0:03

Hello, I'm Kyle Colwell and this is On

0:05

The Money, a weekly look how to get

0:07

the best out of your savings and investments.

0:10

In this episode we're going to be

0:12

focusing on the UK stock market on

0:14

the back of its strong performance over

0:17

the past nine months. On

0:19

a five year view, the

0:21

UK market has notably lagged other

0:23

markets, particularly the US, which has

0:26

been boosted by its technology

0:28

stock giants such as Microsoft,

0:30

Amazon and Nvidia, as well

0:32

as having a lack of tech stocks. The

0:34

UK market has had other headwinds

0:37

to contend with, including the impact

0:39

of Brexit, political instability including

0:41

the free prime ministers in one

0:43

year in 2022 and the Covid-19

0:45

pandemic. However,

0:50

the recent rally for the UK

0:52

market is potentially a sign that

0:54

times may be changing. Joining

0:56

me to discuss prospects for the

0:59

UK market is Charles Luke, full

1:01

manager of the Muddy Income Investment

1:03

Trust. So Charles, the UK stock

1:05

market has had a good run of performance

1:08

since the end of last October and

1:10

the rally has benefited companies of

1:12

all sizes from those housed in

1:15

the FTSE 100 Index down to

1:17

those in the FTSE small cap

1:19

index. So what

1:21

do you think are the key reasons

1:23

for you behind why the UK market

1:25

has been performing well over that period?

1:28

Well, I think if you turn your mind back

1:30

to October and the sort of starting point

1:32

in terms of the good performance we've seen

1:34

since. So back in October

1:36

we had the attacks on Israel concerned

1:39

that rates would need to be higher for

1:41

longer and we had a pretty sluggish global

1:43

economy. And then

1:45

subsequently we've seen inflation easing. We're

1:48

much closer to the first rate cut in the US

1:50

and the UK and a sort

1:52

of generally less negative economic environment in the

1:55

UK and Europe with actually some real wage

1:57

growth and improving confidence. And

1:59

also I think given some lowly valuations that

2:01

the spectra of M&A has returned to

2:03

the market. So we've seen various

2:06

bids, albeit not all of

2:08

these have been consummated, but

2:10

approaches for the likes of

2:12

Direct Line and Anglo American,

2:14

August Lansdowne, Darktrace, Royal Mail,

2:16

I've probably forgotten a few,

2:18

but that's also certainly helped improve sentiment

2:20

and highlight value in the market. And

2:23

for the investment trusts that you manage,

2:25

so money and income, are there any

2:27

companies or sectors that stand out for

2:29

you and that have benefited from

2:32

this market rally? Yeah, so we've got about

2:34

50 holdings in the portfolio and they represent

2:36

quite an eclectic mix of companies. And

2:39

actually quite a few of those are up 40 or 50%

2:41

since October. So the

2:44

ones that come to mind would

2:46

be Oxford Instruments, Howden Joinery, Genuine

2:48

and Experian. I think the

2:51

only sort of common theme with those companies is

2:53

that they actually look very cheap last autumn and

2:55

have subsequently had some robust results.

2:57

And then actually another company that

2:59

you mentioned in your introduction there

3:01

in the portfolio that Stonewall is

3:03

Microsoft, and that's been

3:05

helped by excitement around artificial intelligence.

3:08

So the question many

3:10

investors will now be pondering following

3:12

the upturn in performance is whether

3:14

the UK market is still cheap.

3:17

What are your thoughts and could you

3:19

put some figures on valuations for the

3:21

UK market versus its history? Yeah, sure.

3:23

So if you look at the valuations

3:25

for the FTSE 100, that trades on

3:28

a forward P multiple of

3:30

just under 12 times. The FTSE

3:32

250 is on about 11 and

3:34

a half times, which in absolute terms

3:36

is pretty much the low point of the last

3:38

30 years apart from perhaps the GFC.

3:41

And if you compare the markets

3:43

across different regions and adjust for

3:45

sector differences, so you're comparing apples

3:47

with apples, the UK is nearly

3:49

30% cheaper than the US and around 7% or

3:52

so cheaper than Europe. And the

3:54

sectors where there's the greatest difference to

3:56

valuations compared to the US are

3:59

energy, financials, real estate and

4:01

utilities. And that difference in

4:04

those sectors is 35 to 40%. And you

4:07

know, arguably, there are some reasons why US companies

4:09

should perhaps be a little bit more expensive, such

4:11

as having access to a larger

4:13

market with greater economies of scale. But it

4:16

really seems to me that those valuation discrepancies

4:18

are just too large at the moment. And

4:20

then I think sort of secondly, anecdotally, in

4:22

terms of market valuations is the market cheap.

