138. Why a card is a trojan horse for the untapped online gifting market

24 June 2021 (pre-recorded 22 June 2021)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Chris Salih (CS): Hello and welcome to the Investing on the go podcast. I’m Chris Salih and today we’re joined by Charles Luke, manager of the Elite Rated Murray Income Trust. Thanks for joining us today Charles.

Charles Luke (CL): Thank you Chris. Thank you very much.

[INTERVIEW]

[0:16]

CS: We’ll start with performance; you’ve recently had a good couple of years. Is this because you invest in companies that literally do well in any environment or have you moved the portfolio around a lot?

CL: Yeah. Well, I think to answer that question, it might be useful if I just start by perhaps taking a step back and highlighting the investment proposition. And that’s to construct a portfolio that’s dependable, diversified and differentiated. And for the dependable part, I want to invest in good quality companies exposed to structural and, if appropriate, cyclical trends with a sustainable competitive advantage. And that enables their earnings and dividends to grow long term.

And then in terms of diversification I don’t want to have all of our eggs in one basket or to be overly dependent on any one economic scenario. So, in the portfolio, we have thoughtful diversification by sector and by company and for our income. And then as we’re taking a long-term view, we haven’t moved the portfolio around a lot, but as a function of a focus on those high-quality dependable companies and the diversification, I just mentioned, we think the portfolio can do well in most scenarios and certainly over the long term, which has proven to be the case.

[1:35]

CS: You also have quite a, sort of, high exposure to mid-caps. Could you maybe talk through what’s the attraction to that specific segment of the market?

CL: Yeah, so around 30% to 40% of the portfolio is typically invested in mid-caps. The mid-cap area of the market I find fascinating because there’s a really wide range of interesting businesses, many with excellent growth potential and good quality characteristics. But they’re actually often overlooked and under research companies where the market hasn’t really appreciated their full potential. And I’m fortunate to work in a large team and we cover all of the mid cap companies with our own research, meeting management, writing research notes, which is a great resource for uncovering some of those hidden gems. And I think that is a competitive advantage as well.

So, one example in the portfolio is Inchcape, which people tend to think of as a car retailer, but nearly all of the profits come from distribution, which is a much higher quality business than people give it credit for. So, it has good margins and high return on investor capital, long-term customer relationships and good growth opportunities. And I think the market has yet to give the company the credit for being a much better-quality business than it currently perceives it to be.

[2:53]

CS: I wanted to go into a couple of stock specifics now, firstly, you recently invested in moonpig.com. could you maybe tell us a bit about the rationale behind that?

CL: Yeah, sure. So, we have a small holding in Moonpig which is a relatively recent IPO, but actually a company we’ve known as a business for a long time. It’s interesting because more people are ordering physical cards online, which is a trend that’s obviously accelerated due to the pandemic, but I think more interesting, more interestingly, a card is a trojan horse for the online gifting market, which is largely untapped and where the company sees a really huge potential.

It’s a good quality company. Given that it’s profitable and actually makes good margins. It has low Capex requirements and virtually no inventory risk, as everything is actually made to order. And a really high market share, over 60%, and, you know, millions of people have downloaded the app and have entered birthday reminders, and on top of that they also have some very clever technology to optimize the sales process. And so, although it doesn’t actually pay a dividend it may well do so in a couple of years’ time. And I think that demonstrates how we think about total return in the portfolio – companies that are capable of growing their earnings and their dividends over the long term, which should lead to some very attractive total returns.

[4:25]

CS: Okay. I want to turn to another stock now. This is an overseas holding, which is also an area you can look at a bit, with elevator company Kone. Could you maybe talk us through the benefits of that as well?

CL: Yeah, sure. So we can invest up to 20% of gross assets in overseas listed companies. It’s useful for a couple of reasons, firstly, to diversify risk in concentrated sectors. And secondly, perhaps more importantly to provide access to some good quality companies and industries that you can’t find in the UK.

So at present there’s around eight different holdings representing about 12% of the portfolio invested in overseas listed companies. So we own companies such as Mowi, which is a sustainable salmon fishing company, Accton Technology, which is a Taiwanese technology company, VAT Group, a Swiss vacuum valve manufacturer, Microsoft, Nestle, and, as you mentioned, Kone, which we think is a really great quality business, with a strong balance sheet and it’s exposed to some really exciting long term structural growth opportunities, particularly in China. And we’ve been investing in overseas listed companies for just over 10 years now, it’s been helpful for performance and Kone is one of our longest held overseas listed company holdings.

[5:49]

CS: Your style is obviously to invest in more, sort of, quality growth companies. The opposite is more of a value strategy, which, you know, it has been well-documented how much that has come to the fore recently. Could you maybe tell us whether you are worried about that? Whether it might continue, does it hamper performance or not sit on your radar at all?

CL: Yeah, so I think that there will always be periods when value outperforms quality companies. And we saw that particularly in November 2020 when the market thought that perhaps many poorer quality companies might go bankrupt. They then performed very strongly indeed when the vaccine efficacy sort of announcements came along. But I think it’s important to remember that if you’ve benefited from some of those sorts of companies doing well more recently, you also would almost certainly have owned them when they performed poorly. And actually if you, if you look over the long run and I did a few days ago, I was looking at the top performing companies in the UK market over the last 30 years. And what you notice is that those particular companies have been able to grow their earnings very substantially over a long time period. And that’s generally because they’ve had a sustainable competitive advantage and good management teams and those good quality companies are exactly the kinds of companies that I’m looking to invest in for the long term.

[7:18]

CS: The trust merged obviously with Perpetual Income and Growth last year, have you invested the extra assets and will you be able to reduce fees for investors as sort of an offshoot of economies of scale from that?

CL: Yeah. So back in November before the combination actually occurred, the Perpetual Income and Growth portfolio was aligned with Murray Income. So it was effectively a mirror portfolio, which made it a painless process in terms of the combination. So we didn’t inherit any illiquid holdings or anything that we weren’t keen on. And as you say, a number of important benefits to the merger, the most significant of which is the ability to spread costs over a broader base and take advantage of the lower marginal management fee of Murray Income of 25 basis points for net assets over 450 million pounds. So that means that the trust now has one of the lowest fees in the sector. And we’d like to grow the trust, which will result in even lower fees on a per share basis. All other things being equal.

[8:26]

CS: And just lastly, while the trust isn’t a sustainable trust, you do look at ESG considerations. Could you maybe tell us how that sort of pans out when you approach the portfolio?

CL: Yeah, so ESG considerations are absolutely at the core of what we do. We want to ensure that the companies we invest in manage the risks and opportunities they face, to the best of their ability and to act in the best long-term interests of shareholders and wider society. We have a three-pronged approach to that. Firstly, when writing our research notes, ESG is at the heart of our thinking. And secondly, we have a team of ESG specialists who help with ongoing engagement with companies, which is a key part of our approach. And then thirdly, we also have a large central ESG team, with over 20 very experienced specialists, who think about remuneration and policy statements and write thought pieces. In the portfolio we think very, very carefully about ESG considerations and unlike many other income funds, we don’t own any tobacco companies and the overall portfolio is AA rated by MSCI.

CS: That’s great Charles, thank you very much for joining us today.

CL: Thank you Chris. Thank you, thank you very much.

CS: And if you’re like to learn more about the Murray Income Trust, please visit fundcalibre.com and while you’re there remember to the subscribe to the Investing on the go podcast.