Murray Income underperformed over the year to the end of June 2015 delivering a negative 2.2% return on net assets compared to a positive 2.6% return on its benchmark, the FTSE All-Share Index. The fund’s discount widened as well leaving shareholders with a 5.7% loss for the year. The dividend was increased from 31.25p to 32p.
The manager’s say that Murray Income’s focus on large, well-known companies with above average yields coupled with the aim of providing a diversified portfolio has not positioned it well given the significant underperformance of large and higher yielding companies in the market over the past year. This combined with the stock specific issues below and the adverse currency translation impact of the overseas holdings has negatively impacted returns.
On a gross assets basis, the equity portfolio underperformed the benchmark by 3.6%. Gearing reduced returns by 0.2%. The translation impact of our overseas holdings, given the strength of sterling, reduced performance by 0.9%. The level of gearing was increased by £10m to £55m during the market fall in October with the actual level of gearing maintained in a relatively narrow range between 5%-8% during the year.
Over the year, the poorest performing areas of the market were those exposed to commodity prices. The oil & gas and mining sectors both fell over 20% during the period. Second order effects also caused earnings weakness in a number of sectors that supply into these industries as the oil and mining companies cut their capital expenditure budgets in response to falling commodity prices. For the listed supermarket companies, trading has continued to be very tough given intense competition and changing customer behaviour. Conversely, areas of the market that performed well included the real estate, house-building, telecoms and technology sectors.
From a size perspective, the FTSE 100 Index again significantly lagged both the Mid 250 and Small Cap indices, a function of its higher commodity and lower domestic exposures as those companies focused on the UK economy performed more strongly. Indeed, there was an almost 15% difference in performance between the FTSE 100 and Mid 250 Indices over the period. Reflecting steady risk appetite, the level of initial public offerings has remained high. Similarly, corporate activity has also remained relatively strong with companies keen to take advantage of cheap financing and tax differentials.
Looking specifically at the Company’s portfolio, both stock selection and asset allocation were negative. The returns from the holdings in the industrials and consumer services sectors comprised the main areas of underperformance. Within industrials, the overweight exposure to the aerospace and defence sector and poor stock selection within this sector coupled with an underweight position in support services led to underperformance. In consumer services, the holdings in the food retail sector hurt performance. Poor stock selection in the utilities and banks sectors also impacted performance. By contrast, the underweight positions in both oil & gas producers and mining, and the overweight position in software & computer services benefited performance.
Turning to the individual holdings, there were a number of disappointing returns that detracted from performance. BHP Billiton underperformed given its exposure to both declining oil and commodity (particularly iron ore) prices. The company has taken action to mitigate the lower income by reducing its cost base and cutting capital expenditure. Oil major ENI also performed poorly due to weaker oil prices with the company deciding to reduce its dividend following a strategic review of operations. Utility companies Centrica and GDF Suez also performed poorly due to strategic and competitive issues coupled with lower income from their oil and gas assets. Finally, supermarket holdings Tesco and Casino underperformed as both companies suffered from competitive pressures and Casino was particularly affected by a slowdown in emerging markets.
More positively, there were a number of holdings that significantly outperformed. These included Sage where the market welcomed increasing organic revenue growth and improved margins. Close Brothers performed strongly given benign conditions in its lending operations and a gradual turnaround in its asset management division. The strong returns from smaller companies were reflected in the performance of Aberforth Smaller Companies Investment Trust. The small holding in BG benefited from an agreed takeover approach from Royal Dutch Shell. Finally, Provident Financial also performed strongly as its competitors suffered under tighter regulatory scrutiny and it introduced new products that should provide attractive growth opportunities.
MUT : Murray Income says large cap. and yield bias caused underperformance