Murray Income Trust — Milestones marked by a return to form

Murray Income Trust (LSE: MUT)

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Murray Income Trust — Milestones marked by a return to form

Murray Income Trust (MUT) marks its 100-year anniversary this year. It invests mainly in UK equities and aims to provide capital growth and a high and growing income. The trust continues to meet these three objectives. Recent absolute and relative performance has improved after a rare bout of underperformance last year, as the merits of MUT’s high-quality portfolio holdings reassert themselves. In the six months to end April 2023, the trust returned 15.8% on an NAV basis, versus a market return of 12.8%. The trust is also on track to meet another milestone: 50 successive years of dividend growth. The FY23 dividend is expected to be at least 36.5p, which represents a prospective yield of 4.2%. MUT’s manager, Charles Luke, is confident the trust is well-positioned to continue delivering positive returns and growing income over the long term.

Joanne Collins

Written by

Joanne Collins

Analyst, Investment Trusts

Investment Companies

Murray Income Trust

The fund managers: Charles Luke and Iain Pyle

Investment trusts
UK equity income

23 May 2023

Price ord

869.0p

Market cap

£981.9m

AUM

£1,083.5m

NAV*

934.4p

Discount to NAV

7.0%

*Including income. At 19 May 2023.

Yield

4.2%

Shares in issue

113.0m

Code Ord/A-share

MUT

Primary exchange

LSE

AIC sector

UK Equity Income

52-week high/low

885.0p

715.0p

953.1p

804.4p

*Including income.

Gearing

Net gearing at 19 May 2023

7.6%

Fund objective

Murray Income Trust (MUT) aims to provide a high and growing income combined with capital growth, through investment in a portfolio principally of UK equities. MUT focuses on companies that have potential for real earnings and dividend growth, while also providing an above-average portfolio yield. The emphasis is on the management of risk and the portfolio’s absolute return. MUT measures its performance versus the broad UK stock market.

Bull points

An experienced manager with a well-established track record of outperformance of the market.

50 consecutive years of dividend growth and an attractive prospective yield, at a competitive fee.

Scope for the discount to narrow given the recent improvement in performance.

Bear points

The UK market may remain out of favour with investors.

A quality focus means the trust underperforms during value rallies.

MUT’s gearing level increases its vulnerability to any market downturn.

Analyst

Joanne Collins

+44 (0)20 3077 5700

Murray Income Trust is a research client of Edison Investment Research Limited

Murray Income Trust (MUT) marks its 100-year anniversary this year. It invests mainly in UK equities and aims to provide capital growth and a high and growing income. The trust continues to meet these three objectives. Recent absolute and relative performance has improved after a rare bout of underperformance last year, as the merits of MUT’s high-quality portfolio holdings reassert themselves. In the six months to end April 2023, the trust returned 15.8% on an NAV basis, versus a market return of 12.8%. The trust is also on track to meet another milestone: 50 successive years of dividend growth. The FY23 dividend is expected to be at least 36.5p, which represents a prospective yield of 4.2%. MUT’s manager, Charles Luke, is confident the trust is well-positioned to continue delivering positive returns and growing income over the long term.

Maintaining a long-term record of growing dividends

Source: Refinitiv, Edison Investment Research. Note: FY23 forecast dividend is a minimum, based on a November 2022 board announcement of three interim dividends each of 8.25p per share and a fourth interim dividend expected to be ‘at least 11.75p’ per share.

The analyst’s view

MUT should appeal to investors seeking exposure to a diversified portfolio of high-quality, resilient UK stocks.

The trust’s recent performance has improved, and it has a long track record of outright gains that compare favourably with the market on an NAV basis.

Investors requiring income may be drawn to the UK market by the fact that UK equity income remains attractive relative to income from other asset classes, and UK dividend yields are meaningfully higher than those in other regional equity markets. MUT offers income investors a regular, predictable and rising income, delivered via quarterly dividend payments. The trust’s capacity to use reserves, if necessary, to maintain its 50-year dividend growth record may be reassuring to such investors. They may also appreciate MUT’s portfolio income being well-insulated from the vagaries of the UK economy because, while holdings are listed in the UK, 80% of portfolio income is sourced from abroad.

Another potential drawcard for investors is that UK equity valuations are currently low on an absolute and relative basis versus other major markets.

