Murray Income Trust Regulatory News (MUT)

Murray Income Trust PLC

Half Yearly Report 31 December 2022

An investment trust founded in 1923 aiming for high and growing income with capital growth.

Performance Highlights

Net asset value per share - At 30 June (*31 December) - pence

Dividends per share - Year ended 30 June - pence

Mid-Market price per share - At 30 June (*31 December) - pence

Financial Calendar, Dividends and Investment Portfolio by Sector

Financial Calendar

Dividends

Investment Portfolio by Sector as at 31 December 2022

Chairman's Statement

Shareholders continue to benefit from the enlarged scale of the Company following the merger with Perpetual Income & Growth Investment Trust with net assets over £1 billion, a lower blended management fee rate of 0.37%, a lower forecast ongoing charges ratio of 0.50%, plus additional liquidity and lower bid-offer spreads when trading. Our objective is to continue to provide a high and growing income combined with capital growth from a portfolio principally of UK equities: the dividend yield stood at 4.3% as at 31 December 2022 and we have now increased the dividend every year for the past forty-nine years.

Performance

Over the six months ended 31 December 2022, the Company's net asset value ("NAV") per share rose 4.0% in total return terms, as compared to the FTSE All-Share Index (the "Benchmark") return of 5.1%. The share price total return was 3.8% reflecting the discount widening from 3.8% to 4.1%.

The two principal parts of our investment objective are to provide a high and growing income. The dividend yield, based on the 31 December 2022 share price of 844.0 pence, is 4.3% which is high by most people's standards for an equity portfolio. We continue to grow our dividend, with a dividend increase chalked up in every one of the past forty-nine years. This puts us into the top ten on the AIC's list of 'Dividend Heroes' (the investment trusts with the longest records of annual dividend growth) as measured by the number of consecutive years of dividend growth.

For the full calendar year 2022, NAV total return was -6.0% while the Benchmark returned 0.3% and the share price total return was -4.1%. The underperformance came in the first half of 2022, caused largely by being underweight in the oil and gas sector (which benefited from the war in Ukraine) and a small number of stock specific factors. Looking over longer periods ended 31 December 2022, both NAV and share price performance were behind the Benchmark over three years but ahead of the Benchmark over five and ten years.

Investment Process

Our Manager's investment process is best summarised as a search for good quality companies at attractive valuations. The Manager defines a quality company as one capable of strong and predictable cash generation, sustainably high returns on capital and with attractive growth opportunities. These typically result from a sound business model, a robust balance sheet, good management and strong environmental, social and governance characteristics. These qualities helped avoid the worst of the dividend shocks during the pandemic.

Investment People

abrdn is our appointed investment management company. Charles Luke has been our lead portfolio manager since 2006, and works alongside Rhona Millar and Co-Manager Iain Pyle, as members of abrdn's now 20-strong UK and European Team.

Annual General Meeting ("AGM")

It was like old times at our Annual General Meeting ("AGM") on 1 November 2022, held in London, with many shareholders and their guests attending and plenty of questions asked. Over a buffet lunch afterwards, the opportunity was taken to informally discuss a whole range of matters with shareholders. This year's AGM on 7 November 2023 will be celebrating the Company's centenary and will be held where the Company was founded, in Glasgow.

Board

This is my final year as Chairman and as a Director of the Company. After serving nine years as a Director, I will retire from the Board at the end of the centenary AGM. I am delighted that the other members of the Board have determined that Peter Tait, currently Senior Independent Director, will succeed me as Chairman at that time.

Dividend Policy

Our normal practice is to announce in November our plans for the first, second and third interim dividends for the financial year. On 1 November 2022 we announced interim dividends, each of 8.25p per share, to be paid on 15 December 2022, 16 March 2023 and 15 June 2023. The Board also advised that it expected the fourth interim dividend, to be announced in August 2023 and paid in September 2023, to be at least 11.75 pence per share, as compared to 11.25 pence per share declared for the previous year.

