In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is Charles Luke, manager of Murray Income Trust (MUT).
Which Sector Shows the Biggest Promise in 2024?
I find this a bit tricky to answer as I try and focus on the long term. Indeed, if you look at the best performing companies in the UK market over the long term they are not grouped in any particular sector. They are however characterised by their ability to generate high returns on capital and reinvest to grow their earnings. This would suggest that maintaining a diversified portfolio of good quality companies is perhaps more attractive than focusing on a particular sector, at least over an extended time period.
What's the Biggest Economic Risk Today?
I worry more about companies than economic risks but perhaps in the short term the risk that inflation proves to be more sticky than expected resulting in higher interest rates for longer.
Describe Your Investment Strategy
In a nutshell my investment strategy can be described as ‘quality income’. I try to marry together the benefits of companies with good quality characteristics – i.e., those with strong business models, robust balance sheets, experienced management teams and compelling ESG characteristics – and those with attractive income profiles, given that dividend yield acts as a valuation backstop, is a touchstone for the health of a company and reduces agency risk by encouraging a long-term approach. The outcome of this marriage between quality and income should be a portfolio with strong long term capital growth potential, and resilient earnings and income over the long term.
Which Investor(s) Do You Admire?
I’d like to mention two investors for which there is a common theme. Firstly, Charlie Munger, who sadly passed away at the end of November. Warren Buffett credits Charlie with shifting his investment focus from cheap companies to high quality companies. On my bookshelf I have a copy of ‘Poor Charlie’s Almanack’ which highlights that Charlie had a brain the size of a planet!
Secondly, Nick Sleep, who is clearly less well known but his Nomad Investment Partnership Letters are absolutely required reading for anyone interested in investing. The letters chart a 13-year investment journey (generating a c. 18% annualised return) that begins with a focus on cheap value stocks or ‘cigar butt investing’ but culminates in the realisation of the importance of a company’s business model and the quality of the business.
Name Your Favourite 'Forever Stock'
In the letters mentioned above, Nick Sleep tells a story about how relatively early in his career he attended a cocktail party in New York populated by investment professionals. At this party he asked one fund manager what his largest holding was. The fund manager when asked the question refused to say which seemed to Nick at the time to be rude. Having thought about the answer for a year Nick realised that this was in fact the highest quality answer he could have received. The reason for this being that although a fund manager should have complete conviction in their investment process, they can’t control how a company behaves as businesses evolve, executives change and mistakes may be made. Highlighting a favourite stock reduces the ability to react objectively to developments. Having said that, if I have to name one company, I would of course say Murray Income Trust.
What Would You Never Invest In?
Call me old-fashioned but I struggle to understand the appeal of cryptocurrencies other than for nefarious or extremely speculative purposes so I wouldn’t invest in them.
Growth or Value?
I’m going to say ‘quality’ because it offers the potential to take the most appealing aspects of both growth and value and combine those together. To my mind investing in good quality companies is searching for those companies that make high returns on capital, benefit from sustainable competitive advantages and long-term structural growth prospects, and making sure not to overpay.
House or Pension?
On the basis that this is perhaps a question about retirement planning (i.e., capital doesn’t need to be accessed before retirement), I think a pension on the basis that it can provide diversified exposure to different asset classes which can compound over time and attract tax relief. One of the benefits of property is that it can be mortgaged to enhance equity returns but one of the benefits of the investment trust structure is the ability to also amplify returns by adopting some leverage which, over time, should be beneficial.
Crypto: Brilliant or Bad?
As per the above: bad.
What Can be Done to Improve Diversity in Fund Management?
Unfortunately, there wouldn’t appear to be a handy silver bullet to answer the question and diversity can mean different things to different people but some factors that might well be helpful include ensuring that diversity is present at the top of an organisation, that diversity is celebrated throughout a company and that hiring policies and information about the fund management industry attract and educate a broad range of candidates.
Have You Ever Engaged With a Company and Been Particularly Proud (or Disappointed) in the Outcome?
In 2019, I spent a lot of time looking at the governance of a then FTSE 100 company called NMC Healthcare and in particular the members of its Audit Committee and its statutory auditor. My findings raised serious concerns about the governance of the company and the risks that this engendered which was far from a widely held view at the time. The research culminated in a meeting with the Joint Chairman and Senior Independent Director of NMC Healthcare who were unable to assuage my worries. At the time we were one of the largest shareholders in the company and were able to sell our holding before a significant fraud was discovered the following year and the company ended up in administration and the shares being worthless.
What's The Best Bit of Advice You’ve Ever Been Given?
From an investment perspective it would simply be ‘never underestimate the ability of debt to undermine the value of equity’.
What Would You Be if You Weren’t a Fund Manager?
I think I’ve been incredibly fortunate to pursue a career that provides new challenges and fascinating insights every day. If not a fund manager perhaps I might have been an accountant with a focus on the charities sector.