The managers’ view: Quality portfolio in an undervalued market

The UK’s economic outlook remains challenged, by inflation, rising interest rates, labour shortages and low growth at home, and by war and geopolitical tensions abroad. However, this backdrop does not phase MUT’s manager Charles Luke. ‘There is always something for investors to worry about’ he says. For him, it is individual companies that are important, not the general environment in which they operate.

MUT targets high-quality companies with competitive advantages, pricing power, strong balance sheets and good management, as these are the businesses best placed to navigate uncertain times and capitalise on opportunities to create value. Such companies also tend to have resilient earnings, and thus scope to sustain dividend payments, which are a key driver of long-term total equity returns, and a major consideration for MUT’s manager, given the trust’s income objective. Luke says the portfolio is ‘jam-packed’ with such companies: ‘high-quality, predominantly global businesses capable of delivering appealing long-term earnings and dividend growth at a modest aggregate valuation’.

As evidence of the portfolio’s relative quality, Luke cites its return on equity and return on assets, which stood at 24.1% and 8.2%, respectively, at the end of the trust’s financial half year ended December 2022. These figures compare favourably with benchmark returns of 17.0% and 5.7%, respectively. The portfolio also generates a higher dividend yield. However, Luke believes he has not overpaid for this quality. At end December 2022, the portfolio traded on a P/E multiple of 13.8x, compared to the benchmark’s 11.8x level. While this is a little more expensive, the manager argues that it is a small price to pay for a considerably better-quality portfolio, which is still very attractively valued in absolute terms.

These metrics, combined with the favourable qualitative characteristics of MUT’s holdings, according to the manager, leave Luke comfortable with the portfolio, and confident about its ability to keep delivering sustainable earnings and dividend growth over the long term.

Luke’s assessment of the broader UK equity market’s prospects also remains very upbeat. In his view, regardless of the current economic gloom, the UK is still attractive on ‘a relative, absolute and cyclically adjusted basis’, compared to other major markets. And with foreign investors still underweight, there is scope for increased market support from this quarter as and when overseas investors come to more fully appreciate the attractions of the UK market. The steady flow of M&A activity – bids for Industrials REIT, and Dechra Pharmaceuticals being the most recent – may be a harbinger of potentially much broader interest.

Asset allocation

Current portfolio positioning

Luke says that several ‘unstoppable long-term trends’ underpin the trust’s stock selection process. These include:

Ageing populations, which will drive global demand for the products of portfolio holdings such pharmaceutical companies Astra Zeneca, Novo Nordisk and Roche, and medical instruments supplier Convatec.

Digital transformation, which is creating demand for many new products and services. MUT portfolio holdings related to this theme include Sage, a software applications company focused on cloud-based accounting and other business services; VAT, a supplier of semiconductor components; and RELX, which provides businesses with information-based analytics and decision-making tools.

The transition to renewable energy, which is creating new opportunities for a number of MUT’s holdings, including TotalEnergies, an energy company with an attractive pipeline of renewable assets. SSE, a utility company, is also focused on renewable energy sources, while Anglo American, a diversified miner, has exposure to commodities such as copper and platinum, which are essential to the production of many hi-tech products.

Emerging global wealth, powered by the expansion of the middle classes in China and other developing markets, which will push up demand for everyday products supplied by portfolio companies such as Coca-Cola Hellenic, Nestlé and personal and household goods producer Unilever. The suppliers of more expensive goods, such as LVMH, which manufactures luxury handbags, and Diageo, which owns prestige alcohol brands, will also benefit.

While Luke may be comfortable with the portfolio as it stands, he is always on the lookout for interesting investment opportunities that satisfy his exacting investment criteria. He has added one new name, Genus, to the portfolio in recent months. Genus is an animal genetics company that sells gene-edited animals for breeding. The company is developing an exciting new product – a genetic alteration designed to make pigs resistant to porcine reproductive and respiratory syndrome (PRRS), a disease that has decimated the pig-farming industry in the United States and China. Genus is currently close to seeking approval for this product from the US Food and Drug Administration (FDA), which it aims to receive in 2024. The FDA is the world’s leading food and drug regulator, so a green light from it would clear the way for Genus to sell its unique product in one of the largest pig markets in the world.

