Murray Income 03 May 2024

The managers of Murray Income Trust (MUT), Charles Luke and Iain Pyle, pursue three core objectives: achieving capital growth, generating a high income, and sustainably growing that income primarily through investments in UK large- and mid-cap companies. The managers describe their investment process as ‘quality income’, seeking companies with strong business models, robust balance sheets, and compelling ESG characteristics, as well as those with attractive income profiles (see Portfolio). The managers cite the current attractiveness of UK equity valuations, topping up several high-quality businesses to the portfolio over the last 12 months, including Rentokil and Games Workshop as well as initiating new positions in Genus and Rotork.

The managers argue investing in high-quality companies exhibiting these traits can result in fewer tail risks and a greater margin of safety, leading to less volatile and more resilient earnings streams over time. This strategy has proven highly effective under the managers’ tenure, resulting in outperformance of the index over the long run (see Performance). Moreover, it has been significantly supportive of the trust’s impressive Dividend record, with 2023 marking its 50th consecutive year of dividend increases.

To diversify the underlying portfolio’s income streams and enhance its resilience, the managers have constructed a portfolio of UK-based companies with global exposure, whereby they can generate significant portions of their revenue overseas. Moreover, the managers employ a modest option-writing programme, which accounted for 5.8% of total income earned in the latest financial year, affording the managers headroom to invest in the more non-traditional areas, including medium-sized companies, which may offer lower starting yields but stronger dividend and capital growth prospects.

MUT has been awarded a Kepler Growth rating for 2024.

Overall, we think MUT is a compelling option for income hunters and those seeking capital growth through exposure to the UK market. Unlike some others in the sector, the managers’ strategy aims to marry the benefits of both strong quality and income characteristics, leading to a good performance profile over the long run, and an exceptionally strong Dividend record. A focus on income brings with it valuation sensitivity and a focus on quality has resulted in more resilient and sustainable earnings over time. Additionally, meticulously selected exposure overseas and option-writing calls have contributed positively, and in our opinion, allowed the portfolio to navigate certain macroeconomic difficulties effectively, evidenced by MUT’s lower-than-average volatility for the sector, despite consistently being geared (see Portfolio).

While MUT has demonstrated good long-term performance, we think it’s important to acknowledge that its strategy may lead to periods of underperformance, as seen in the past 12 months due to its quality bias coming under pressure in a value-driven market (see Performance). However, its balanced investment approach has often provided resilience during market drawdowns, such as during the first year of the pandemic, where it outperformed both the index and peer group. While it may not surge ahead of stylistically driven peers during market upswings, we think it’s demonstrated an ability to weather challenging macroeconomic conditions.

Looking ahead, we think MUT’s current Discount of 9.6%, wider than its five-year average of 6.1%, presents a potentially attractive entry point for investors seeking differentiated exposure to the UK market. Should MUT's performance rebound and investor sentiment towards UK equities strengthen, the discount could therefore narrow back towards its long-term average, and potentially beyond, thus providing an additional boost to returns.