Murray Income Trust — Delivering income and capital growth

MUT returned 4.5% in NAV terms during the six months of its financial half year ending 31 December 2023, lagging the benchmark return of 5.2%, due to its quality bias, as value stocks continued to outperform over the period. Performance over this period was supported at the sector level by an overweight to consumer discretionary and an underweight to financials, while an overweight to industrials and an underweight to basic materials both detracted. At the stock level, positions in Sage, a UK-listed software applications business, TotalEnergies, a French oil and gas producer, and UK housebuilder Vistry added most. The strong performance of overseas markets in the latter half of 2023 meant the portfolio also benefited from its near 20% exposure to non-UK companies, including Accton Technology, a Taiwanese communications equipment supplier, Novo Nordisk, a Danish pharmaceutical firm, and VAT Group, a Swiss specialist industrial machinery producer. Each of these stocks rose by more than 20% in the six months ended December 2023. Positions in pest controller Rentokil Initial and drinks supplier Diageo were the main detractors from returns over this period, along with the decision not to hold either Shell or Rolls-Royce.

More recently, performance has benefited from MUT’s position in asset manager Intermediate Capital, which specialises in private equity investments. This stock performed well after the company reported a rise in assets under management. Direct Line, a diversified insurer, also rose sharply on reports of a takeover bid from Belgian insurance company Ageas. The trust’s holding in Close Brothers, a UK regional bank, detracted following an announcement that it would waive its dividend to conserve capital ahead of the findings of an FCA review of historical practices in the motor finance sector, due in September. The managers trimmed their exposure following this announcement.

Over the past decade, MUT’s cumulative upside capture was 99%, illustrating that the trust is likely to track the market very closely in months when the market rallies (Exhibit 4). The company’s downside capture over this period was 96%, indicating that it outperforms in falling markets due to the relative resilience of its quality holdings. This quality approach proved especially helpful to relative performance during the market instability triggered by the onset of the pandemic in early 2020. MUT’s downside capture declined modestly over the following two years, to just under 90%, reflecting its partial immunity to the market weakness experienced during this period.

MUT is a member of the AIC’s UK Equity Income sector, which comprises 17 investment trusts, although it is differentiated from many of the constituents of this sector in several respects. While MUT is focused on companies with high-quality characteristics, several of its peers have a more value-oriented investment approach. MUT’s portfolio is more diversified than some, across sectors, stocks and geographies, as around 20% of its portfolio is invested in mid-cap stocks and c 20% is held in international stocks. The manager also seeks to supplement and diversify income sources with modest option writing.

MUT’s merger with Perpetual Income & Growth (PLI) in November 2020 doubled its market capitalisation, making it the fifth largest fund in this sector (Exhibit 5). The trust’s relative performance has improved in the past six months and it has now outperformed the average of its peers over all periods shown in Exhibit 5 and is ranked in the top three performers over 10 years. MUT’s ongoing charge is the second lowest among peers following the merger, reflecting the benefits of its scale. Its discount is above the average, while its gearing is lower. MUT’s dividend yield is also slightly below the average of its peers.

The managers added two new names to the portfolio over the six months ended 31 December 2023:

Over this period, the managers sold three names. Croda, a specialist chemicals producer, was sold following profit warnings and an increase in operational leverage. They closed positions in Marshalls, a building materials company, on concerns about the trading environment, and in Drax, a producer of renewable energy, due to increased uncertainty about the company’s long-term business model. In February 2024, Luke sold Standard Chartered bank, to invest in its competitor, HSBC, which offers a more attractive dividend yield and better quality characteristics.

The managers have also adjusted several other positions over the past six months or so, including boosting the holding in National Grid, the UK’s energy and gas distributor, which was funded by a reduction in the position in SSE, a utilities supplier. They cut the portfolio’s position in BHP, a metals and mining company, and invested the proceeds in its competitor Anglo American. Luke and Pyle continued to trim Vistry in anticipation of a cut in dividend payments, as the company has indicated a preference for share buybacks. The proceeds of this sale went to Berkely Group, a high-quality housebuilder with a strong balance sheet. Shares in Rentokil Initial and Games Workshop, a producer of miniature figures and games, declined following disappointing trading statements, but the managers remain positive on the long-term prospects for both companies, so they took the opportunity to add to positions in both. They also took profits on VAT Group after strong gains.

MUT has scope to invest up to 20% of gross assets in overseas listed companies. This provides the managers with flexibility to access industries not available within the UK market, to diversify income and risk and to invest in ‘better quality proxies of UK listed companies’. As a result, MUT owns some of the world’s leading companies, with great long-term growth prospects in their respective industries (Exhibit 6). These holdings have been performing strongly, so the managers have increased exposure. The acquisition of Mastercard takes the number of overseas holdings to 14, which together now comprise c 19% of the portfolio, up from historical levels of around 15%.

As can be seen from Exhibit 7, the overall structure of the portfolio has not changed dramatically as a result of these portfolio changes. The most significant increases in sectoral exposure over the past year are in consumer discretionary and industrials, while there have been declines in holdings in real estate, consumer staples and basic metals.

MUT has conducted an option writing programme for over a decade, to diversify and modestly supplement portfolio income. Income from these transactions also gives the managers scope to invest in companies with lower starting yields, but attractive dividend and capital growth prospects. Income from option-writing totalled £1.7m in the first six months of FY24, representing 9.8% of total income over the period. Current call positions include calls on Experian, Microsoft, RELX and Sage.

Following the retirement of Neil Rogan as chair and the resignation of Merryn Somerset Webb at the conclusion of the AGM in November 2023, Angus Franklin was appointed to the Board from 1 January 2024. MUT’s board now comprises five independent non-executive directors. It is chaired by Peter Tait. Alan Giles has assumed the position of senior independent director.

For details on MUT’s fund profile, investment policy and fees and charges, see our November 2022 note.