In the year ended 30 June 2022 we were able to increase our full year dividend per share to 36.0p which represented a yield of 4.3% on the 31 December 2022 share price of 844.0p. Revenue earned by the Company for the year was 40.5p per share, with the surplus 4.5p being added to our revenue reserves which serve to support and smooth future dividends. For the year ending 30 June 2023, revenue earned is currently projected to be ahead of last year's dividend.

Share Capital

The Company bought back 1,168,091 Ordinary shares of 25p into treasury during the six months ended 31 December 2022, representing 1.0% of shares in issue at 30 June 2022, resulting in there being 115,522,381 Ordinary shares of 25p in issue with voting rights and an additional 4,007,151 shares held in treasury, at 31 December 2022.

Environmental, Social and Governance ("ESG")

In last year's Half-Yearly Report, we reported a new focus on the net zero initiative, one aspect of our ESG approach. Countries and companies are signing up to commitments as to when their operations will become net zero in terms of carbon emissions and on what basis they will be measured. We can apply this focus to Murray Income too: 96% of the portfolio by value or 50 out of 55 companies held in the portfolio on 31 December 2022 have set a net zero target date. The breakdown is shown in the following table:

Our Manager continues to engage with those that have not yet set a date as well as holding to account or pressing further those that have committed. From the companies that have committed we can infer an average net zero date for the Murray Income portfolio of 2040, a similar number to this time last year. The encouraging change over the year is that only five companies have yet to commit, compared to 16 a year ago. Please note that these numbers are snapshots, they could move up or down if the portfolio changes and the outcomes are not in any case within our control. But this will be a useful number for comparison over time, whilst remembering that net zero is just one of the environmental factors within ESG.

ESG considerations are integrated into the company analysis carried out by our Manager which is able to draw on the expertise of more than 20 in-house ESG specialists covering the UK and Europe. This aims to mitigate risk and enhance returns over the longer term, results in frequent dialogue with investee companies and helps to ensure that the companies in the portfolio are acting in the best long-term interests of their shareholders and society at large. It is important to note that the policy pursued by our Investment Manager on our behalf is dynamic rather than static. ESG conclusions can change if the inputs change: for example, one might look at Russia's invasion of Ukraine and conclude that the social factor of security and safety is more important now than previously considered. Similarly, one might consider energy security be given a higher weight relative to absolute CO2 emissions and come to a different conclusion on holding an oil orgas stock.

The Investment Manager's Report contains further information (including examples) on how ESG factors are incorporated into the Managers' investment approach. For more detailed information we would refer you to our 30 June 2022 Annual Report (pages 93-97) and to our website (www.murray-income.co.uk).

Update

From 31 December 2022 to 23 February 2023 (the latest practicable date prior to approval of this Report), the net asset value per share total return and share price total return were 5.1% and 4.5%, respectively, while the Benchmark total return was 6.4%. The discount widened to 6.0% over the same period, during which a further 1,559,380 shares were bought back into treasury by the Company, resulting in 113,963,001 shares with voting rights, and an additional 5,566,531 shares in treasury, as at the date of this Report.

Outlook

Writing this amongst headlines of crisis, emergency, strikes, inflation, recession and 'Spare' Harry, it was easy to miss the headline that the UK's FTSE-100 Index was at a 4-year high. How could that be if everything is so bad? A sense that some of these factors are either as bad as they could be or have started to recover is part of the answer. Let's consider the predominant concerns:

Inflation rose way higher than expected in 2022 fuelled by the jump in oil and gas prices following Russia's invasion of Ukraine. As companies passed on the pain to consumers, inflation rates rose well above central bank targets and sparked demands for increased wages to maintain living standards. The outlook now is rather different: wholesale oil and gas prices have already dropped sharply from last year's levels. The warm European winter (so far) has helped as have increased imports of Liquid Natural Gas. It is possible that we end this winter with enough gas in storage to meet next winter's needs. Central banks in the western world were too slow to react initially but have now tightened monetary policy significantly in response to rising inflation. While the effect is yet to be seen, remember that monetary policy works with a lag: most economists would say 12-18 months. Inflation may have already peaked.

