Murray Income Trust — Milestones marked by a return to form

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.