Murray Income Trust Regulatory News (MUT)

Murray Income Trust PLC

Half Yearly Report 31 December 2023

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

Investment Objective

The Company aims for a high and growing income combined with capital growth through investment in a portfolio principally of UK equities

Performance Highlights

Net asset value per share B

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 Highlights

Financial Calendar

Dividends

Chair's Statement

"The Company has prospered over the years through multiple economic, social and political crises. There are many good reasons to believe that it will continue to thrive in the years to come."

Peter Tait, Chair

Having taken over as Chair of Murray Income Trust plc (the "Company") at the Centenary Annual General Meeting ("AGM") in November 2023, I am delighted to present my first Half-Yearly Report for the Company for the six months ended 31 December 2023 (the "Period"). Last year was historic for the Company. Not only did it celebrate its centenary, it also increased its annual dividend for the 50th consecutive year, giving it one of the longest records of progressive dividend growth in the investment trust sector. Our aim is to continue the trend of capital and income growth which we have seen over many years - and a dividend yield of 4.5% at 31 December 2023 is a good place to start. The Board also welcomed the announcement by abrdn plc, in December 2023, that it had commenced a programme whereby it would purchase shares in the Company equivalent to six months' management fees.

Performance

The Company's net asset value ("NAV") per share (with debt at fair value) increased by 4.5% over the Period, as compared to the rise of 5.2% in the FTSE All-Share Index (the "Benchmark"), both figures in total return terms.  The fair value of the Company's long-term debt was adversely affected by interest rate movements during the Period, which weighed on the Company's NAV return. The share price total return was 6.2% following a narrowing of the discount from 8.2% to 6.9%.

A With debt at fair value

Investment Team

abrdn is our appointed investment management company. Charles Luke has been our lead portfolio manager since 2006 and works alongside co-manager Iain Pyle and Rhona Millar as part of abrdn's Developed Markets Equities team.

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 over the longer term. These typically result from a sound business model, a robust balance sheet, good management and strong environmental, social and governance characteristics.

Annual General Meeting ("AGM")

The 2023 AGM for the Company was held in Glasgow on 7 November 2023, celebrating the centenary of its launch in that city in 1923. The Company was initially called "The Second Scottish Western Investment Company", changing its name to Murray Income Trust plc in 1984, at which time it also altered its remit to invest for a high and growing income from a portfolio of predominantly UK equities. It was encouraging to see such a strong and enthusiastic turn-out for this special event. 

A further centenary event for the Company was held in December 2023 when I, as Chair, had the pleasure of officiating at the closing ceremony of the London Stock Exchange, where I was joined by most of the Board, representatives from abrdn and our corporate broker, as well as the three most recent former Chairs.

Board

Following the retirement of Neil Rogan and resignation of Merryn Somerset Webb at the conclusion of the 2023 AGM, the Board was delighted to announce the appointment of Angus Franklin as a new non-executive director from 1 January 2024. Angus joined the Board following a distinguished career in various senior investment roles with Bailie Gifford & Co. Having, myself, assumed the role as Chair, my former position as Senior Independent Director is now held by Alan Giles who has been a Board member for three years. The other members of the Board are Stephanie Eastment, as Chair of the Audit Committee, and Nandita Sahgal Tully, who specialises in investment and ESG matters.

Dividend

The dividend for the year ended 30 June 2023 was increased by 4.2% to 37.5p per share, giving a year-end historic yield for the Company of 4.5%. Whilst intending to maintain the Company's progressive dividend policy for the year to 30 June 2024, the Board also decided to rebalance the quarterly dividend pay-outs, allowing shareholders to access more quickly and more evenly their dividend income throughout the year. As announced in November 2023, the first three dividend payments for the year ended 30 June 2024 are 9.5p per share (previously 8.25p per share). As a result, the fourth interim dividend will be lower than that for last year but it is anticipated to be not less than 9.5p per share, giving an expected total for the year of a minimum of 38.0p per share.

Share Capital

The Board constantly monitors the level of the share price discount to NAV and buys back shares when market conditions suggest that this may reduce discount volatility. In addition, all share buybacks are at a discount to NAV and are accretive to the Company. To that end, the Company bought back 3,686,219 Ordinary shares of 25p into treasury during the Period, representing 3.3% of shares in issue at 30 June 2023. As a result, at 31 December 2023, the Company had 108,033,782 Ordinary shares of 25p in issue with voting rights and an additional 11,495,750 shares held in treasury.

Environmental, Social and Governance ("ESG")

ESG considerations are deeply embedded into the company analysis carried out by our Manager with the aim of mitigating risk and enhancing returns. There is frequent dialogue with investee companies, focused on ensuring that the companies in the portfolio are acting in the best long-term interests of both their shareholders and society at large. By way of example, the Investment Manager's Report describes engagement during the Period with Standard Chartered, National Grid and London Stock Exchange Group.