That monetary lag is a negative for growth prospects. Many believe that we in the UK are already in recession. If not, we are very close to it. With interest rates still rising, consumer electricity and gas costs still very high and wages not keeping up with inflation it is going to be a while before growth recovers. But remember that the world economy is still growing.

After thirteen years of super-low interest rates in response to the 2008 financial crisis, it should have been no surprise that interest rates have started to return to normal, that is into the 3-5% range that would be considered average by historical standards. Yet some have been taken by surprise and have clearly not stress tested their business models for a return of normality. The most obvious example of this is the blow-up in LDI (Liability Driven Investment, a strategy used by pension funds to match their assets and liabilities more closely) that caused the crash in the UK gilt market in September. UK gilt yields rose to a level that was entirely reasonable but caught out many pension funds by doing so in six weeks, meaning that a significant number of them could not easily meet their increased collateral requirements. The real problem in this was leverage: some funds were, and still are, using leverage to boost their asset returns so as to meet their future liabilities.

Whenever a new financial crisis appears, excessive leverage is the most likely root cause. Banks' excessive exposure to sub-prime real estate lending is well understood to be the root cause of the 2008 crash. The question is: are markets strong enough to withstand the future stresses on leverage? Those stresses currently seem most visible in property and private equity. Just applying a common sense test reveals that most property prices are too high, yet most investors in property have little experience of falling prices. Combined with leverage and illiquidity, a property crash would be painful for many. Less obvious is the now-huge private equity sector, which depends heavily on leverage and favourable tax treatment for its returns. If you were a private equity fund that stripped the cash out of a company and paid it to yourselves in dividends, funding that payment by borrowing on the company's balance sheet and then interest rates go up, the net worth of that company would fall. In aggregate, private equity companies are yet to feel that pain. Excess leverage will be a problem if interest rates stay high.

One more visible change from last year in the UK is in politics: the new Sunak Conservative government may have less than two years to run before losing a general election to Labour, but there seems to be very little difference between the economic policies of the UK's two main political parties. Headline announcements of "take back control', "reform the NHS" and "no unfunded tax cuts" have originated from the Labour camp. This is perhaps the important legacy of the doomed Truss government: do something too radical and the consequences will force you out of office. Heeding this warning, the two parties now offer remarkably similar economic policies. However unlikely, that heralds the return of political stability. Another intriguing possibility is that a great reset is underway which will lay the foundation for future prosperity. It is well understood that productivity growth in the UK has lagged well behind previous trends and that many UK companies have depended on cheap labour, whether imported or otherwise, to fund their profitability. Whether it was Covid or Brexit, the supply of cheap labour has been disrupted. Companies are finding it very difficult to recruit workers on the low-wage or zero-hours contracts of before. Although the headline unemployment number is low, many people of working age are not currently seeking work, with early retirement and illness being common reasons. The initial response from many companies has been to cut back a little on staff numbers and wait. But now a new mood is emerging: higher hourly wage rates and better terms and conditions in return for productivity improvements is a recipe for future prosperity. Something is clearly starting to change here.

While the national mood is clearly and rightly pessimistic, there are some grounds for optimism. Remember that 2022 turned out to be nothing like the way it was forecasted to be a year ago. It wouldn't be a surprise if 2023 confounds forecasts too.

Neil RoganChairman28 February 2023

Investment Manager's Report

The portfolio underperformed the FTSE All-Share Index (the "Benchmark") during the six months ended 31 December 2022 leading to the NAV per Ordinary share rising by 4.0% compared to an increase in the Benchmark of 5.1% (both figures calculated on a total return basis).