4:25

And many companies are buying back their shares.

4:28

And also, you know, as I just mentioned,

4:30

we've seen that sort of acceleration in M&A

4:32

as corporate purchases and private equity

4:34

are also identifying attractive value

4:37

in the market. And then just

4:39

thirdly, maybe in terms of thinking

4:41

about supply, you know, we've

4:43

had domestic selling of UK equities from pension funds for

4:45

the last 25 years. And

4:48

their allocations are now minimal. So it's difficult to

4:50

see more selling pressure from there. And international investors

4:52

have been selling UK equities since 2016. And are

4:54

also significantly

4:57

underweight. So I think that's a sort

4:59

of helpful dynamic as we look forward.

5:02

But I think it's just worth saying, you know,

5:04

if the UK market is trading on to just

5:06

under 12 times P, then the Murray income portfolio

5:08

is is on around 14 times. So a little

5:10

bit more expensive. But the reason for that is

5:12

the quality of the underlying holdings is much better.

5:15

So a little bit more expensive, but

5:17

I'd argue a small price to pay

5:19

for companies with strong returns and an

5:21

in aggregate attractive long term growth prospects.

5:23

So where can investors find value in

5:26

the UK market after the recent rally?

5:28

You invest in both large caps and

5:30

mid caps. Is it the mid caps

5:32

where you find the best valuation opportunities?

5:34

And could you highlight some companies and

5:37

sectors that are looking attractive in terms

5:39

of their valuations? I think you

5:41

can find it attractively valued companies across a range

5:43

of different sectors. So to mention a few holdings

5:45

of the portfolio, they look particularly interesting.

5:47

And these are a mix of mid

5:50

and large cap companies. So, you know,

5:52

maybe starting off with Rentakil, which is

5:54

the world's leading pest control business, you

5:56

know, shorter term performance has been a

5:58

little bit difficult as they integrate. the

6:00

terminix acquisition. But I think

6:02

the long-term prospects for the business are very strong

6:04

and it's noteworthy that a well-known

6:07

activist has recently taken a stake in

6:09

the business and those shares now

6:11

trade on a very significant discount to

6:13

their closest US peer. Another company,

6:16

another large national grid, they recently completed

6:18

a rights issue that took the market

6:21

a little bit by surprise but that helps to

6:23

provide the long-term funding for the company and

6:25

enable it to grow its asset base by 10%

6:28

a year as it meets the needs of the

6:30

energy transition and it also generates

6:32

a generous dividend yield. And then again

6:34

the valuation looks very attractive for that

6:36

business on just about all

6:38

measures. And then the third sort

6:40

of large cap company is Coca-Cola

6:42

Euro Pacific Partners and this

6:45

company is the Coke bottling company for Northern

6:47

Europe and the Philippines and Indonesia. So

6:50

it gives you access to the

6:52

very strong Coke beverage brands at a

6:54

valuation more modest than Coca-Cola itself. It's

6:57

not so well known in the UK, it

6:59

does have a listing in the UK but

7:01

it's not actually included in any indices. So

7:03

it's a little off the radar but with

7:05

the likely UK listing reforms, the

7:07

company could be a constituent of the of the FTSE 100

7:09

by the by the end of the year.

7:11

So I think that's a that's also an

7:13

interesting company. And then just maybe looking at

7:16

a couple of mid-cap companies. So the first

7:18

one would be RS Group which is a

7:20

distributor of industrial and electronic parts and components.

7:23

The business was effectively over earning in the

7:25

in the aftermath of the pandemic and the

7:27

shares have been quite weak subsequently

7:29

but the company has a relatively

7:31

new management team with a strong track

7:34

record. It's got a sensible

7:36

plan to improve margins and is trading somewhere

7:39

close to a trough multiple and what

7:41

should be trough earnings with

7:43

the potential to earn a return on capital

7:45

well above 20% and deliver mid to high

7:47

single digit revenue growth. So that one I

7:49

think is interesting. And then finally I'd

7:51

mentioned the self storage company SafeStore which is

7:54

one of the leading self storage companies in

7:56

Europe. Also a company that

7:58

benefited from super normal. demand during COVID and

8:00

has suffered something of a hangover since then.

