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Murray Income’s tobacco holdings aid performance

Over the year to the end of June 2016, Murray Income Trust’s net asset value (total return) outperformed its benchmark, rising by 5.9%, compared to 2.2% for the FTSE All-Share Index. The Board is recommending a final dividend of 11.25p, which makes a total for the year of 32.25p, an increase of 0.8%. The shares produced a total return of 0.1% which reflected a widening of the discount.

The manager says that the positive relative return of 3.7% represents the sixth year of outperformance on a Net Asset Value basis in the last seven years. Many of the factors that had led to underperformance in the previous financial year reversed in the year under review with larger, higher yielding companies outperforming and better stock selection coupled with the beneficial translation effect on the overseas holdings positively impacting returns. The weak pound aided performance by 2.2%. Gearing increased returns by 0.5%. The level of gearing was flat at GBP55m with the actual level of gearing maintained in a relatively narrow range between 6%-10% during the year.

Over the year, the poorest performing area of the market was the bank sector.  A mixture of tough regulation, increased compliance costs, lower investment banking revenues, weak loan demand and low interest rates led the sector to fall by more than 25% during the period.  The mining sector, following a number of years of weak performance, kept up its poor track record as falling commodity prices and oversupply impacted earnings.  Those sectors exposed to the domestic economy also struggled, particularly at the end of the period given concerns over the impact of the EU referendum decision.  Conversely, the tobacco sector performed very strongly, returning over 40%, helped by the translation benefit of overseas earnings and the market seeking out ‘bond proxies’.  Perhaps surprisingly, the oil majors also performed well as the oil price recovered and the companies continued to reduce their cost bases with the maintenance of BP and Royal Dutch Shell’s dividends helping performance on a total return basis.

From a size perspective, in a reversal of fortune, the FTSE 100 Index outperformed the Mid 250 and Small Cap indices, a function of its higher overseas exposure and its tobacco and oil constituents. Apart from a couple of exceptions, corporate activity has been subdued but as we have started to see, the weakness of sterling provides a window of opportunity for overseas companies.

Looking specifically at the Company’s portfolio, both stock selection and asset allocation were positive.  The returns from the holdings in the consumer goods, health care, consumer services and technology sectors comprised the main areas of outperformance.  Within consumer goods, overweight positions in both personal goods and tobacco benefited performance.  Health care performed relatively strongly due to an overweight position and good stock selection. Strong stock selection in travel and leisure aided performance.  On the other hand, the underweight position in oil producers and weak stock selection in chemicals within the industrials sector hurt performance.

Turning to the individual holdings, there were a number of companies that demonstrated substantial share price increases.  British American Tobacco and Imperial Brands performed very strongly as their attractive yields and defensive growth profiles coupled with substantial non-sterling earnings was looked upon favourably by the market. Compass performed very well due to good operational momentum but also thanks to its substantial US dollar denominated earnings base.  Similarly Unilever, which has continued to make sound strategic progress, performed strongly over the year.

On the other hand, Standard Chartered performed particularly poorly in the first half of the year before partly recovering.  The slowdown in emerging markets, lower corporate finance income and a high regulatory burden resulted in a rights issue and a change of management that now puts the bank on a much stronger footing.  Close Brothers and Provident Financial also performed poorly as investors fretted over a weakening domestic economy. Finally, BHP Billiton underperformed given its commodity exposure and the impact of the Samarco dam disaster.

MUT : Murray Income’s tobacco holdings aid performance

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