BMO Capital & Income 23 December 2020

BMO Capital & Income Investment Trust (BCI) targets long-term growth in both capital and income, primarily from a portfolio of companies listed on the FTSE All-Share Index. Managed by Julian Cane since 1997, BCI has increased its dividend every financial year since launch in 1992 (as discussed under Dividend) and is an AIC ‘dividend hero’.

BCI currently yields c. 4% on a historical basis (as at 14/12/2020). Julian seeks to identify total return opportunities whilst ensuring the dividend is covered in ordinary market circumstances. However, the extraordinary market backdrop in 2020 has seen the board use revenue reserves to maintain dividend growth, allowing the manager to focus on what he believes are the most attractive total return opportunities.

Stock selection focusses on identifying high-quality companies with strong management teams when they are on attractive valuations, as discussed under Portfolio. Constituent companies typically exhibit high barriers to entry and strong competitive advantages, with management teams with track records of strong capital allocation. Julian looks to identify companies where growing free cash flow can ultimately support growing dividends. This, he notes, has helped BCI to outperform over the longer term.

ESG considerations are embedded in the investment process, and impact calculations of fair value. As detailed under the ESG section, ESG evaluations and engagement strategies with company management are considered key inputs to the investment process.

With a well-diversified shareholder base, BCI has consistently traded at a premium in recent years (as we discuss under Discount), and this has allowed the board to issue shares for greater economies of scale. However, BCI has moved out to a narrow discount in recent days.

BCI seems to us to be positioned as a ‘core’ UK equity income product, aiming to generate a relatively consistent return profile, and with growth and income considerations balanced. We think it should therefore be of interest to income investors looking to ensure ‘real’ growth in income without sacrificing capital value. The trust has an enviable long-term track record of dividend increases, and the ability to deploy some of its sizeable revenue reserves against the current challenging backdrop for dividends has helped ensure the strong track record of dividend growth has been extended. In an environment where many companies with long-term growth potential saw sharp valuation de-ratings, recourse to the use of revenue reserves has also enabled the manager to concentrate on identifying the strongest total return opportunities instead of being compelled to reach for yield.

The yield is somewhat lower on a historic basis than that of many peers, which may deter investors looking to maximise their income. However, we believe there are attractions in the remaining revenue reserves and in the manager having had the ability to pivot to companies which may have low trailing yields but stronger prospective yields. Coupled with BCI’s historic tendency to outperform peers in a rising UK market, should Brexit resolution lead to a return of international capital to the UK market this could represent an interesting entry point, despite recent returns having been more challenging.