premium of 4.8% per Ordinary share.

Gearing

At the year end, total borrowings amounted to £185 million, representing net gearing (calculated by dividing the total assets less cash by shareholders' funds) of 12.5% (2017: 10.7%) all of which is drawn in Sterling.  On 31 May 2018, the Company agreed a new £60 million loan facility with The Royal Bank of Scotland International Limited (“RBSI”) which was drawn in full and fixed for five years at an all-in rate of 2.328%. The new facility was used to repay a maturing £60 million loan with RBSI. The Company also has a loan totalling £15 million with RBSI that is due to mature in May 2019. The Directors are in the process of reviewing options for the replacement of this facility.

Outlook

Rarely, if ever, has the combination of rising interest rates, increasing protectionism, deteriorating asset quality and constricting liquidity been conducive to sustainable positive equity market performance.  Since 2015, the US Federal Reserve has raised interest rates nine times. The cumulative effect of these rises finally took its toll on global equity markets in 2018. The question now is whether the very real possibility of growth stalling and profits declining will weigh further on markets in 2019.  The market repricing of late 2018 is unlikely to be the end of this corrective phase.

Consequently, from a portfolio management perspective, great caution needs to be exercised.  The implications of the protracted period of growth for the global economy subsiding, combined with concerns about geo-political tensions such as persistent protectionism, present difficult challenges for company profits.  There is no reliable precedent with which to predict how markets will behave while many large economies adjust to high indebtedness concurrently with central bank withdrawal of liquidity.  The Manager's investment preference will continue to favour quality companies with sustainable business models in regions of the world where growth and opportunity still prevail.  As such our portfolio will focus on global diversification in pursuit of the Company's long term investment objectives.