It is important to note that the policy pursued by our Manager on our behalf is dynamic rather than static. ESG conclusions can evolve if the inputs change: for example, one might reassess Russia's invasion of Ukraine or the conflict in the Middle East and conclude that the social factor of national security and safety is more important now than previously considered.

Update

At 29 February 2024 (the latest practicable date prior to approval of this Report), the net asset value per share (with debt at fair value) and share price were 906.98p and 821.00p, respectively. Accordingly, for the period from 31 December 2023 to 29 February 2024, the net asset value total return (with debt at fair value) and share price total return were -1.4% and -4.0%, respectively, while the Benchmark total return was -1.1%.

Outlook

The previous calendar year (2023) was a mixed bag for equity markets with a strong recovery in technology stocks, resulting in a 25% gain in the US S&P index, but a more modest 7.9% increase in the UK FTSE All-Share Index, the Company's own benchmark. With other non-UK markets also performing well during the year, the portfolio benefited from its near 20% exposure to overseas stocks including Accton Technology, Novo Nordisk and VAT Group, which each rose by more than 20% in the six months ended 31 December 2023.

As we turn our attention to 2024, one question I am asking myself is why has the UK market been a laggard and what might cause the situation to improve in the months and years ahead? There is, of course, never one definitive reason for market performance, but such reasons could include higher than anticipated inflation and interest rates, the impact of the Ukraine war on energy supply and utility bills, a lack of technology stocks in the Benchmark, a continuing Brexit hangover (dissuading foreign investors from the market) and the sharp reduction in equity exposure, particularly UK equity exposure, by UK Defined Benefit pension schemes. Information published by the Pensions and Lifetime Savings Association shows that, 20 years ago, UK Defined Benefit pension schemes invested about half of their assets in UK equities, but that this had fallen to only about 3% by 2023.

As a result, as noted in the Investment Manager's Report, the UK market now looks very cheap compared to its own history and to international markets. Of course, there will be headwinds along the way, but interest rate trends are usually very important for equity market movements. The anticipation of falling UK interest rates later this calendar year could attract the attention of potential investors, particularly given the appealing combination of a market dividend yield of 4.0% and forecast dividend and earnings growth in 2024, according to a Bloomberg consensus of estimates in January, of 9.2% and 10.1%, respectively, despite the lacklustre outlook for overall economic growth.

From a Murray Income shareholder perspective, your starting point is a higher yield of 4.6%, and the shares standing on a 9.5% discount to net asset value (as at the date of this Report, with debt at fair value). The potential, therefore, for positive returns from owning the Company's shares is encouraging, with a good yield and the capacity for earnings growth, together with a discount to net asset value at present. Markets can be blown off-course by many exogenous factors, and there remain significant risks in the current geo-political situation, emanating from the continuing Russian war in Ukraine, the current Middle East crisis, and tensions between China and both Taiwan and the USA, not to mention the fact that nearly half of the world's population will be participating in general elections during the course of 2024. But the Company has prospered over the years through multiple economic, social and political crises. There are many good reasons to believe that it will continue to thrive in the years to come. 

For a more detailed review of the UK market and the outlook for the Company's portfolio, please see the Investment Manager's Report.

Peter TaitChair5 March 2024

Investment Manager's Report

The Company generated a positive Net Asset Value ("NAV") per share (with debt at fair value) return of 4.5% for the six months ended 31 December 2023 (the "Period"). This underperformed the Company's Benchmark (the FTSE All-Share Index ) which returned 5.2% (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 overweight position in the Consumer Discretionary sector and underweight exposure to the Financials sector benefited performance. In contrast, the overweight position in the Industrials sector detracted from relative performance, as did the underweight exposure to the Basic Materials sector. The holdings in Sage, TotalEnergies and Vistry were the most beneficial to relative returns while the holdings in Rentokil Initial and Diageo detracted the greatest, relatively. Not holding Shell and Rolls-Royce also detracted from performance.

Two new holdings were purchased for the portfolio during the Period. The first addition was the leading global actuator business, Rotork, which has strong quality characteristics and under-appreciated growth opportunities. Drivers of growth include their electric actuator product which is used to reduce methane emissions in the Oil & Gas sector, which is increasingly a priority as the industry looks to meet emission reduction targets. The second new entrant was US-listed Mastercard, which we see as having attractive quality characteristics, including strong competitive positioning and high barriers to entry, as well as having multiple long-term growth opportunities. The Company's ability to own overseas holdings allows the portfolio to access an industry not available through the UK market. Further information on Rotork and Mastercard may be found in the case studies..