Other recent portfolio activity included the reduction of a position in Standard Chartered Bank, which has been under pressure from contagion concerns following turmoil in the US banking sector. The proceeds of this sale were reinvested in Oversea-Chinese Banking Corporation (OCBC), a higher-yielding Singaporean bank. Large positions in AstraZeneca, BHP, LVMH, SSE and investment manager M&G were trimmed to manage position sizes, while some portfolio ‘housekeeping’ resulted in the sale of three small holdings to tidy up the portfolio, including fund manager Ashmore and electrical parts producer XP Power, which were both struggling in challenging industries. The manager also sold a stake in Norwegian salmon producer Mowi, which was hit by the imposition of a new tax.

Exhibit 1: Portfolio sector exposure* versus benchmark (% unless stated)

Portfolio end- March 2023

Portfolio end- March 2022

Change (pp)

Index weight

Active weight vs index (pp)

Trust weight/ index weight (x)

Financials

16.7

17.0

(0.3)

22.2

(5.5)

0.8

Industrials

15.3

16.3

(1.0)

11.6

3.7

1.3

Healthcare

14.2

12.1

2.2

11.4

2.8

1.2

Consumer staples

13.8

11.3

2.5

15.5

(1.7)

0.9

Consumer discretionary

10.8

9.2

1.5

11.7

(0.9)

0.9

Basic materials

7.7

9.3

(1.6)

7.7

(0.0)

1.0

Utilities

6.9

7.6

(0.7)

3.7

3.2

1.9

Energy

6.6

4.7

1.9

11.1

(4.5)

0.6

Technology

3.7

3.9

(0.2)

1.1

2.6

3.4

Real estate

2.8

7.1

(4.3)

2.5

0.3

1.1

Telecommunications

1.6

1.5

0.1

1.5

0.1

1.1

100.0

100.0

100.0

Source: MUT, Edison Investment Research. Note: *Adjusted for cash.

These changes have left the portfolio broadly unchanged at a sectoral level (Exhibit 1), except for a reduction in the exposure to real estate, due to the sale of several holdings between July and October last year, motivated by the deterioration in economic conditions and concerns about excess leverage in the rising rate environment. The portfolio is, however, more concentrated. It now comprises 55 holdings, down from around 60 a year ago, while its top 10 holdings now represent almost 39% of the portfolio, up from around 35% a year ago (Exhibit 2). Consistent with the manager’s long-term approach, there have been few changes in the portfolio’s largest holdings over the past year.

Exhibit 2: Top 10 holdings (as at 31 March 2023)

Company

Country

Industry

Portfolio weight %

31 March 2023

31 March 2022*

RELX

UK

Media

5.4

4.1

AstraZeneca

UK

Healthcare

5.3

5.4

Unilever

UK

Consumer goods

5.1

2.3

Diageo

UK

Consumer goods

5.0

4.5

SSE

UK

Utilities

3.3

3.2

BHP

Australia

Metals & mining

3.3

3.9

TotalEnergies

France

Oil & gas producers

3.2

2.8

BP

UK

Oil & gas producers

3.2

N/A

Anglo American

UK

Metals & mining

2.6

2.9

Coca-Cola HBC

Switzerland

Consumer goods

2.5

N/A

Top 10 (% of portfolio)

38.9

34.8

Source: MUT, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in end-March 2022 top 10.

The same holds for the portfolio’s overseas holdings, which are unchanged since our last report, expect for the disposal of Mowi (Exhibit 3), mentioned above. These holdings still comprise approximately 17% of gross assets.

Following the recent small disposals for housekeeping purposes, the manager expects portfolio turnover to decline.

Exhibit 3: MUT’s overseas holdings as at 31 March 2023

Company

Country

Sector

% of portfolio end March 2023

TotalEnergies

France

Oil & gas producers

3.4

OCBC

Singapore

Financials

2.0

Novo-Nordisk

Denmark

Pharmaceuticals & biotechnology

2.0

Nordea

Finland

Financials

1.5

Microsoft

USA

Software & computer services

1.3

Kone

Finland

Industrial engineering

1.2

LVMH

France

Luxury goods

1.1

Nestlé

Switzerland

Food producers

1.0

Telenor

Norway

Industrial engineering

1.0

Roche

Switzerland

Pharmaceuticals

0.9

VAT Group

Switzerland

Industrial engineering

0.9

Accton Technology

Taiwan

Telecommunications equipment

0.6

Total non-UK exposure

16.9

Source: MUT, Edison Investment Research

Luke continues to write a modest number of options to supplement and diversify portfolio income. At present the portfolio has calls on Anglo American, BHP and Nordea. The income generated from these positions also provides the manager with greater capacity to invest in companies with lower starting yields, but better dividend and capital growth prospects.

