Shareholders continue to benefit from the enlarged scale of the Company following the merger with Perpetual Income & Growth Investment Trust with net assets over £1 billion, a lower blended management fee rate of 0.37%, a lower forecast ongoing charges ratio of 0.50%, plus additional liquidity and lower bid-offer spreads when trading. Our objective is to continue to provide a high and growing income combined with capital growth from a portfolio principally of UK equities: the dividend yield stood at 4.3% as at 31 December 2022 and we have now increased the dividend every year for the past forty-nine years.

Performance

Over the six months ended 31 December 2022, the Company’s net asset value (“NAV”) per share rose 4.0% in total return terms, as compared to the FTSE All-Share Index (the “Benchmark”) return of 5.1%. The share price total return was 3.8% reflecting the discount widening from 3.8% to 4.1%.

The two principal parts of our investment objective are to provide a high and growing income. The dividend yield, based on the 31 December 2022 share price of 844.0 pence, is 4.3% which is high by most people’s standards for an equity portfolio. We continue to grow our dividend, with a dividend increase chalked up in every one of the past forty-nine years. This puts us into the top ten on the AIC’s list of ‘Dividend Heroes’ (the investment trusts with the longest records of annual dividend growth) as measured by the number of consecutive years of dividend growth.

For the full calendar year 2022, NAV total return was -6.0% while the Benchmark returned 0.3% and the share price total return was -4.1%. The underperformance came in the first half of 2022, caused largely by being underweight in the oil and gas sector (which benefited from the war in Ukraine) and a small number of stock specific factors. Looking over longer periods ended 31 December 2022, both NAV and share price performance were behind the Benchmark over three years but ahead of the Benchmark over five and ten years.

Investment Process

Our Manager’s investment process is best summarised as a search for good quality companies at attractive valuations. The Manager defines a quality company as one capable of strong and predictable cash generation, sustainably high returns on capital and with attractive growth opportunities. These typically result from a sound business model, a robust balance sheet, good management and strong environmental, social and governance characteristics. These qualities helped avoid the worst of the dividend shocks during the pandemic.

Investment People

abrdn is our appointed investment management company. Charles Luke has been our lead portfolio manager since 2006, and works alongside Rhona Millar and Co-Manager Iain Pyle, as members of abrdn’s now 20-strong UK and European Team.

Annual General Meeting (“AGM”)

It was like old times at our Annual General Meeting (“AGM”) on 1 November 2022, held in London, with many shareholders and their guests attending and plenty of questions asked. Over a buffet lunch afterwards, the opportunity was taken to informally discuss a whole range of matters with shareholders. This year’s AGM on 7 November 2023 will be celebrating the Company’s centenary and will be held where the Company was founded, in Glasgow.

Board

This is my final year as Chairman and as a Director of the Company. After serving nine years as a Director, I will retire from the Board at the end of the centenary AGM. I am delighted that the other members of the Board have determined that Peter Tait, currently Senior Independent Director, will succeed me as Chairman at that time.

Dividend Policy

Our normal practice is to announce in November our plans for the first, second and third interim dividends for the financial year. On 1 November 2022 we announced interim dividends, each of 8.25p per share, to be paid on 15 December 2022, 16 March 2023 and 15 June 2023. The Board also advised that it expected the fourth interim dividend, to be announced in August 2023 and paid in September 2023, to be at least 11.75 pence per share, as compared to 11.25 pence per share declared for the previous year.

In the year ended 30 June 2022 we were able to increase our full year dividend per share to 36.0p which represented a yield of 4.3% on the 31 December 2022 share price of 844.0p. Revenue earned by the Company for the year was 40.5p per share, with the surplus 4.5p being added to our revenue reserves which serve to support and smooth future dividends. For the year ending 30 June 2023, revenue earned is currently projected to be ahead of last year’s dividend.

Share Capital

The Company bought back 1,168,091 Ordinary shares of 25p into treasury during the six months ended 31 December 2022, representing 1.0% of shares in issue at 30 June 2022, resulting in there being 115,522,381 Ordinary shares of 25p in issue with voting rights and an additional 4,007,151 shares held in treasury, at 31 December 2022.

Environmental, Social and Governance (“ESG”)

In last year’s Half-Yearly Report, we reported a new focus on the net zero initiative, one aspect of our ESG approach. Countries and companies are signing up to commitments as to when their operations will become net zero in terms of carbon emissions and on what basis they will be measured. We can apply this focus to Murray Income too: 96% of the portfolio by value or 50 out of 55 companies held in the portfolio on 31 December 2022 have set a net zero target date. The breakdown is shown in the following table:

Our Manager continues to engage with those that have not yet set a date as well as holding to account or pressing further those that have committed. From the companies that have committed we can infer an average net zero date for the Murray Income portfolio of 2040, a similar number to this time last year. The encouraging change over the year is that only five companies have yet to commit, compared to 16 a year ago. Please note that these numbers are snapshots, they could move up or down if the portfolio changes and the outcomes are not in any case within our control. But this will be a useful number for comparison over time, whilst remembering that net zero is just one of the environmental factors within ESG.

ESG considerations are integrated into the company analysis carried out by our Manager which is able to draw on the expertise of more than 20 in-house ESG specialists covering the UK and Europe.  This aims to mitigate risk and enhance returns over the longer term, results in frequent dialogue with investee companies and helps to ensure that the companies in the portfolio are acting in the best long-term interests of their shareholders and society at large. It is important to note that the policy pursued by our Investment Manager on our behalf is dynamic rather than static. ESG conclusions can change if the inputs change: for example, one might look at Russia’s invasion of Ukraine and conclude that the social factor of security and safety is more important now than previously considered. Similarly, one might consider energy security be given a higher weight relative to absolute CO2 emissions and come to a different conclusion on holding an oil or
gas stock.

