Murray Income Trust: a rare star in the income sector

The Murray Income Trust is a reliable and promising pick in a struggling sector.

In the second quarter of 2020 dividends paid by UK companies fell by 57%. Just a quarter of dividend-paying constituents of the FTSE 350 maintained or increased payments. For the year as a whole, dividends paid by FTSE 100 firms are forecast to be 32% lower than last year.

As a result, the UK equity income section of the funds market has become something of a graveyard, with many five-year performances negative. The sector’s fall from grace has been exacerbated by the exaggerated expectations of the past, based on a combination of the hunt for income in a world of falling bond yields and interest rates, and a misunderstanding of the pattern of historic returns.

Misinterpreting history

Many commentators emphasised the importance of reinvested income to long-term returns, from which they jumped to the non sequitur that investing for income was the way to maximise returns. The flaws in this idea are firstly that investors can’t benefit from compounding if the income is not reinvested. Secondly, the benefit of compounding comes from extracting the income of mature, high-yielding investments and reinvesting it not in the same companies, but in immature growth companies. 

Nevertheless, the flood of money into high-yielding shares encouraged managements to pay unsustainable dividends, pushed up share prices and created the illusion of success for many years before it ran out of momentum. As the Neil Woodford debacle showed, the tide was going out for income investing long before the pandemic struck.

Many income-fund managers crowded into the same high-yielding stocks, notably Shell, HSBC and Vodafone. But the shrewder ones focused on companies with moderate but growing yields, rather than high but static ones. Notable among these are Charles Luke and Iain Pyle, managers of the £530m Murray Income Trust (LSE: MUT). Full disclosure: MoneyWeek’s editor-in-chief, Merryn Somerset Webb, sits on the board). 

Its shares have returned 30% over five years (far ahead of the FTSE All Share’s 8.5%), trade on a 5% discount to net asset value, but still yield 4.7%. Luke emphasises the importance of “high-quality companies with strong competitive positions, robust financial characteristics and experienced management. 

Diversification is helped by having up to 20% of the portfolio listed overseas, a broad range of companies and the avoidance of exposure to any one economic scenario”. The top-20 investments include no banks, no oil majors other than Total (no 16), no Vodafone and no retailers. 

Betting on long-term growth

More importantly, the portfolio has barely changed since the start of the year. There has been little or no whitewashing by disposing of embarrassing mistakes. 

With companies such as Diageo, Aveva, Unilever and RELX in the top ten, long-term growth is well represented. Healthcare comprises 15% of the portfolio (AstraZeneca, GlaxoSmithKline and Roche). Murray has large holdings in BHP and Rio Tinto.

With a solid record and a sensible portfolio, it is not surprising that Murray Income has been chosen by the directors of Perpetual Income & Growth Investment Trust, the troubled trust previously managed by Invesco, as its merger partner. This should result in cost savings for Murray Income and provide new investors with an opportunity to buy at an attractive price. 

UK equity income won’t return to its previous level of popularity, but rumours of its death have been exaggerated. The UK faces significant uncertainties, but valuations of quality British equities were low in absolute and relative terms before the crisis and are even cheaper now. Having ridden the down cycle better than most rivals, Murray Income should profit from the upswing.

Recommended

If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020
Why investment trusts are the best vehicle for your money
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020