Performance: Competitive, risk-adjusted returns

Exhibit 4: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

CBOE UK All Companies (%)

MSCI AC World
(%)

30/04/19

12.6

8.5

2.5

11.6

30/04/20

(4.5)

(6.6)

(17.2)

(1.2)

30/04/21

24.0

22.5

25.3

33.4

30/04/22

1.8

5.7

9.1

4.7

30/04/23

3.5

5.7

7.0

2.5

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

MUT’s performance has returned to form in recent months, after a brief period of underperformance last year, when the market rotated away from the quality companies favoured by the manager and into lower-quality, value sectors such as banks and commodity companies, where MUT is underweight. In the six months to end April 2023, MUT generated strong absolute and relative returns, rising 15.8% on an NAV basis and 16.5% in share price terms, comfortably ahead of the market return, represented here by the CBOE UK All Companies Index, which rose 12.8% over the period. The trust’s long-term track record is also strong. Over the 10 years to end April, it has made an average annualised return of 6.5% in NAV terms, ahead of the market return of 6.2% on the same basis, although the share price return of 5.7% has lagged the market slightly.

Many of MUT’s holdings have contributed positively to recent performance. Among the most significant contributors is Novo Nordisk, a Danish pharmaceutical company that has recently launched a widely acclaimed anti-obesity drug, Wegovy, and is also a world leader in treatments for diabetes. Kitchen maker Howdens Joinery is also performing well, increasing market share and expanding into France and Ireland. It is still benefiting from the pandemic-induced surge in home improvements and a general trend towards renovating existing homes in preference to moving house. This trend is driven at least in part by a shortage of housing stock, so it is no surprise that house builder Vistry also performed well, adding to recent returns. The manager’s acquisition of LVMH in October last year proved particularly opportune, as China’s subsequent re-opening provided support for this stock. The manager also expects LVMH to benefit once interest rates stop rising and discretionary consumer spending begins to recover. Finally, returns were also enhanced by decisions not to own British American Tobacco, Glencore (a metals and mining company) and Shell.

Exhibit 5: Investment company performance to 30 April 2023

Price, NAV and index total return performance, three-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

Some of the most significant detractors from recent returns were decisions not to own Rolls Royce, Flutter, a sports betting and gaming company, CRH, a building materials company, and HSBC Bank. Direct Line Insurance was the portfolio holding that detracted most, following a major profit warning that resulted in the departure of the CEO. The portfolio’s out of index position in Roche also hurt relative returns, as the company’s experimental Alzheimer’s drug failed key clinical trials. This fuelled market concerns about Roche’s thin product pipeline.

Discount

MUT’s share price historically trades at a discount to its NAV. Over the past 10 years, the discount has averaged around 4.5%. Last year’s underperformance pushed the discount out to around 9%, although the recent improvement in returns has supported the share price and the discount has narrowed to around 7.0%.

MUT’s board monitors the discount and regularly repurchases shares to support the price. In the financial year ended June 2022, the board repurchased a total of 356,000 shares into treasury and has purchased a further 2.7m shares so far this financial year (as at 22 May 2023). Given recent performance has returned to form, there is, in our view, scope for the discount to continue its recent narrowing trend and move closer to its long-term average.

Exhibit 6: Share price premium/discount to NAV (including income) over 10 years (%) 

Source: Refinitiv, Edison Investment Research 

Peer group comparison

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 a quarter of its portfolio is invested in mid-cap stocks and more than 10% is held in international stocks. The manager also seeks to supplement and diversify income sources with modest option writing.

