CT UK Capital & Income 11 May 2023
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.
CT UK Capital & Income Investment Trust (LON:CTUK) has been managed by Julian Cane for more than 25 years. The fact that the trust is a stalwart AIC ‘Dividend Hero’ is, therefore, very much thanks to his careful stewardship of the trust’s assets and the consistent application of his cautious approach to investing in the UK equity market, with the aim of generating long-term capital and income growth.
Julian is a stock-picker and he looks to take advantage of the closed-ended structure and the size of trust to ensure the portfolio reflects his highest-conviction ideas. With net assets of c. £300m, CTUK is large enough to benefit from economies of scale (see Charges section), but small enough to be nimble. This has enabled Julian to take a more concentrated approach, with a target of around 40 to 45 investments. At the same time, this increased concentration has not compromised his ability to invest in mid and small-cap stocks, and the portfolio has significantly more exposure to this area of the market than the benchmark index.
All these factors illustrate that the result of Julian’s fundamental analysis is a truly differentiated portfolio (see Portfolio section). However, being a stock-picker, Julian expects to go through short-term periods of outperformance and underperformance, but expects to outperform the benchmark over the long term. Julian has achieved this, as we illustrate in the Performance section. That said, more recently, performance has been more challenging and CTUK has underperformed the benchmark. Amongst stock-specific factors, the trust has suffered on a relative basis, not just from a low exposure to energy stocks, but also from the fact that the mid-caps underperformed large-caps during 2022.
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. As a result, the portfolio is somewhat differentiated from other income funds, through having a greater allocation to UK mid-caps and a relatively concentrated portfolio (see Portfolio section).
Over Julian’s tenure, his cautious approach and focus on investing in companies that can grow their dividends has paid off, resulting in the AIC ‘Dividend Hero’ status. At the same time, CTUK has built up revenue reserves, which helped the board continue to raise the dividend through the Covid-19 pandemic. As we illustrate in the Dividend section, 2022 has seen the trust return to paying a covered dividend, which is encouraging, in our view. CTUK offers a historical dividend yield of 3.9%, which is attractive when compared to the benchmark’s c. 3.5%. Additionally, CTUK arguably offers greater dividend and capital growth prospects, thanks to the manager’s active approach.
Recent market conditions have not been conducive for Julian’s strategy and relative performance has suffered. 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 which can be used by the board, means the discount tends to trade at close to par. Investors may see the current discount to NAV of c. 3% as a potentially attractive entry point into a differentiated equity income strategy that uses many of the tools of the investment trust structure to deliver a truly active exposure to UK equities.
- Experienced manager has outperformed benchmark over c. 26-year tenure
- Decades-long track record of dividend growth
- Strong investor base means CTUK tends to trade close to par
- Short-term performance challenges may mean discount remains wide
- Tilt towards growing, mid-sized firms risks underperformance at points in the cycle
- Gearing can amplify downside, as well as upside