Maintaining steady income at Murray

After all, the internationally-focused stablemate managed by Bruce Stout has benefited immensely from its ability to invest worldwide and is a leading advocate of a global approach to generating income. Its near-namesake, Murray Income investment trust, has a much more restricted mandate when it comes to investing overseas.

Mr Luke's response? "There is no reason why investors shouldn't invest in both. The portfolios tend to be quite complementary, while Murray Income offers an attractive yield and tends to trade on a slight discount to net asset value (NAV) compared with Murray International which trades on a premium."

Mr Luke contends that investors own Murray Income investment trust because it invests in good-quality household-name companies with strong competitive positions and balance sheets, boasts an experienced board, and "is conservative, with a small c". Ultimately, he says, while the fund does have less international exposure than Murray International, it still provides attractive growth and a higher yield.

Income winner

It also has dividend pedigree, having increased the payout every year for 20 years. The trust has had three interim dividends for 2011 maintained at 5.5 p, giving the shares an historic yield of 4.7 per cent. Expectations are that the total dividends for this year will be at least equal to those paid last year.

The trust's strong revenue reserve provides a welcome income cushion, as it means it can smooth the dividend profile over a number of years. Mr Luke points out that Murray Income's revenue makes up three-quarters of its annual dividend. He expects the dividend cover to be rebuilt steadily over time.

Performance has also been steady: over the past year the index has gone up 18 per cent, while Murray Income's NAV is up 21 per cent and its share price is up by 22 per cent. The share price has outperformed the index over three and five years, and the fund is one of the top performers in its sector.

But Mr Luke, like his colleague Mr Stout, agrees that there is a need for investors to look beyond UK borders for income. For this reason the mandate of the Murray Income Trust was changed to allow it to have 20 per cent of its investments overseas, bringing it more in line with other funds in the AIC's (Association of Investment Companies) growth and income sector. "We wanted access to industries and geographies that we weren't able to gain through companies in the UK. The UK index is very concentrated in certain sectors and, rather than being forced to own two companies in the oil industry or in pharmaceuticals, we thought it would make sense to diversify some of that risk and invest overseas," explains Mr Luke.

At the moment the fund has around 4 per cent of the portfolio invested in overseas equities. Recent new additions included Eni, an attractively valued Italian oil company with a generous dividend yield, and Swiss pharmaceutical company Roche, which is attractively valued and generates lots of cash. Mr Luke says he expects the trust's overseas exposure to increase to at least 10 per cent over the next year.

Investment process

The trust recently increased its gearing facility, although the actual amount of debt drawn down has remained relatively stable at £35m for the last year. The extra headroom was needed because it writes options to help enhance and diversify the income, but has a policy of keeping sufficient cash to cover any put options that might be assigned. "The market has gone up and to maintain the same level of gearing you need a larger quantum of debt. We have also increased the gearing so that if we do see a pull-back in the market we are in a position to invest a little bit more capital," explains Mr Luke.

Does that mean he's expecting a pull-back? Mr Luke says there are a number of risks, such as the significant imbalances in the global economy, potentially painful deleveraging in the west, unemployment which could trigger protectionism or social unrest, and regulatory change which may have unintended consequences. "We are mindful of these issues, and while it is difficult to say which will come to fruition, it is important to be aware. If they do create potential buying opportunities, then we have the ability to take advantage of this through the increased gearing facility," says Mr Luke.

But while the macro picture might be uncertain, Mr Luke is clear that the trust's investment process is very much company focused, and very bottom-up. Macro factors do not dictate the buys or sells. "We're looking for companies that we can own for 10 years and which can do well on their own, and are not dependent on any one economic scenario in order to grow. It's about what the companies can do, how they're positioned, what the management team's strategies are and how strong the balance sheets are."

Even though it is relatively concentrated with around 41 holdings, Mr Luke says the trust benefits from a sensibly diversified portfolio, which is also important in terms of income diversification. No one holding is ever above 5 per cent, regardless of what the index weight is, in order to reduce risk.

Managing risk is important, as was illustrated with BP. Following the Deepwater Horizon explosion and subsequent dividend cut, Mr Luke and his team held several meetings with the oil giant. However, he maintains that the market overreacted to the news. Mr Luke was ready to buy more BP shares but, given the sensitivity of the income account and the importance of revenue, decided against it. He says while the BP disaster hurt the trust's income, they have not crystallised a capital loss.