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Murray Income fee cut won't help discount, says Numis

Murray Income fee cut won't help discount, says Numis

Murray Income (MUT) has negotiated a cut in management fees but underperformance means it may make little difference to its discount.

Full-year results from the £607 million UK equity income trust reported a net asset value (NAV) total return of 16.7% in the 12 months to 30 June, behind the 18.1% return from the FTSE All Share. The trust currently yields 4.1%, above the average 3.4% for UK Equity Income rivals.

While the performance of the fund – which is managed by Charles Luke of Aberdeen Asset Management - may have disappointed investors, they were handed to a cut in management fees.

The reduction will take effect from 1 January, when Aberdeen will be entitled to an annual fee, calculated on net assets, of 0.55% up to £350 million, 0.45% between £350 and £450 million, and 0.25% over £450 million.

Based on year end NAV levels this would mean a fall in fees overall from 0.51% to 0.47%.

Numis analyst Charles Cade said despite the yield attraction, the trust ‘fails to stand out among peers’, which is why it currently trades at a discount of 8.6% - more than double the UK Equity Income sector average discount of 4.2%.

‘The fee reduction is positive for shareholders, but in our view is likely to have little impact on investor demand,’ said Cade.

‘Over the past five years, the NAV total return of 58% is closely in line with the FTSE All-Share return of 60.4%, but well behind the peer group average return of 76.8%.’

He added that Murray Income’s performance was also closely in line with Aberdeen-managed Dunedin Income Growth (DIG), which trades at a discount of 10%.

In the results, Luke warned that the coming year looked set to be a difficult one as valuations were high and any optimism about markets had already been factored in

‘Equity market performance over the last year has been strong, helped by an improvement in the global growth dynamic, generally market-friendly political outcomes and the maintenance of low interest rates,’ he said.

‘From here the balance of risk probably lies to the down side… in an environment where in general equity valuations appear full and a broadly positive outlook is already priced in, we feel that it makes sense to be cautious.’

Over the last year, the trust has seen the equity portfolio hit by underperformance from BT (BT), outsourcing giant Capita (CPI), and educational publisher Pearson (PSON).

Luke (pictured) said there were two reasons why the portfolio – which is made up of more 'defensive' income-generating stocks with geographically diverse earnings – did not do well over the year.

‘Firstly, the share prices of those companies reliant on the strength of the UK economy rebounded from an oversold position in the immediate aftermath of the EU referendum results,’ he said.

‘Secondly, companies with defensive growth characteristics underperformed and more cyclically exposed companies outperformed as interest rate and inflation expectations rose… our focus on higher quality, less market-sensitive companies will generally lead to underperformance in a strongly rising market, as occurred over the year.’

There were some positive contributors to the fund, notably HSBC (HSBA), power supplies company XP Power (XPP), BBA Aviation (BBA), and insurer Prudential (PRU).

Turnover was higher than normal in the period as Luke built small and mid cap exposure, including buys such packaging specialist Essentra (ESNT), real estate investment trust Assura (AGRP), storage group Big Yellow (BYG) and Manx Telecom (MANX).

Small and mid cap stocks now make up around 24% of the portfolio, having accounted for less than 10% four years ago.

'Often the initial yields of these companies are lower than the existing portfolio average, but they typically have better prospects for growth than higher yielding mega caps which can be constrained by the overall economy and by high dividend payout ratios,' said Luke.

Luke sold positions in six companies, including British Gas owner Centrica (CNA), property developer Land Securities (LAND), and engineering group GKN (GKN).

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