Investment trust bargain hunter: dividend hero slips to 10% discount

Bull markets present a tougher challenge for bargain hunters, but for those prepared to look hard there are some compelling discount opportunities in the closed-ended fund arena.

Take Murray Income, for example – an investment trust that has seen its discount stuck in a range of 7 per cent to 12 per cent.

According to Alex Moore, a research analyst at Rathbones, in this instance a wide discount is not down to poor underlying performance.
‘Generally, discounts on UK equity strategies widened in 2016, particularly in the early part of the year and immediately after the EU referendum. Although net asset value (NAV) returns rebounded in line with the market, discounts have persisted. In some instances, discounts can be explained based on poor underlying performance.

‘But even those trusts that performed well in NAV terms are also stubbornly on discounts. Murray Income returned 16.5 per cent in 2016 in NAV terms, but 12.9 per cent in price terms. This has reverted somewhat in 2017, but the trust still trades on a 9 per plus cent discount.’

Figures from Winterflood, the broker, show that Murray Income is currently on a discount of 9.6 per cent, wider than its 12-month average discount figure of 8.9 per cent, which potentially pushes the trust into bargain territory. The dividend yield is 4.2 per cent.

The trust mainly sticks to the big blue-chip names in the FTSE 100 index, which is evidenced by its top three holdings – Unilever, British American Tobacco and GlaxoSmithKline.

Moore thinks the current discount on offer may present an opportunity for long-term investors.  ‘However, I emphasise the long term. There is every chance that a leg down in the market could see discounts widen further, coupled with NAV loss,’ he adds.
In the trust’s latest update, manager Charles Luke said he is positioning the portfolio for an ‘uncertain and potentially volatile period ahead’ by focusing his attention on companies that have strong balance sheets and superior business models with attractive valuation.

In terms of performance numbers Murray Income under Luke’s tenure has outperformed the FTSE All-Share index over five years. But more impressively it boasts a 43-year track record of dividend growth.

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Despite being a reliable dividend payer, the current discount of 9.6 per cent suggests the trust is somewhat out of favour. According to Moore, the low interest rate environment has seen investors look for high and differentiated income sources, for example from infrastructure and specialist property funds. The appeal of yields varying from 4 to 6 per cent that are uncorrelated with equities has sent these trusts to high premiums.

‘UK equity income funds seem to be second preference. The obvious elephant in the room is Brexit and uncertainty around that. Liquidity, or more specifically lack of, has anecdotally been cited as another related cause for the discount widening,’ adds Moore.

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