From a style perspective the portfolio's Quality bias continued to be a headwind to performance (albeit to a lesser extent than during the first half of the calendar year) as the Value factor outperformed. In sector terms, the portfolio's underweight position in the Communication Services sector and overweight exposure to the Information Technology sector benefited performance. In contrast, the overweight positions in the Materials and Real Estate sectors detracted from relative performance. The holdings in Aveva, TotalEnergies and BHP were the most beneficial to relative returns while the holdings in Marshalls and Watkin Jones detracted the greatest, relatively. Not holding Vodafone and HSBC contributed positively to relative performance while not owning Glencore, Shell and Rio Tinto detracted from relative performance.

Three new holdings were purchased for the portfolio during the six months. The first purchase was the pharmaceutical company, Roche, which has a healthy balance sheet and a strong pipeline which we believe to be undervalued. The second new entrant was Games Workshop, the hobby miniatures company, which we see as a unique asset with strong quality credentials and an attractive dividend yield. The third purchase was LVMH, the European luxury goods company which offers strong long-term growth potential through its portfolio of well-known brands.

We increased exposure to a number of our existing holdings which we believe have high quality characteristics with attractive growth prospects at appealing valuations including Sage, Unilever, Kone, London Stock Exchange Group, Howden Joinery and Relx.

Ten holdings were sold during the period, of which three stocks were sold following takeover bids: Aveva, Euromoney and Countryside Partnerships (we continue to have a holding in the acquiror, Vistry). Concern around high levels of leverage and potential risk to dividends given rising discount rates and higher interest charges resulted in the sales of Sirius Real Estate, Assura and Unite Group in the real estate sector. The small holding in Watkin Jones was sold following a profit warning which led to a change in confidence in the company's business model and concern about the risk of further downgrades. The residual position in Haleon, the consumer healthcare business which was spun-out from GSK, was exited. Finally, the small positions in Bodycote and Weir were sold given more attractive opportunities.

We reduced the exposure to a number of holdings where we have higher conviction in other names in their respective sectors including Ashmore and Nestlé. The holding in AstraZeneca was reduced in order to manage its increasingly large weight in the portfolio.

We continued our measured option-writing programme which is based on our fundamental analysis of holdings in the portfolio. We believe that the option-writing strategy, which we have now employed for over 10 years, is of benefit to the Company by diversifying and modestly increasing the level of income generated and providing headroom to invest in companies with lower starting yields but better dividend and capital growth prospects.

One of the tenets of our investment philosophy is the belief that over the long term in order to grow dividends a company needs to grow its earnings and that high quality companies are best placed to do that. We believe that the portfolio is very well positioned to do just this. Looking at the portfolio from a quantitative perspective at the end of the period, typical measures of portfolio quality such as returns measures and earnings stability were high in absolute terms and considerably better than the Benchmark (for example, in aggregate, the return on equity and return on assets of the portfolio holdings was 24.1% and 8.2% respectively, compared to the Benchmark at 17.0% and 5.7% respectively). Furthermore, the portfolio generates a dividend yield above the Benchmark. At 31 December 2022, the portfolio traded on a P/E multiple of 13.8x compared to the Benchmark on 11.8x: a little more expensive but to our minds a small price to pay for a considerably better quality portfolio and one still very attractively valued in absolute terms.

Environmental, Social and Governance ("ESG")

ESG engagement issues are addressed as part of our regular meetings with management. However, we also engage on a variety of specific issues outside our regular meetings cycle. It should be noted that given the quality threshold inherent in the portfolio, these meetings are rarely about issues for which we hold significant concerns. To provide a couple of examples of our engagement during the period;. firstly, we met with Nordea to discuss their targets for green lending and reducing financed carbon emissions in their lending portfolio. Nordea appear well placed to benefit from the rise in green bonds and are on a positive trajectory towards achieving their climate targets; and, secondly, we conducted a meeting with London Stock Exchange Group ("LSEG") to discuss the company's approach to human capital management in the context of the large acquisition of Refinitiv and a competitive market for technology talent. We think LSEG are managing these challenges well.

