Murray International (MYI) has published its annual results for the year ended 31 December 2021. During the period, MYI provided NAV and share price total returns of 14.1% and 7.2% respectively. The difference between the two reflecting a widening of the discount during the period. In comparison, MYI says that the UK Retail Price Index rose by 7.6% while its reference index, the ALL World TR Index returned 20.0%. Income per share generated from MYI’s portfolio increased to 51.7p for the year (2020: 46.6p).
Of the 440 basis points (before expenses) of performance below the reference index, asset allocation detracted 270 basis points and stock selection detracted 170 basis points. Structural effects, relating to the fixed income portfolio and gearing net of borrowing costs, detracted a further 30 basis points of relative performance. MYI’s chairman, David Hardie, comments that, “in recent years, capital performance has underperformed the Reference Index and, indeed, the Company’s peer group; while this is understandable to an extent, given the significant differences between the Company’s portfolio and both of these, it has of course been a source of disappointment to the Board”.
Dividends – A ‘Next Generation Dividend Hero’
So far, MYI has declared three interim dividends of 12.0p per share (2020: three interims of 12.0p) have been declared and MYI’s Board is now recommending an increased final dividend of 19.0p per share (2020: final dividend of 18.5p). If approved at the AGM, total Ordinary dividends for the year will amount to 55.0p (2020: 54.5p), an increase over the previous year of 0.9% which compares with the 7.5% increase in the Retail Price Index in 2021. MYI’s chairman says that the level of increase reflects the fact that the trust already pays a competitively high dividend yield which stood at 4.8% at year end. This represents the 17th year of dividend increases for the Company, which remains an AIC ‘Next Generation Dividend Hero’.
Dipping into revenue reserves
As a long-established investment trust, MYI has been able to build up a decent level of revenue reserves and, as at 31 December 2021, had £62.9 million of distributable reserves on its balance sheet. The payment of the final dividend, if approved, will use approximately £23.9 million from revenue reserves, which amounts to approximately 36.1% of these reserves. Dividend cover at year end was 0.94x (2020: 0.86x).
Gearing – 10 year Senior Unsecured Loan Note issued
At its year end, MYI had total borrowings of £200 million, representing net gearing of 12.2% (2020: 13.4%), all of which is drawn in sterling. In May 2021, MYI extended part of its long-term borrowings by issuing a £50 million 10 year Senior Unsecured Loan Note at an annualised interest rate of 2.24%. MYI used the proceeds of the Loan Note issue to repay its £50 million Revolving Credit Facility, which expired at that time. Under the Loan Note facility, an additional £150 million remains available for drawdown by MYI for a five-year period from its first issue. MYI’s Board’s says that its current intention is to only draw this down to repay existing debt and that MYI is now at an advanced stage in the process of agreeing terms to use £60m of this shelf facility to replace the £60m term loan when it expires in May 2022. MYI@s board says that it expects to provide an update on this shortly.
Management fee reduction
On 30 December 2021, MYI announced a reduction in the level of its management fees. From 1 January 2022, the management fee has been charged at the rate of 0.5% per annum of Net Assets up to £500m and 0.4% per annum of Net Assets above £500m. Up to 31 December 2021, the management fee was charged at the rate of 0.5% of Net Assets up to £1,200m and 0.425% of Net Assets above £1,200m. The ongoing charges ratio (OCR) for 2021 has reduced to 0.59% (2020: 0.68%). The reduction in the level of management fee will, all other things being equal, flow through to a further reduction in the OCR in future years.
Investment manager’s comments on portfolio activity
“Portfolio activity returned to more “normal” levels of around 12% turnover in gross assets in 2021, having been higher in 2020 when market volatility presented numerous opportunities to switch expensive fixed income securities into undervalued equities. Such pricing discrepancies proved less prevalent as pandemic-induced panic subsided, but some notable strategic changes were implemented. Exposure to Emerging Market Bonds continued to be reduced such that, by the financial year end, overall equity exposure had risen to 102.5% of Net Assets compared to 98.8% at the end of 2020.
“In total, five new companies were introduced to the portfolio and seven companies were fully divested. North American equity exposure slightly increased on selective buying of two new positions, Canadian pipeline operator Enbridge and US pharmaceutical giant Bristol Myers, offset by the outright sale of semiconductor manufacturer Intel. European exposure also only marginally increased; with new purchases of Swiss pharmaceutical company Sanofi and Scandinavian regional bank Nordea being offset by outright sales of Bayer and Novartis plus a large reduction in exposure to Roche. Such activity in these geographical regions partly reflected a change in Healthcare preferences, accentuating both potentially higher capital growth and income opportunities. Overall Asian exposure marginally declined on a net basis, with outright sales of Auckland Airport, Swire Pacific and Japan Tobacco, plus ongoing profit-taking in Taiwan Semiconductor to adhere to a maximum 5% of total portfolio in any one holding in accordance with investment guidelines. Only one new position was established in Asia with the initiation of China Vanke, a high quality property developer and management company. Over the period, there were only two meaningful transactions within UK equities, adding to the existing holding in out-of-favour Consumer Goods producer Unilever and the full divestment of Standard Chartered Bank. Whilst future prospects for Latin America remain attractive, the region witnessed the largest amount of profit-taking within the overall portfolio, the reduction of Chilean lithium producer Sociedad Quimica (Soquimich) and Mexican airport operator Grupo Asur purely a reflection of strong performance and periodically extended valuations.
“From an overall investment perspective, the emphasis continues to be on diversified asset exposures in companies deemed beneficiaries of the evolving backdrop, maintaining a “barbell” strategy of owning both growth and cyclical stocks. Structurally higher inflation is supportive of companies owning real assets and exposed to the global economic cycle, whilst selective growth companies should benefit from accelerating trends in industrial automation, semiconductor miniaturisation and digital communications. In our view, the greatest potential for positive cyclical momentum upside surprises can still be identified in Asia and other countries that have lagged the recovery in the Developed World, given the current lower expectations for earnings and dividends that prevail. In such sectors and businesses the portfolio remains meaningfully invested.”