Page 6 - DIY Investor Magazine | Issue 30

FINDING QUALITY COMPANIES IN VOLATILE MARKETS
By Charles Luke, Investment Manager, Murray Income PLC
- In a see-saw year for markets, income generation in the Murray Income Trust has held up well
- Our key priorities in the Trust are to be ‘dependable’, ‘diversified’ and ‘differentiated’
- We see better times ahead for the UK equity income sector
This has been a see-saw year for investment markets. In the early stages of the pandemic, investors focused their attention on companies with reliable growth. Since the vaccination programme has allowed economies to reopen, there has been a rotation to ‘recovery’ companies. As long-term investors, we need to look beyond these short-term shifts in markets to the true outlook for individual companies.
We have been both beneficiaries and victims of these market shifts. The focus on quality companies at Murray Income meant that the Trust proved resilient during the worst pandemic sell-offs, but it also meant that we lagged the sharp rally in November 2020. The same has been true for the income profile of the Trust.
In general, the companies we hold continued to pay dividends throughout the crisis, in contrast to the wider market, which of course means that they haven’t participated to the same extent in the subsequent partial recovery.
As such, investors in the Trust have avoided the whipsaw of investment markets over the past 12 months. This is deliberate; one of our key aims on the Trust is to be ‘dependable’ – we aim to deliver consistent capital returns and income.
This is why we focus on higher quality companies. While weaker companies may have short-term periods of share price growth, good quality companies are best placed to grow their earnings sustainably over time.
Perhaps more importantly, the market tends to underestimate the durability of returns from this type of business. Earnings streams are less volatile and stronger balance sheets allow companies to navigate tougher times more successfully. We have seen this through the pandemic.
‘WE AIM TO DELIVER CONSISTENT CAPITAL RETURNS AND INCOME’
HOW WE ASSESS QUALITY
When assessing quality, we consider five attributes – the sustainability of a company’s business model, its financial strength, the capability and skill of the management team, the attractiveness of the industry in which it operates and an assessment of environmental, social and governance (ESG) risks and opportunities.
We want to find companies that manage both risks and opportunities successfully.
‘A COMPANY CANNOT BE HIGH QUALITY IF IT NEGLECTS ITS ENVIRONMENTAL IMPACT’
Our focus on environmental, social and governance factors is part of this quality assessment. A company cannot be high quality if it neglects its environmental impact, for example, or mistreats its employees.
We have an on-desk ESG specialist and an internal ESG team, whose research is available to all analysts in the company and is a fundamental part of our decision-making.
Diversification is integral to avoiding the worst of market volatility. The pandemic has shown how problems can emerge unexpectedly and hit previously rock-solid industries.
As such, it is important not to put all our eggs in one basket. This is also vital when generating income.
DIY Investor Magazine | Sept 2021 6