Market and Economic Background

The UK equity market rose by 5.1% on a total return basis over the six month period. The period was characterised by high levels of inflation, monetary policy tightening and concerns about a potential recession. Sentiment towards the outlook ebbed and flowed at times with strong corporate earnings providing some comfort and some optimism that central banks would slow the pace of rate hikes, contrasted with periods of growing fears about recession risks.

Performance at a sector level was mixed. Mining and oil and gas companies performed well but telecommunications, media and real estate companies struggled. The FTSE100 Index outperformed the more domestically focused FTSE250 Index over the period.

Domestic economic data was generally weak. UK GDP was unchanged in the fourth quarter of 2022 following a decline of 0.2% in the third quarter. The UK is the only Group of Seven ("G7") country not to fully recover output lost during the Covid-19 pandemic with the economy 0.8% smaller than at the end of 2019. Consumer confidence was reported to be at its lowest level since records began in 1974. Conversely, employment data generally continued to be strong given the shortage of labour.

Inflation continued to be high with the Consumer Prices Index reaching 11.1% in October, the highest level in more than four decades. The government announced caps to household energy bills for the next two years. Widespread strike action towards the end of 2022 weighed on sectors including transport, health, education, and postal services. The Bank of England ("BoE") acted to control inflation by raising interest rates multiple times over the period, with the policy rate ending the year at 3.5% (and subsequently has been increased to 4.0%).

Political uncertainty was elevated as Prime Minister Johnson announced his resignation. The impact of fiscal policy on markets was heightened when the new Chancellor Kwarteng's mini-budget, announcing widespread tax cuts, sparked a wave of selling of UK gilts and a substantial weakening of the pound. The BoE launched emergency measures to stabilise markets, delaying a planned gilt sale and instead committing to buy more gilts. UK government bond prices rose and the pound recovered somewhat as first Chancellor Kwarteng and then Prime Minister Truss resigned and many of their previously announced tax cuts were reversed.

Circumstances overseas also had an impact on the UK equity market. Towards the end of the period, signs that China would move away from their zero-covid policy was taken positively for stocks with exposure to the Chinese economy, including miners. Energy prices continued to be elevated compared to historic averages due to the impact of the Russian invasion of Ukraine on energy markets, which led to the energy sector outperforming.

Outlook

We expect the multiple headwinds facing the global economy - rate hikes, elevated energy costs and the continued impact of Covid-19 - to lead to challenging conditions in 2023. Uncertainties remain around the potential depth and severity of an economic downturn. For the UK, we currently forecast GDP to decline by 1.3% in 2023. We expect the BoE to continue to act to control inflation. For 2023, the Manager's economists expect one more 0.50% rate increase from the BoE, which would see rates reach 4.5% in the spring. Given the recessionary outlook they then foresee a sharp cutting cycle resulting in base rates ending 2023 at 2.5%.

Although the backdrop may be challenging, we are optimistic about the outlook for the holdings in the portfolio. The portfolio is jam-packed with high quality, predominantly global businesses capable of delivering appealing long-term earnings and dividend growth at a modest aggregate valuation. In more difficult times it is those companies which can demonstrate pricing power and resilience, benefit from their robust balance sheets and are led by experienced management teams that are able to emerge stronger - ultimately this will be recognised in their valuations. That these companies are predominantly listed in the UK, a market that remains attractive on a relative, absolute and cyclically-adjusted basis, is doubly appealing. Therefore, we feel very comfortable maintaining our focus on excellent quality highly profitable businesses capable of delivering sustainable earnings and dividend growth over the long term.

Charles Luke and Iain Pyle,abrdn Investments LimitedInvestment Manager28 February 2023

Ten Largest Investments

As at 31 December 2022

Investment Portfolio

All investments are in ordinary shares.

