There is a great deal of corporate activity going on at the moment as boards step up and look to tackle discounts. There is some evidence that this is having an effect.

The median discount across the whole sector has narrowed from 12.9% a year ago to 10.5% today. For trusts investing in listed equities, the median discount has narrowed from 10.7% to 8.3%. That is good news as it means that fewer of these trusts will be in the sights of the activists, but there is still more to do.

One of the latest to decide to take action was Murray Income (MUT ). The trust is a decent size with net assets of £930m despite having bought back 18.8m (about £160m worth) of shares over the last three years. However, its performance is towards the bottom of the peer group table. A net asset value (NAV) total return of 2.2% from the underlying portfolio over the past 12 months compares to 10.6% for both the medium UK equity income trust and the FTSE All-Share, and 20.6% for the sector leader Temple Bar (TMPL ).

That track record has weighed heavily on demand for MUT’s shares and is the main reason why it was trading on a 10% plus discount ahead of the announcement.

The board has been conscious of the poor relative performance of the trust for some time. At the previous financial year end on 30 June 2024, the trust was lagging its benchmark by some margin over three years. However, over five years it was still just ahead. Unfortunately, as the numbers above suggest, the situation did not improve – if anything it got worse.

It is about five years since I last wrote about MUT here. At the time, it was celebrating its merger with Perpetual Income & Growth (PLI). MUT was the top choice of merger partner for the PLI board in part because it could boast a great track record. Over the five years to the end of June 2020, MUT’s NAV return was 31.2%, more than double the All-Share return of 15.2% over that period. My hope was that this would create a new champion for the UK equity income sector. However, this proved a great example of the adage that past performance is no guide to the future.

MUT was caught out by some stocks, holding Close Brothers (CBG) when the car finance mis-selling scandal broke, for example. Close Brothers was forced to put aside £165m for potential claims. However, every investor makes mistakes and MUT’s problem is largely one of style.

Backing good quality companies is a core part of Aberdeen’s investment approach. However, while over the past five years the quality style has outperformed even growth on a global basis (based on the MSCI All Countries World Index, which is heavily skewed by US stocks), in the UK this is not the case.

A company is perceived as being good quality because of the strength of its business model (giving it pricing power), low sensitivity to economic cycles, its strong balance sheet and, more subjectively, the quality of the management team. These types of companies tend to trade on higher valuations. That makes them more vulnerable to sharp falls in share price when something goes wrong, as the Close Brothers example showed. MUT was also hit by the sharp fall in the share price of Novo Nordisk – it has the ability to hold some non-UK stocks.

Over the last few years, we have seen a resurgence in the value style of investing in the UK. All UK equity income trusts, even MUT, are managed to produce revenue to cover the dividend – in contrast to some global equity income trusts such as JPMorgan Global Growth and Income (JGGI ), for example, which top up dividends from capital. That skews the UK equity income trusts towards a value style. TMPL is the poster child for this and has reaped the rewards.

MTU’s relative underperformance reflects the absence or relatively underweight exposure to some of the value stock success stories. It has an underweight exposure to the banks sector, for example.

Some of the other trusts in the sector consciously try to find ways of backing higher quality stocks. The portfolio of MUT stablemate Dunedin Income & Growth (DIG ) has also struggled over the past 12 months, for example. Finsbury Growth and Income (FGT ) also has a quality bias. These three occupy the three bottom places in the peer group table over five years, in terms of NAV return.

So, all of this begs a question: does MUT risk abandoning its bias to quality at the bottom of the cycle for this investment approach? PLI shareholders who rolled over into MUT have experienced the pitfalls of switching styles. Unfortunately, looking at other Invesco trusts that made moves around the same time, this was also true for Keystone shareholders after the switch to Baillie Gifford, and even Edinburgh Investment Trust disappointed for a bit before it ended up at Liontrust.

As it reviews the no doubt substantial pile of proposals from managers keen to take on MUT’s substantial assets, the MUT board has a difficult task ahead of it. My guess is that MUT investors who want to retain exposure to a UK equity income trust – as they should, UK stocks are still cheap, remember – will clamour for a trust that has already had a good run of performance.

James Carthew is head of investment company research at QuotedData.

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