The Investment Manager’s Report contains further information (including examples) on how ESG factors are incorporated into the Managers’ investment approach. For more detailed information we would refer you to our 30 June 2022 Annual Report (pages 93-97) and to our website (www.murray-income.co.uk).

Update

From 31 December 2022 to 23 February 2023 (the latest practicable date prior to approval of this Report), the net asset value per share total return and share price total return were 5.1% and 4.5%, respectively, while the Benchmark total return was 6.4%. The discount widened to 6.0% over the same period, during which a further 1,559,380 shares were bought back into treasury by the Company, resulting in 113,963,001 shares with voting rights, and an additional 5,566,531 shares in treasury, as at the date of this Report.

Outlook

Writing this amongst headlines of crisis, emergency, strikes, inflation, recession and ‘Spare’ Harry, it was easy to miss the headline that the UK’s FTSE-100 Index was at a 4-year high. How could that be if everything is so bad? A sense that some of these factors are either as bad as they could be or have started to recover is part of the answer. Let’s consider the predominant concerns:

Inflation rose way higher than expected in 2022 fuelled by the jump in oil and gas prices following Russia’s invasion of Ukraine. As companies passed on the pain to consumers, inflation rates rose well above central bank targets and sparked demands for increased wages to maintain living standards. The outlook now is rather different: wholesale oil and gas prices have already dropped sharply from last year’s levels. The warm European winter (so far) has helped as have increased imports of Liquid Natural Gas. It is possible that we end this winter with enough gas in storage to meet next winter’s needs. Central banks in the western world were too slow to react initially but have now tightened monetary policy significantly in response to rising inflation. While the effect is yet to be seen, remember that monetary policy works with a lag: most economists would say 12-18 months. Inflation may have already peaked.

That monetary lag is a negative for growth prospects. Many believe that we in the UK are already in recession. If not, we are very close to it. With interest rates still rising, consumer electricity and gas costs still very high and wages not keeping up with inflation it is going to be a while before growth recovers. But remember that the world economy is still growing.

After thirteen years of super-low interest rates in response to the 2008 financial crisis, it should have been no surprise that interest rates have started to return to normal, that is into the 3-5% range that would be considered average by historical standards. Yet some have been taken by surprise and have clearly not stress tested their business models for a return of normality. The most obvious example of this is the blow-up in LDI (Liability Driven Investment, a strategy used by pension funds to match their assets and liabilities more closely) that caused the crash in the UK gilt market in September. UK gilt yields rose to a level that was entirely reasonable but caught out many pension funds by doing so in six weeks, meaning that a significant number of them could not easily meet their increased collateral requirements. The real problem in this was leverage: some funds were, and still are, using leverage to boost their asset returns so as to meet their future liabilities.

Whenever a new financial crisis appears, excessive leverage is the most likely root cause. Banks’ excessive exposure to sub-prime real estate lending is well understood to be the root cause of the 2008 crash. The question is: are markets strong enough to withstand the future stresses on leverage? Those stresses currently seem most visible in property and private equity. Just applying a common sense test reveals that most property prices are too high, yet most investors in property have little experience of falling prices. Combined with leverage and illiquidity, a property crash would be painful for many. Less obvious is the now-huge private equity sector, which depends heavily on leverage and favourable tax treatment for its returns.  If you were a private equity fund that stripped the cash out of a company and paid it to yourselves in dividends, funding that payment by borrowing on the company’s balance sheet and then interest rates go up, the net worth of that company would fall. In aggregate, private equity companies are yet to feel that pain. Excess leverage will be a problem if interest rates stay high.

One more visible change from last year in the UK is in politics: the new Sunak Conservative government may have less than two years to run before losing a general election to Labour, but there seems to be very little difference between the economic policies of the UK’s two main political parties. Headline announcements of “take back control’, “reform the NHS” and “no unfunded tax cuts” have originated from the Labour camp.  This is perhaps the important legacy of the doomed Truss government: do something too radical and the consequences will force you out of office. Heeding this warning, the two parties now offer remarkably similar economic policies. However unlikely, that heralds the return of political stability. Another intriguing possibility is that a great reset is underway which will lay the foundation for future prosperity. It is well understood that productivity growth in the UK has lagged well behind previous trends and that many UK companies have depended on cheap labour, whether imported or otherwise, to fund their profitability. Whether it was Covid or Brexit, the supply of cheap labour has been disrupted. Companies are finding it very difficult to recruit workers on the low-wage or zero-hours contracts of before. Although the headline unemployment number is low, many people of working age are not currently seeking work, with early retirement and illness being common reasons.  The initial response from many companies has been to cut back a little on staff numbers and wait. But now a new mood is emerging: higher hourly wage rates and better terms and conditions in return for productivity improvements is a recipe for future prosperity. Something is clearly starting to change here.

While the national mood is clearly and rightly pessimistic, there are some grounds for optimism. Remember that 2022 turned out to be nothing like the way it was forecasted to be a year ago. It wouldn’t be a surprise if 2023 confounds forecasts too.

Neil Rogan
Chairman
28 February 2023

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Find out more at www.murray-income.co.uk or by registering for updates. You can also follow us on Twitter and LinkedIn.