8:02

But I think on a long term view,

8:05

it's got an attractive development pipeline, it

8:07

operates in a sort of structurally growing

8:10

market and has an attractive

8:12

network of stores in the UK and Europe.

8:14

And currently that's trading on

8:16

about a 20% discount to NAV, which

8:18

is very appealing relative to its history.

8:21

So this podcast episode that's being

8:23

published on the day of the

8:25

general election, so we don't

8:27

know what the outcome will be. Haven't said

8:30

that. Charles, do you see

8:32

any risks around a change of

8:34

government that could derail the improved

8:36

sentiment? I actually listened to

8:38

Rachel Reeves talking at an event last

8:40

week, which was also attended by quite

8:43

a few FTSE 350 CEOs.

8:46

And it's interesting that over the last three

8:48

years or so, the Labour Party has held really

8:50

quite a close dialogue with industry and business

8:52

to help formulate plans for growth, because in

8:55

the absence of being able to borrow

8:58

significantly, the private sector will be key.

9:00

And speaking to those CEOs last week,

9:02

she said that your

9:04

fingerprints are all over our plans.

9:06

So I'm hopeful that

9:08

when Rachel talks about the importance

9:11

of a successful private sector, that

9:13

is a credible statement. And some of the

9:15

ideas that seem sensible around reform of the

9:18

planning system, the Industrial Strategy

9:20

Council, British Infrastructure Council, and generally making

9:22

it easier for firms to invest. Companies

9:25

like Stability, and you mentioned the

9:27

number of prime ministers, I think we've had six

9:30

chancellors of the Exchequer in the last five

9:32

years, so a period of relative calm would

9:34

certainly be welcomed. And interestingly, that's

9:37

potentially a different picture from some of

9:39

the more uncertain outcomes that we

9:41

could see after elections in Europe and perhaps

9:43

the US as well. Let's now

9:45

move on to the way in which

9:47

you invest. You focus on quality income

9:50

stocks. Could you summarize the types of

9:52

attributes you are seeking and how important

9:54

has this focus been in terms of

9:56

helping to deliver 50 years of the

10:00

dividend growth for money income? Yeah, so

10:02

we have a very simple thesis that

10:04

for a company in the portfolio to

10:06

grow its dividends, it needs to grow

10:08

its earnings. And we think good quality

10:10

companies are best placed to do that

10:13

over the long term. And so the

10:15

portfolio is focused on a diversified selection

10:17

of good quality businesses and by good

10:19

quality, I mean companies

10:21

with sustainable competitive advantages, such as

10:24

intellectual property or brands or scale or

10:26

network effects. Companies led

10:28

by experienced management teams with sound

10:30

financial characteristics, and robust growth

10:32

opportunities. And as you say, Murray Income has

10:35

a track record of 50 consecutive years of

10:37

dividend growth. I've only managed the

10:39

portfolio for around 18 years, but but reading back

10:41

through old annual reports before my time, the

10:44

directors have wisely ensured that the underlying

10:46

investment theme has always been a focus

10:48

on a diversified portfolio

10:50

of strong established blue chip

10:52

companies. And those have generally provided

10:55

a reliable source of earnings and dividend growth. It's

10:57

also worth saying that the weakness of sterling over

11:00

the last 50 years has also been helpful for

11:02

a dividend paid in pence, but

11:04

with a portfolio generating a meaningful proportion of

11:06

its income overseas. And then finally, just the

11:08

the investment structure has also been been of

11:11

help. So as you know, one

11:13

of the benefits of investment trust compared to open

11:15

ended funds is the revenue reserve to pay out

11:17

income on a rainy day. And over

11:20

the last 50 years, the companies used its revenue

11:22

reserve, I think eight times. So we paid out

11:25

around 830 pence of dividends

11:27

of which just under 10 pence has come

11:29

from the revenue reserve. So the directors have

11:31

only had to use this very modestly, but

11:33

it's certainly been helpful in terms of helping

11:35

to maintain that track record. But

11:38

I think perhaps, you know, more importantly, looking forward to the

11:40

next 50 years, the portfolios exposed

11:42

to a variety of overarching long term

11:44

trends that should hopefully be a tailwind

11:47

for earnings and dividend growth. So these

11:49

long term earnings drivers include digital transformation.