Investment Case Studies

Games Workshop

Games Workshop, with a market capitalisation of approximately £3bn, was introduced to the portfolio in the period under review. The unique mid-cap company has very strong intellectual property through its fantasy wargame Warhammer series. The company designs, manufactures, distributes and sells high quality miniatures and related products via retail, trade and online channels. Around three-quarters of sales are outside the UK with significant growth opportunities in the United States and Asia. There are also opportunities to grow outside the core table-top product, for example in computer games and television and the company recently announced it would work with Amazon to develop film and television productions. High customer loyalty and strong IP means the business model has high margins, generating very high returns on capital employed. The company has no debt and an attractive dividend yield.

LVMH

LVMH, the Paris-listed luxury goods company, was added to the portfolio in the period under review. The company has an approximate market capitalisation of €400bn and the holding provides the portfolio with exposure to a market segment that is difficult to access through companies listed in the UK. The company has a wide selection of best-in-class brands across divisions including Fashion & Leather Goods (for example Louis Vuitton, Dior, Fendi, Marc Jacobs), Wines & Spirits (for example, Moet Hennessey, Krug, Dom Perignon, Glenmorangie), Perfumes & Cosmetics and Watches & Jewellery. LVMH demonstrates very strong financial quality characteristics with pricing power, high gross and operating margins, strong cashflows and a robust balance sheet, and is known for taking a long-term perspective on investment. The dividend yield is relatively modest but we see good scope for strong long-term dividend growth.

Interim Board Report

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties which it has identified, together with the delegated controls it has established to manage the risks and address the uncertainties. These are considered to be unchanged as at 31 December 2022, as compared to 30 June 2022, other than in relation to the Board's perception of heightened interest rate risk and geopolitical uncertainty, noting the potential volatility associated with the conflict in Ukraine, which the Board anticipates will persist over the six months to 30 June 2023. The principal risks and uncertainties are set out in detail on pages 16 to 19 of the Company's Annual Report for the year ended 30 June 2022 ("Annual Report 2022") which is available on the Company's website. The Annual Report 2022 also contains, in note 18 to the Financial Statements, an explanation of other risks relating to the Company's investment activities, specifically market risk, liquidityrisk and credit risk, and a note of how these risks are managed.

Related Party Transactions

Under Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), the Company has identified the Directors as related parties. No other related parties have been identified. There have been no related party transactions that have had a material effect on the financial position of the Company.

Going Concern

The factors which have an impact on the Company's status as a going concern are set out in the Going Concern section of the Directors' Report on page 42 of the Annual Report 2022. As at 31 December 2022, there had been no material changes to these factors.

The Board has set limits for borrowing and regularly reviews the level of any gearing, cash flow projections and compliance with covenants associated with the Senior Loan Notes and bank facilities. As at 31 December 2022, in addition to the £40m 10 year Senior Loan Notes 2027 and £60m 10 year Senior Loan Notes 2029, £6.7m of the Company's three-year £50m multi-currency revolving bank credit facility (the "Facility") was drawn down. On the expiry of the Facility in October 2024, the Company would expect to continue to access a credit facility. However, should acceptable terms for a new credit facility not be forthcoming at that time, any outstanding borrowing will be repaid through the proceeds of equity sales.

The Directors are mindful of the principal risks and uncertainties disclosed above and, having reviewed forecasts detailing revenue and liabilities, they believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis of accounting in preparing the Financial Statements.

US Executive Order No. 14032

The Board confirms that the Company has not and does not intend to invest in any of the companies designated as "Chinese Military-Industrial Complex Companies" by the US Executive Order No. 14032.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

·  the condensed set of Financial Statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);

·  the Half-Yearly Board Report includes a fair review of the information required by rule 4.2.7R of the Disclosure Guidance and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the financial year); and

·  the Half-Yearly Board Report includes a fair review of the information required by 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).

The Half-Yearly Financial Report for the six months ended 31 December 2022 comprises the Half-Yearly Board Report, the Directors' Responsibility Statement and the condensed set of Financial Statements.

For and on behalf of the BoardNeil Rogan,Chairman28 February 2023

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements

For the year ended 31 December 2022

Alternative Performance Measures ("APMs")

END