Bloomberg News

Bonds Rigged as Stocks Expensive for Money Man Doubling Fund (1)

May 24, 2013

From his view of the world in Scotland, Bruce Stout says investors risk getting burned because optimism is too high for stocks and bond yields are too low. The markets might be proving him right.

The MSCI World Index, a gauge of developed stock markets, sank by the most yesterday since April 15, while Japan’s Topix Index lost 6.9 percent. Stout, whose 1.5 billion-pound ($2.3 billion) Murray International Trust (MYI) at Aberdeen Asset Management Plc (ADN) posted triple-digit returns during the past four years, has been selling shares he reckons are now too expensive, while his fixed-income holdings are the lowest in 25 years.

“The higher prices go the more short-term expectations can distort things and then you can lose your money,” Stout said at his office in Edinburgh. “That’s why we’re in a capital preservation mode to try and not lose money.”

With economies in Europe yo-yoing in and out of recession, a slowdown in China and India, and central banks from the U.S. to Japan still printing money to revive growth, Stout is more pessimistic than some of the world’s biggest investors.

Goldman Sachs Group Inc. said this week that the U.S. stock-market rally may last at least another 2 1/2 years. While Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest fixed-income fund, said May 10 that a 30-year bull market in bonds has probably ended, he raised his holdings of Treasuries in April to the highest since July 2010.

Paying Up

“You can’t have the worst economic fundamentals of all time and record-low bond yields,” Stout, 54, said on May 17, calling the bond market “rigged.” “In the stock market, it’s understandable that people will pay up for growth, but when you pay too much for anything you lose your money.”

Stout, whose fund can invest in any asset anywhere in the world, has reduced the fund’s stakes this year in companies such as Kimberly-Clark de Mexico SAB and Novartis AG. (NOVN)

His closed-end fund has risen 125 percent since March 2009, based on net asset value per share. Over the past five years, its returns rank first of 10 comparable so-called global growth and income funds, according to data compiled by Morningstar Inc. This year, shares in Murray International, which was founded in 1907, have risen 21 percent, placing it third at Morningstar.

Higher Valuations

Even with yesterday’s 1.3 percent drop, the MSCI World Index climbed 25 percent in the past year, pushing company valuations to their highest since 2009, data compiled by Bloomberg show. The current average price-to-earnings ratio is 17.1, up from 13.6 two years ago. The index has returned 146 percent since March 9, 2009, including dividends, the data show.

The index was little changed at 9:10 a.m. in London, rising less than 0.1 percent. After rising and falling as much as 3.3 percent, the Topix recovered 0.5 percent from yesterday’s decline, the biggest since the tsunami disaster in March 2011.

Markets had rallied this year as the Federal Reserve, Bank of England and Bank of Japan injected money into the economy with asset purchases, a process called quantitative easing.

Fed Chairman Ben S. Bernanke said this week that the flow of asset purchases could be reduced “in the next few meetings” if economic conditions improve. The Standard & Poor’s 500 Index in the U.S., which rose to records this month, dropped for a second day yesterday. The yield on 10-year Treasuries (USGG10YR) rose 36 basis points to 2.03 percent so far in May.

‘No Chance’

In the U.K., the FTSE 100 Index (UKX) is up 14 percent, more than at any time year-to-date since 1998, while 10-year government bond yields are at 1.91 percent. The British economy expanded 0.3 percent in the first quarter, the Office for National Statistics said this week, after shrinking by the same amount in the previous three months.

“Would you lend money to Westminster or Washington today at 2 percent?” said Stout. “I wouldn’t. No Chance.”

It’s been years since Stout had a more optimistic outlook from his office opposite Edinburgh Castle.

The Scottish money manager, whose fund benefited by not holding bank stocks during the credit crunch, said in an interview in August that central bankers were “blinkered” when it came to tackling debt. A year earlier he talked of how it was difficult to make any money and the key was not to lose it. In February 2010, he called the U.K. currency “vulnerable.”

“The fundamentals supporting the currency are worse than they were five years ago,” Stout said in the interview last week. “The enormous amount of quantitative easing has meant a huge expansion of the gilt market at a time when the quality of those bonds has deteriorated.”

Biggest Holdings

Murray International’s biggest stockholdings were Mexican airport operator Grupo Aeroportuario del Sureste SAB, which has risen 44 percent over the past year, and British American Tobacco Plc (BATS), which is up 25 percent. New stakes this year include Verizon Communications Inc. (VZ:US), Stout said. Its shares advanced 26 percent in the past 12 months.

He added to a holding in French retailer Casino Guichard-Perrachon SA (CO) as it grows its business in emerging markets. The company’s stock, which gained 24 percent in the past year, was cheaper because of being “tainted” by being based in a euro country, Stout said. Its price-to-earnings ratio is 8.8, according to data compiled by Bloomberg.

He sold shares of consumer goods company Kimberley-Clark de Mexico, a 60 percent advancer over the past year. Its P/E ratio on current profit is 28.8, the Bloomberg data show. Novartis, Europe’s biggest drugmaker, is up 46 percent in the past year and its P/E ratio is now 18.7.

“The main problem is trying to get yield in a world where there is no yield,” Stout said. “But paying up for it is not the solution.”

To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net


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