Murray Income Trust (MUT) was founded in Scotland in 1923 and has been part of the Aberdeen Asset Management (AAM, now Aberdeen Standard Investments, or ASI) stable since 2000.
Charles Luke has been the trust’s portfolio manager since 2006. His deputy, Iain Pyle, joined the team in 2018. The Aberdeen/Standard Life merger in 2017 saw the UK part of AAM’s Pan-European equity team, of which Luke was a member, merge with SLI’s UK team to create ASI’s 16-strong UK equity team.
In April 2020, Perpetual Income and Growth Investment Trust (PLI) announced it was terminating its management agreement with Invesco and in July, after a competitive tender, it released details of a proposed merger with MUT.
PLI’s chairman, Richard Laing, said the PLI board opted for the combination, instead of taking the more usual route of appointing a new manager, because of MUT’s top-quartile performance over the short and longer term and the strength of its team. This combination also offered all shareholders in the enlarged trust – both MUT’s existing shareholders and those PLI investors who took up the offer of shares in MUT – the opportunity to realise significant cost savings thanks to lower marginal fee rates and an enlarged capital base over which to spread fixed costs.
The merger, completed on 17 November 2020, saw MUT’s total assets under management rise to ca £1.1bn, making it the third largest fund in the Association of Investment Companies’ (AIC) UK Equity income sector, delivering a higher profile and greater liquidity.
The newly enlarged MUT maintains its objective of realising a high and growing income, combined with capital growth, through investment in a diversified portfolio of mainly UK equities, although up to 20% may be invested in non-UK stocks. The trust has a longer-term investment focus and targets good quality, well managed companies, with attractive valuations and strong ESG characteristics.
MUT uses a broad UK stock market index as its benchmark. For comparison purposes in this note, we use the CBOE UK All Companies index. Performance is also measured against peers in the UK Equity Income sector. Following the combination with PLI, gearing of up to £120m is accessible via long-term, fixed rate borrowings and a flexible multi-currency bank loan. Net gearing as at 23 November 2020 was 8.3%. MUT has a 47-year record of annual dividend growth.
MUT’s performance remains consistently strong in relative terms, outperforming the UK market both during recent months and over the longer term. In the three months ended October 2020, the trust returned -2.3% on a share price basis and -2.4% in NAV terms, compared to a decline of 4.1% in the broad UK market, as represented by the CBOE UK All Companies index. In the year to end-
October, it returned -12.6% and -11.3% in share price and NAV terms respectively, compared
to a market decline of 20.2%.
The trust also outperformed the market over three, five and 10 years. In addition, MUT’s annualised absolute returns have been positive over three, five and 10 years on a share price basis and over five and 10 years on a NAV basis. As well as outperforming the UK market over all periods shown, except on a share price basis over six months, the trust has also outperformed the MSCI UK High Dividend Yield
Index, which could be viewed as a closer proxy than the broad UK market for the investment universe of a UK equity income fund. However, unsurprisingly, MUT has underperformed the MSCI AC World index, which is dominated by expensive and fashionable US mega-cap growth stocks and Chinese internet names.
The main contributor to MUT’s outperformance is stock selection. As discussed above, the managers’ relentless focus on quality has helped avoid the worst of this year’s dividend shocks. Over the year
ended 30 June 2020, the most significant contributors to performance were underweights to Royal Dutch Shell and HSBC and more modest overweights to Microsoft, Roche, Assura and VAT Group.
More recently, positions in Mondi, a manufacturer of paper and packaging products, Close Brothers, a specialist financial services provider, and engineering services company Weir Group, have assisted
The positive performance impact of these holdings was partially offset by the adverse effect of underweights to HSBC, Reckitt Benckiser, AstraZeneca and British American Tobacco, and overweights to National Express, Aveva, Total and Euromoney Institutional Investor. Financial holding Ashmore also detracted, as did National Grid.
While stock selection has contributed most to recent performance, asset allocation also made a meaningful addition to returns, especially via underweights to banks and oil & gas – a sector hit by low oil prices and increasing ESG concerns – and overweights to technology and healthcare. In fact, sector positioning enhanced returns in most areas.
