This week’s episode of the Investment Q&A from Fund calibre, is with Charles Luke, manager of the Murray Income Trust.
Charles highlights a trio of reasons why the UK market looks compelling at present, while also discussing the importance of focusing on quality companies when there is so much noise. We delve deeper into some of the companies in his portfolio, including a genetics company working on virus resistant pigs and a familiar FTSE 250 name that is set to benefit from an Amazon film and TV series. We also discuss the benefits of a strategy combining quality and income and why having some international exposure is important for the trust.
Why you should listen to the interview: This week’s fund manager has a wealth of experience in UK equities and has steered the trust through a fair few challenging economic scenarios. With 50 years of consistent dividend growth, the Murray Income Trust has a longstanding track record of delivering a resilient income. Charles discusses why UK equities should be a strategic buy for investors, reveals which European stocks are used to diversify risk and gain access to different industries and why it’s quality income that counts more than quality growth.
Quotes that sparked our curiosity:
The UK is comfortably the most attractive market for income investors again
“The UK itself is a very international market, so around 75% of revenues earned by companies listed in the UK are actually from overseas, so the majority of earnings are from outside the UK. In other words, investing in the UK is investing mostly globally.
“The second point is that UK valuations are at the moment attractive in absolute terms. So the FTSE All Share Index trades on a P/E of around 11 times earnings, which is cheap relative to history and relative to other markets. And when you adjust for different sector compositions of regional equity markets, UK equities are around about 15% to 20% cheaper than global equities.
“And specifically from an income perspective. The UK market has a dividend yield of about 4%, which is above other regional equity markets. It’s got good dividend cover and also, you don’t have to pay withholding tax on the income from companies overseas.”
M&A: there’s cheap, there’s very cheap, and then there’s ridiculously cheap
“In the last 24-30 months or so, we’ve had nine companies in the portfolio that have been taken over, the majority of those by private equity. And I think private equity typically looks for the same sort of characteristics that we do in a company, things like an experienced management team, strong balance sheet, low CapEx requirements, stable cash flows, good competitive positions and decent growth opportunities, not least really because all of those are helpful in terms of an exit route or crystallising value for private equity. And, of the companies that have been taken over, the prices paid really have been pretty fair. But we’re very happy to make a fuss if we think if they’re not.”
A favour of holdings in the portfolio
“Games Workshop Group PLC has been on the radar for quite some time, but had always looked a little bit expensive. Then around about this time last year, it de-rated and that’s when we took the opportunity to introduce the company to the portfolio. And we like it because it has strong IP, loyal customers, it makes high margins on a relatively low cost to produce item, which are their tabletop models. And future growth should come from a potential Amazon TV series. They’re also expanding licensing agreements into areas such as computer games. And every couple of years, two or three years, they have a new edition of an update to Warhammer. Also, I think geographical expansion particularly in North America and Asia should also generate good growth for the future for the company.
“Genus plc is the global leader in porcine genetics and it’s developed a pig which is resistant to a nasty virus called Porcine Reproduction and Respiratory Syndrome (PRRS). And in the US alone, that’s estimated to cost the industry about $600 million a year. And that amount of money should be able to be saved with the rollout over the probably the next three to four years of Genus’ PRRS-resistant pig. It does first need to get regulatory approval, but we’ve seen some of the first instances of that already, but the two main markets where it would be very helpful is the US and also China. And overall, when the benefits of the PRRS-resistant pig are felt, it has the potential to really quite significantly enhance the earnings of the company, which makes it very attractive from our perspective.”
The case for ‘quality growth’ – or should we say ‘quality income’?
“I’d actually call it quality income rather than necessarily quality or growth, taking the benefits of marrying together quality on the one hand and income on the other. So, you have quality which offers earnings resilience from strong business models and good ESG characteristics.
“And on the other hand, you have income which helps to provide a sort of valuation backstop and reduces agency risk by encouraging a long-term approach by management teams; you have to think about the cash flows needed to continue to maintain the dividend payments.
“And when you put quality and income together – in the middle of the Venn diagram – what that offers is strong, long-term capital growth potential, an attractive and resilient income, which is what we’re trying to do in terms of building that Murray Income portfolio focused on good quality companies with attractive income credentials.”
Conclusion: Charles has been quoted as saying that he doesn’t like surprises so it’s a good indicator of his management style – steadily consistent and reliable. Insights into his investment approach demonstrate a vehicle that is designed to be resilient in all market conditions by focussing on quality companies, strategically diversifying, ignoring the noise and looking to the long-term.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author are their own and do not constitute financial advice.
