CT UK Capital & Income 16 November 2022
This is a non-independent marketing communication commissioned by Columbia Threadneedle Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Following the acquisition of BMO’s EMEA Asset Management business by Columbia Threadneedle Investments, BMO Capital and Income was recently renamed to CT UK Capital and Income (CTUK), although there has been no change to the way the portfolio is run. Julian Cane remains the manager, having been in post since 1997. Julian has delivered good returns over the long term and outperformed the benchmark index, the FTSE All-Share Index. Meanwhile, the build-up of strong revenue reserves has helped the board to raise the dividend every year since the trust was launched in 1992, even the pandemic years, CTUK thus being recognised amongst the AIC’s ‘Dividend Heroes’ (see Dividend section).
In recent years, Julian has adopted a more growth-orientated approach to meet CTUK’s total return objective. This is in the belief that many of the traditional core income stocks lack the structural growth prospects to continue to deliver for income investors. This means the portfolio is now somewhat differentiated from other income funds through having a greater allocation to UK mid-caps. He has also taken a more concentrated approach, reducing the target number of companies to 45-50 from c. 70 a few years back (see Portfolio section).
The latest gearing level is approximately 6% and has tended to average in the low single digits over the past five years, as Julian has generally taken a cautious approach on gearing. CTUK has a dividend yield of c. 4.1%, as at the time of writing, lower than the sector average but significantly better than the benchmark. It trades on a discount of around 3% and has an OCF of 0.59%, lower than the unweighted average of the sector.
Julian looks for companies with an element of quality to their earnings’ growth, allowing for a sustainable dividend, and where companies can demonstrate strong defensive moats and pricing power. He is not an income-chaser and is happy to trade off yield for future growth prospects. The market conditions since early 2021 have not been conducive for this strategy, with large-caps and value stocks outperforming. However, we believe that such short-term drawbacks are an inevitable part of investing and now could be an interesting opportunity to consider a more growth-biased fund whose characteristics would be complementary to the typical income strategy.
We think that the dividend yield is attractive, easily surpassing what’s on offer from the benchmark index. Additionally, judging by the three interim dividends paid and the accrued underlying portfolio income, we think the board will be in a position to raise the dividend again this year without dipping into reserves. CTUK has a loyal base of investors through the CT Savings Plans who regularly reinvest their dividend income back into CTUK. This, along with an established discount control mechanism by the board, means the discount tends to trade close to par, providing some reassurance on the ability to buy or sell at stable prices.
- Experienced manager has outperformed benchmark over 25-year tenure
- Decades-long track record of dividend growth
- Strong investor base means CTUK tends to trade close to par
- Lower yield than peer group average
- Tilt towards growing, mid-sized firms risks underperformance if large, value stocks rally
- Gearing can amplify downside as well as upside