11:51

So examples of companies we own exposed

11:53

to that would be Microsoft,

11:56

Sage, MasterCard and Experian also

11:58

the of long-term trend of

12:00

aging populations which benefit ComforTec

12:03

and AstraZeneca. Energy

12:05

transition which should help power the earnings of

12:07

companies like SSE and National Grid which

12:10

I mentioned earlier. And then finally I sort of

12:12

point to emerging global wealth for which Unilever

12:15

or LVMH or L'Oreal should

12:17

be a beneficiary. You mentioned

12:19

overseas exposure. You can invest

12:21

up to 20% of

12:23

the portfolio in overseas stocks and

12:26

you have nearly 20% of present. So

12:28

what does having exposure to overseas

12:30

stocks give you that you cannot find

12:32

in the UK market? Yeah so as you

12:34

say the majority of the portfolio

12:36

is invested in companies listed in the UK but

12:39

actually around 75 to 80% of their revenues

12:42

are generated outside the UK which is

12:44

aligned with the UK market as a

12:46

whole which is very international in terms

12:48

of its earnings and revenue. So there

12:51

are really sort of three reasons why we

12:53

invest in companies that are themselves listed on

12:55

stock markets outside the United Kingdom and

12:58

the principal reason is that there are

13:00

a variety of attractive industries for which

13:03

the UK market has little or perhaps

13:05

actually no exposure. So being

13:07

able to invest in overseas listed

13:09

companies is helpful for accessing those

13:11

companies and industries and I'll mention

13:13

some of those in a second but I think it's

13:16

also the case that occasionally we can

13:18

find better quality versions of UK listed

13:20

companies overseas and then thirdly

13:22

it can sometimes be helpful to diversify

13:25

exposure in sectors where there

13:27

are perhaps only a couple of large companies in

13:29

the UK market so pharmaceuticals

13:31

would be an example there. So

13:33

at the moment we own around a dozen or

13:35

so overseas listed companies and actually you know to

13:37

my mind these are some of the best quality

13:40

businesses in the world. So for example to help

13:42

with technology exposure you mentioned Microsoft earlier so we've

13:44

had that holding for the last 10 years for

13:47

diabetes and more recently weight loss we've

13:49

owned Novo Nordisk in the portfolio for

13:51

six years and other industries that

13:53

are difficult to access in the UK but where

13:55

we can gain exposure would be our holdings in

13:58

LVMH for luxury. goods, Kone

14:01

for elevators, MasterCard

14:03

for payments, L'Oreal for

14:05

cosmetics, L'Equide for

14:09

industrial gases. That is

14:11

a Swiss manufacturer of vacuum valves

14:13

which supply into the semiconductor industry.

14:16

And then finally we have a holding

14:18

in Acton technology which is actually listed

14:20

in Taiwan that gives exposure to artificial

14:23

intelligence and data growth. And

14:25

it's probably just worth saying that the majority of

14:27

the overseas companies are actually listed in Europe where

14:30

we also see valuations being attractive

14:32

particularly compared to the United States.

14:34

In the UK equity income sector

14:37

it's unusual to see an investment

14:39

trust have as much

14:41

as 20% in overseas listed

14:44

companies. And the quality

14:46

focus is more challenging

14:48

given that these companies have lower

14:50

yields. But are there any other

14:52

ways in which money income is

14:54

differentiated compared to its peer group? Yes,

14:56

so I think we're aware there's quite

14:59

a lot of choice for investors looking

15:01

for a UK equity income fund. But

15:04

through a variety and a combination of

15:06

different factors I think we are differentiated from the

15:08

peer group. So certainly the

15:10

benefits of being an investment trust

15:12

in terms of the revenue reserve

15:14

that I mentioned earlier, having an

15:17

experienced knowledgeable independent board, the

15:19

company buying back shares at a discount to

15:21

enhance value, the ability to have maybe a

15:23

little bit of modest debt to amplify returns

15:25

over long term. And as

15:27

an investor being able to take advantage when

15:29

the shares are at a discount I

15:32

think at well over a billion pounds of assets we're

15:34

a good size. And then just

15:37

to sort of mention a couple of those

15:39

points that in terms of the portfolio the focus

15:41

on quality is pretty unusual in the sector as

15:43

you say. We've got a diversified portfolio by sector

15:45

and income and capital and as a rule of

15:47

thumb I don't like to have more than 5%

15:49

of the capital in any

15:51

one company or 5% of the income coming

15:53

from any one company. We're focused on

15:56

ESG so there are no tobacco holdings in

15:58

the portfolio. We've got a good mix of

16:00

low larger mid-cap companies, and also as we've

16:02

discussed, exposure to some of the

16:04

highest quality companies listed overseas as well. My

16:07

thanks to Charles, and thank you for listening to this

16:09

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16:40

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