Exhibit 7: UK Equity Income peer group as at 9 May 2023*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Ongoing
charge

Perf.
fee

Disc/prem
(cum-fair)

Net
gearing

Dividend
yield

Murray Income Trust

986.8

8.6

33.8

33.5

80.9

0.5

No

(6.8)

107

4.2

abrdn Equity Income Trust

155.9

(3.9)

31.8

(9.5)

43.2

0.9

No

(1.7)

114

6.9

BlackRock Income and Growth

39.6

9.0

40.8

20.4

87.0

1.2

No

(11.0)

102

3.9

Chelverton UK Dividend Trust

36.6

(6.7)

66.4

(8.3)

107.4

2.0

No

2.1

169

6.9

City of London

2,060.4

6.5

42.4

21.8

79.0

0.4

No

1.9

106

5.0

Diverse Income Trust

309.6

(11.3)

19.2

7.2

103.6

1.1

No

(6.0)

100

4.5

Dunedin Income Growth

446.3

14.4

31.2

33.2

74.4

0.6

No

(2.8)

107

4.4

Edinburgh Investment

1,101.7

8.4

54.2

14.4

75.8

0.5

No

(7.6)

110

3.8

Finsbury Growth & Income

1,871.4

13.6

28.0

34.2

153.3

0.6

No

(4.7)

101

2.0

JPMorgan Claverhouse

405.8

2.4

36.9

10.0

74.4

0.7

No

(4.6)

109

5.1

Law Debenture Corporation

1,068.6

3.9

60.7

37.5

127.1

0.5

No

2.4

122

3.5

Lowland

332.3

5.6

48.2

1.5

63.0

0.6

No

(9.5)

115

5.0

Merchants Trust

829.8

5.3

73.1

33.2

90.5

0.6

No

1.1

111

4.8

Schroder Income Growth

213.3

6.6

50.2

20.7

91.0

0.7

No

(0.8)

111

4.3

Shires Income

79.7

0.7

34.8

20.4

79.1

1.0

No

(0.4)

123

5.4

Temple Bar

705.7

5.2

64.1

5.1

48.7

0.5

No

(6.1)

100

4.1

Troy Income & Growth

184.0

1.4

12.9

12.4

66.7

0.9

No

(2.5)

100

2.8

Simple average

636.9

4.1

42.9

16.9

85.0

0.8

(3.4)

112

4.5

MUT rank in sector

5

4

12

3

8

=2**

14

=11

11

Source: Morningstar, Edison Investment Research. Note: *Performance to 8 May 2023 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 = ungeared). **Denotes second lowest fee within the peer group.

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 7). It has outperformed the average of its peers over one and five years and almost matched the average 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, and its gearing is lower. Its dividend yield is also slightly below the average of its peers.

Dividend policy and record

MUT aims to provide investors with a high and growing dividend, paid quarterly in December, March, June and September each year. The dividend for the year ended June 2022 (FY22) was 36.0p, up 4.3% on the 34.5p paid the previous financial year. The board has announced the first three interim dividend payments for FY23, each of 8.25p (totalling 24.75p), paid in December 2022, and March and June 2023. The board expects the fourth interim dividend, to be announced in August 2023, to be ‘at least 11.75p’, which would take the total dividend for the year to 36.50p, a 1.4% increase on the previous financial year (see chart on page one).

The chairman has stated that there would be no special dividend to mark MUT’s 100th anniversary next year. However, a dividend of 36.5p would still be sufficient to ensure MUT’s dividend payment record remains in place for 50 successive years. This represents a prospective dividend yield of 4.2% based on the current share price.

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

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United Kingdom

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Research: Healthcare

Respiri — Telehealth acquisition to bolster US roll-out

In a strategic push of its US commercialisation strategy, Respiri has announced the proposed acquisition of Access Managed Services, its US remote patient monitoring (RPM) and chronic care management partner, for a cash consideration of up to US$3m (A$4.5m). We expect the acquisition to afford Respiri greater oversight of operations and sales and marketing efforts, potentially reducing sales cycles and expediting patient onboarding. The acquisition will also result in the RPM recurring revenue increasing to US$70–100 from US$10–20 per patient, although we note Respiri will cease to recognise revenue from device sales and operating expenses will likely trend higher. Management now guides for break-even to be achieved at 9,000 patients (by end CY24) vs 30,000–40,000 patients previously. The acquisition will be funded by a A$6.5m capital raise, including A$4.5m in convertible notes and a A$2m equity offer. We will update our model and estimates following the fund-raise and deal closure.

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