Murray Income MUT Call options in portfolio

MDMD

Just been looking over the portfolios of a few income generating ITs, and in the Murray Income listing, they have a few companies which are shown as “Call” with a negative value:

https://www.aberdeenstandard.com/docs?editionId=a472629e-34d7-46d3-84f7-5676f0ee524d&_ga=2.2540467.2020941381.1613774702-340512402.1613774702

Just want to check my understanding of this - as these are negative numbers are these shares they own and have sold (or lent out) with a call option to buy them back at a predetermined price? or is it something else entirely?

george4064

The trust has a number of call options which are derivatives that allow the holder to buy a fixed number of shares (shares column) at a pre-determined price (strike price column) before the option expires (Expiration Date).

The trust also has one put option, which is effectively the same as above except it gives the holder the option to sell a certain number of shares at a pre-determined price before the option expires. In order to exercise the option (ie sell the share’ this they would’ve borrowed a share to achieve that which is written into the option contract itself.

It seems that all options within the portfolio are shown as negative, I think that’s just to differentiate them from the physical holdings rather than they are all out of the money/showing a loss at the moment!

Alexland has hit the nail on the head, leaving my post up for info.

Alexland

Murray Income are selling call options to generate additional income. Basically they are entering into contracts that give buyers the right to acquire some of the trust's portfolio in future at a pre agreed higher price. The buyers pay some upfront cash and would take any market upside above the pre agreed price if it happens during the agreed period. The shares which have been sold but not yet transferred should show as a negative liability in the portfolio. Provided that the sold shares is less than the total held then the call is covered and the NAV is correct.
On average the trust shareholders including myself should be making a small gain in providing this service to the market.

Alexland

Also if you are thinking of buying into MUT then the % costs are going to be lower than the datasheets are showing for last year because Aberdeen are working on a tiered percentage charge basis so with the PLI assets roughly doubling the size of the trust and the board being a generally fixed cost it should be lower around 0.5%

maxsteam

The fund trades in options which can have a value and can be traded, just like their shares. Traded options can be a very volatile, high risk instrument or they can be an extremely safe way to benefit from stability or movements, depending on how they are used. All of the option positions are "short" positions, that is the fund has sold the contracts and so the number of contracts they hold, and their value, is negative. All of the option positions seem to be in shares which are also held in the portfolio. I would guess, but I have not checked, that the option positions are all covered by the share holdings. There is not enough information on your sheet to be able to tell which positions are showing a profit. Personally I would not be concerned by anything on the list but I would expect the fund's performance to be above the performance of the most relevant index, otherwise (on a very simplistic level) there would be no point in continuing to trade in options. It's worth checking the fund's documentation to see how the fund's objectives correspond to the options holdings.

MDMD

Alexland said:

Also if you are thinking of buying into MUT then the % costs are going to be lower than the datasheets are showing for last year because Aberdeen are working on a tiered percentage charge basis so with the PLI assets roughly doubling the size of the trust and the board being a generally fixed cost it should be lower around 0.5%

Thanks - I was wondering if they had already factored this in. 

MDMD

maxsteam said:

It's worth checking the fund's documentation to see how the fund's objectives correspond to the options holdings.

The prospectus lists it as one of their differentiating factors (along with an ESG focus, although I’m not quite sure how they square that with their BAT holding) and it allows them to use companies that pay lower yields but instead they can (I assume) generate income from these companies who would have a growing share price by being able to sell it using the option.

https://www.aberdeenstandard.com/docs?editionId=d7beb33d-64d9-46c4-9ecb-bf16ad2c3331&_ga=2.4100019.2020941381.1613774702-340512402.1613774702

The Portfolio yield is supplemented through the modest use of derivatives in the form of covered options. This provides an additional uncorrelated, diversified income stream in concert with the investment approach, enabling investment in companies with lower yields but better capital and dividend growth prospects. The option writing strategy is implemented through exchanged trade and Over The Counter European style options written on the basis of fundamental analysis to top slice or top up holdings. Exposure is typically 25 basis points per investment with options written circa 5 per cent. out of the money with a 1 – 3 month duration. Income from traded option premiums was £2.472m in financial year 2020, representing 10.8 per cent. of total income.

maxsteam

That all sounds good to me. The crucial things that convince me are that the options are covered and they are making money from trading in options (I am assuming, but, being suspicious I would want to check, that the income is the net income from options). It is possible to compose all sorts of fancy words to justify a trading strategy but unless it makes a profit (and/or outperforms an index), it's no more than fancy words. Options can be used in many different ways and it looks like they are using them to profit from short term movements while using the underlying shares to profit from long term movements. Of course, every trade won't make a profit but it sounds like they are getting things right more often than they get things wrong.

Alexland

MDMD said:.
enabling investment in companies with lower yields but better capital and dividend growth prospects. 

The Morningstar data for MUT shows a 26% weighing to value and a 24% weighting to growth so very balanced for an income portfolio. By comparison the FTSE All Share is 35% value and CTY is 48% value. Some trusts are under real pressure to maintain that higher yield (Job Curtis explained on a podcast how it had been the worst year of his career) and I suspect it's now materially affecting the prospects for the investments so I sold CTY at a premium to buy MUT at a discount.