Investment strategy – a focus on income growth prospects
MUT’s managers Charles Luke and Iain Pyle are members of a five-person UK equity income team which is part of ASI’s wider UK equity group. The group provides detailed coverage of the UK’s largest 350 listed companies. Luke receives further support from ASI’s UK smaller companies team and from the firm’s global research network. Investment ideas are tested against a quality filter, which includes assessments of the attractiveness of the industry, the durability of the company’s business model, its financial strength, management capability, and environmental, social and governance (ESG) risks. All ideas are subject to rigorous team scrutiny and debate. Fundamental research is supplemented by regular company meetings.
Luke and his team seek undervalued companies with high margins and return on equity, low levels of net debt, and above-average earnings and dividend growth potential over the long term. MUT’s portfolio typically comprises between 50 and 70 stocks, which are held for an average of five years, to give holdings time to realise their potential value. Portfolio turnover is therefore low, although the managers will exit a stock quickly if a company’s fundamentals deteriorate. All positions are kept under continuous review, supported by the ASI UK equity team’s daily meetings to discuss company news and outlook changes.
Diversification is crucial to MUT’s approach. About 30% of the portfolio is invested in mid- and small-cap companies, while overseas stocks may represent up to 20% of holdings. This provides diversification by size and geography beyond that of some other UK equity income funds.
ESG considerations are a key component of ASI’s philosophy, based on the view that this helps foster stronger long-term performance and mitigate risk. Over the most recent financial year, the team has engaged with companies on a variety of ESG issues including board diversity, experience and expertise, climate change and child labour, to ensure that they are acting in the long-term interests of shareholders and broader society. The trust holds a Morningstar Sustainability Rating of four out of five.
The managers’ view – quality income more vital than ever
Almost half of the largest 100 UK companies have suspended, cancelled or reduced dividends since the onset of the pandemic and at least 100 of the next 250 by market capitalisation have followed suit, leaving total 2020 dividends about 40% below their level in 2019. This unparalleled hit to company payouts means that MUT’s managers, Charles Luke and Iain Pyle, are more focused than ever on quality income, and their close attention has paid off. Luke expects MUT’s income to decline by 14% this calendar year, well below the cuts experienced by the market as a whole. This result is all the more impressive for being realised at a time when the managers are also focusing increasingly on acquiring companies with better long-term capital and dividend growth characteristics, rather than just a high
Luke sees the outlook for dividend payments as mixed. He expects that many companies which have cut their dividends will probably wait for clarity on a vaccine and post-virus economic activity before resuming regular dividend payments. Luke believes many will prioritise repayment of government support and additional borrowings over payments to shareholders. Also, even when they reinstate dividends, it may not be at the same level as previously.
However, despite these uncertainties, Luke insisted that income investing can still work. Some companies maintained their dividend payouts, supported by strong demand, robust balance sheets and recurring or needs-driven revenues. He cited as one example the strong iron ore price, which supported mining companies and allowed Rio Tinto, among others, to increase its payout. The majority of healthcare and pharmaceutical companies, including AstraZeneca, GlaxoSmithKline and Smith & Nephew also maintained payments and for some sectors, it has been, relatively speaking, business as usual, said Luke. Utilities and food producers including National Grid, SSE and Unilever all continue to pay dividends. Beverage companies Diageo and Coca-Cola Hellenic did the same, assisted by strong sales
to supermarkets. Furthermore, Luke is encouraged by recent signs that some companies are becoming more confident about reinstating their dividends. In his view, some were excessively cautious initially, while others, such as insurers, have seen continued or increased demand for their products and services. Some are even signalling their willingness to pay missed dividends.
MUT’s managers expect the general corporate environment to remain unusually challenging, with profits under pressure for the foreseeable future. In this low growth world, earnings growth will be prized more highly than ever, said Luke.
|Murray Income Trust|
|Premium to NAV||0.3%|
|Premium to NAV||0.2%|
- Excluding income; ** Including income. As at 24/10/2020
Previous review of Murray Income Trust.