Three holdings were sold during the Period: Croda, where our conviction in the long-term strategy deteriorated, while the valuation remains high; Marshalls, where we had concerns around the trading environment and potential implications for the company's balance sheet; and Drax, due to increasing uncertainty around the long-term business model.

Other trading related to managing position sizes, reflecting conviction levels. In the utilities sector, National Grid was added to while SSE was reduced. In healthcare, we reduced Smith & Nephew and added to ConvaTec. In the mining sector, the position in BHP was reduced and proceeds reinvested in Anglo American. The holding in Mondi, which reached an agreement to sell its Russian business in September, was added to. The holdings in Rentokil Initial and Games Workshop were added to following trading statements which led to weakness in the shares, as we remain more positive on the longer-term outlooks for both companies. The holding in VAT Group was trimmed following strong share price performance, which made the valuation less attractive. The position in Vistry was reduced given it appears there is a low likelihood of dividend payments, with the company instead favouring buybacks. Further trades included adding to bp, Diageo, Intermediate Capital, L'Oréal, Oxford Instruments, Oversea-Chinese Banking Corp and RS Group while trimming AstraZeneca, Coca-Cola HBC, Inchcape, Novo Nordisk, RELX and Safestore.

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 well over a decade, 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. The Company also bought back shares, representing 3.3% of the shares in issue, during the Period.

One of the tenets of our investment philosophy is the belief that in order to grow dividends over the long term a company needs to grow its earnings and that high quality companies are best placed to do that. We believe that the portfolio is well positioned to do just this. Looking at the portfolio from a quantitative perspective at 31 December 2023, 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 20.7% and 7.5% respectively, compared to the Benchmark at 15.8% and 5.3%, respectively). Furthermore, the portfolio generates a dividend yield approximately in line with the Benchmark. At 31 December 2023, the portfolio traded on a forward P/E multiple of 14.5x compared to the Benchmark on 11.5x: more expensive but to our minds a reasonable price to pay for a considerably better quality portfolio and one still very attractively valued in absolute terms.

Environmental, Social and Governance ("ESG")

ESG issues are discussed as part of our regular engagement with portfolio companies' 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 some examples of the variety of engagements during the Period: firstly, we met with the Head of Sustainable Finance at Standard Chartered to discuss the steps the bank is taking to reach its sustainable finance targets. Secondly, we engaged with National Grid to discuss their approach to securing public consent among those communities that are likely to be affected by the construction of new infrastructure required to meet the electricity needs in a net-zero economy. Thirdly, we met with London Stock Exchange Group to discuss proposed changes to its remuneration policy.

Market and Economic Background

The UK equity market, as measured by the Benchmark, rose by 5.2% on a total return basis over the Period. The start was characterised by wavering optimism that signs of declines in inflation would bring an end to the rate hiking cycle which has been ongoing since 2022, while on the other hand concerns that the strength of economic data in the US would lead to further rate increases remained. In November 2023, confidence began to build that interest rates across major economies had peaked, leading to an end of year rally for equity markets. 

Performance at a sector level was mixed. Aerospace & defence and housebuilding companies performed well but some retail companies struggled. The more domestically focused FTSE 250 Index outperformed the FTSE 100 Index over the Period.

Domestic economic data was generally weak. UK economic activity continued to stagnate with GDP falling by 0.4% in the three months to December 2023, following a 0.1% decline in the three months to September 2023. Consumer confidence strengthened from historically low levels over the Period; conversely, employment data weakened with wage growth slowing and vacancies falling.

Inflation continued to decline from a peak of 11% in 2022, no longer looking like a significant international outlier. This led to a slowing in the pace of rate hikes over the Period, with the Bank of England ("BoE") raising rates by 0.25% in August 2023 but holding at 5.25% at each of the subsequent meetings. Despite the falls in inflation, the BoE Governor, Andrew Bailey, was quick to stress that rates would not be cut in the near future, reiterating the Bank's commitment to bring inflation back within its 2% target.

These inflation trends have been similar in the US and the Eurozone, where inflation fell more quickly than was expected. Central banks in those regions have also held rates flat since late summer. Economic growth in the US has been particularly robust, which led to increased optimism of a soft landing and a strong end to the Period for US markets, with the 'Magnificent 7' technology companies continuing to be strong. In China, economic activity data showed signs of bottoming and monetary and fiscal policy is expected to ease further. Energy prices ended the Period slightly higher, rising strongly on OPEC production cuts and following the Israel-Hamas conflict, but then falling back on concerns about slowing global growth.

