Charles Luke, Investment Manager, Murray Income Trust PLC
At a time when investors can pick up a high income from bonds, the real value of a stock market portfolio is its ability to grow income and capital over time. This growth potential is particularly important when inflation is likely to be structurally higher, and preserving the real value of invested wealth is increasingly difficult.
100 years may be beyond the time horizon of many investors, but Murray Income’s growth since it was founded in Glasgow on 8 June 1923 shows what is possible. The Second Scottish Western Investment Company started with an initial share capital of £500,000 and on 30 June 2023, its net asset value was nearly £1bn. That’s quite some appreciation.
For many of our investors, dividend growth will be every bit as important, and 2023 was the 50th year that Murray Income has grown its dividend. It was an important milestone and that growth has been delivered in a range of market environments – from the oil price shocks of the 1970s, to the international debt crisis of the 1980s, the fall of the Berlin Wall in 1989 and the collapse of the Eastern bloc, onto the technology boom and bust of the 2000s and the Global Financial Crisis and its aftermath in the 2010s.
Finding growth today
Today, we find ourselves in another new environment. After a decade of near-zero interest rates, borrowing costs have risen rapidly in response to mounting inflation. Investors can now get a high and reliable income from both cash and bonds, creating greater competition for dividend-paying equities. The important differentiator for a stock market portfolio today is the growth in income and capital it can generate, and the inflation protection it offers as a result.
Murray Income has grown its payouts to investors by an average of 9.2% per year over the last 50 years. This is well ahead of inflation, which has averaged 5.5% since 1973. One of the key reasons for achieving this dividend growth record is a focus on a diversified portfolio of high quality companies. We have always invested in strong, established companies with a track record of growing their earnings and an ability to pay a rising dividend to shareholders.
We look for certain characteristics: a robust business model that allows a company to protect its competitive advantage, and a strong balance sheet with little debt, that gives a company optionality and defensiveness in a range of market conditions. We like a strong management team, with a commitment to dividend growth, and strong environmental, social and governance performance to show proper risk management.
Once selected, these companies need careful monitoring over time. Even the best companies will go through difficult patches, get taken over, make mistakes. Maintaining a fluidity and agility in portfolio selection helps ensure that companies sustain those traits over time.
Any portfolio with aspirations to deliver reliable income growth over time needs to be aligned to unstoppable long-term trends. Today, those trends include the energy transition and decarbonisation, which leads the trust to TotalEnergies, an energy company with an attractive pipeline of renewable assets and SSE, a utility company, focused on networks and renewables.
Demographics is also a focus, with ageing populations driving demand for areas such as pharmaceuticals (through Astra Zeneca or Novo Nordisk) and medical equipment (through Convatec). While the UK stock market is seen as a technology desert, there are companies benefiting from the digital transformation, including accounting software group Sage and information provider, Relx.
At the same time, there is a rising middle class in many emerging markets. UK companies such as Unilever are firmly plugged into this trend, with established businesses in developing economies.
The latest company to enter the portfolio is a good illustration of the type of company we like. Rotork manages industrial flow control equipment. Its businesses include hydrogen and carbon capture and it has a fast-growing business in the US. It is a mid-cap company, trading below its historic average, which also has compelling ESG characteristics. It has a conservative management team and high margins, plus significant intellectual property.
Beyond the index
This is not how many investors view the UK stock market, preferring to focus on its low growth, old economy stocks. This is why we argue strongly against an index approach, or an approach that focuses only the UK’s largest dividend payers. To target income and capital growth, it is vital to look deeper. The UK has a range of interesting and exciting companies for those willing to look hard enough.
The investment trust structure has also been important in delivering a growing income and we believe it will continue to be so in future. We do not use our revenue reserve often, just eight times over the past 50 years, but at times of financial crisis, or pandemic, the ability to use those reserves has been invaluable. Today, the trust has around half of its annual dividend held in reserve, ready for the next crisis, should it appear.
While investors may be able to get 5% on a gilt, they shouldn’t neglect growth in their income portfolio. That growth will be vitally important to preserve the purchasing power of their income at a time when inflationary pressures are elevated. At various points in the past 100 years, the environment has been every bit as challenging as it is today, but Murray Income’s approach has allowed it to keep improving capital and income growth for shareholders year after year.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
Discrete performance (%)
|Net Asset Value||9.0||(3.5)||20.8||(5.3)||7.9|
Five year dividend table (p)
|Total dividend (p)||37.50||34.50||34.25||34.00||33.25|
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- The Company may charge expenses to capital which may erode the capital value of the investment.
- Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
The Key Information Document (KID) for the Trust can be found on the website: www.murray-income.co.uk/literature