Outlook

We expect the sharp monetary policy tightening over the past 18 months to lead to a slowdown in global economic growth in 2024. For the UK, we currently forecast zero GDP growth in 2024. Inflation is expected to continue to trend downwards but still remains higher than BoE targets and a key focus for markets will be on interest rate cutting cycles and when and how quickly they get under way. The most recent Consumer Prices Index data for the 12 months to January 2024 indicated a reading of 4.2%. At its January 2024 meeting, six members of the BoE's 9-strong Monetary Policy Committee voted to maintain interest rates unchanged, at 5.25%. abrdn's economists expect the BoE to start cutting rates in mid-2024.

Political risk, with a number of significant likely elections including the US and UK this calendar year, and geopolitical risk with, in particular, increased tensions in the Middle East, are likely to remain elevated.

The portfolio is full of high quality, predominantly global businesses capable of delivering appealing long term earnings and dividend growth at a modest valuation. Our focus on quality companies should provide protection through a downturn: those companies with pricing power, high margins and strong balance sheets are better placed to navigate a more challenging economic environment and emerge in a strong position. Furthermore, these quality characteristics are helpful in underpinning the portfolio's income generation.

The valuations of UK-listed companies remain attractive on a relative and absolute basis. Apart from the global financial crisis in 2008/2009 the UK's price/earnings multiple of 10.4x is near its lowest point for 30 years. The UK stockmarket is cheap in absolute terms, relative to history and also relative to global equities. Investors are earning global income at a knock-down price. Moreover, the dividend yield of the UK market remains at an appealing premium to other regional equity markets.

In summary, we feel optimistic that our long-term focus on investments in high quality companies with robust competitive positions and strong balance sheets, which are led by experienced management teams, will be capable of delivering premium earnings and dividend growth.

Charles Luke and Iain Pyle,abrdn Investments Limited5 March 2024

Ten Largest Investments

As at 31 December 2023

Investment Portfolio

Investment Case Studies

Mastercard

Mastercard, the US-listed technology company in the global payments industry, was added to the portfolio in the six months ended 31 December 2023. The company has an approximate market capitalisation of $430bn and the overseas-listed holding adds exposure to a market segment that would be difficult for the portfolio to access through the UK market.

Mastercard's core business is consumer payments processing for credit and debit cards and the business model is a beneficiary of the shift from cash to electronic payments, which will continue to drive earnings growth. Furthermore, business to business flows are also an attractive area for growth. In addition, the company's value-added services business (which includes cyber-security and analytics insights into consumer spending), provides a further avenue for expansion.

The company has a significant competitive advantage, driven by the 'network effect' of issuing over a billion credit cards, accepted by millions of merchants and many financial institutions, as well as the security capabilities enabled by the extensive data these transactions generate. The dividend yield of the stock is relatively modest compared to some of the other holdings in the portfolio but we see potential for strong long-term dividend growth supported by a share buy-back programme.

Rotork

A constituent of the FTSE 250 Index, with a market capitalisation of approximately £2.7bn, Rotork was introduced to the portfolio during the six months ended 31 December 2023. Rotork operates in the valve industry and is the global leading manufacturer of actuators, selling products and services to industries including Oil & Gas, Industrials, Chemicals, Water and Power.

In the short term, the recovery in oil and gas capex budgets should be a tailwind for the company. In the longer term, the company has a part to play in the energy transition helping to remove methane emissions in oil and gas wells while also enabling the growth of hydrogen and carbon capture, utilisation and storage (CCUS). Rotork is conservatively managed and has strong quality characteristics, such as, for example, attractive margins, a high return on capital employed, high barriers to entry (such as strong brand resonance, certification, reliability and field service) and a net cash balance sheet.

The company's dividend has good scope to grow as earnings increase through a mixture of revenue growth, product mix and operating leverage while the strong balance sheet provides an opportunity for inorganic 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 materially unchanged as at 31 December 2023, as compared to 30 June 2023. The principal risks and uncertainties are set out in detail on pages 18 to 22 of the Company's Annual Report for the year ended 30 June 2023 ("Annual Report 2023") which is available on the Company's website. The Annual Report 2023 also contains, in note 18 to the Financial Statements, an explanation of other risks relating to the Company's investment activities, specifically market risk, liquidity risk 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 pages 42 and 43 of the Annual Report 2023. As at 31 December 2023, 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 2023, in addition to the £40m 10 year Senior Loan Notes 2027 and £60m 10 year Senior Loan Notes 2029, £6.5m 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 sales of portfolio holdings.

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 2023 comprises the Half-Yearly Board Report, the Directors' Responsibility Statement and the condensed set of Financial Statements.

For and on behalf of the BoardPeter TaitChair5 March 2024

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 six months ended 31 December 2023

Alternative Performance Measures ("APMs")