CT UK High Income 23 October 2023
Disclaimer
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.
While David Moss became the lead portfolio manager of CT UK High Income Trust (CHI) in July 2023, the investment policy remains unchanged and he continues to invest in UK companies to help deliver a good income to shareholders, as well as capital growth over time. David will also invest overseas in companies with scale and dominance if he believes an equivalent business cannot be found in the UK, meaning CHI has some exposure to non-UK names too.
Continuity remains in the investment process, despite the portfolio manager change, including in what David looks for in stocks and how he goes about investing. It rests on pure stock picking, meaning bottom-up research and rigorous analysis is paramount in identifying high quality names (see Portfolio section). Therefore, David runs a concentrated portfolio, reflecting his best ideas and allowing his true stock-picking ethos to shine through.
Over the last five years before David became portfolio manager performance was mixed (see Performance section). While there were encouraging periods, omitting big dividend-paying oil majors and high street banks has hurt performance since 2021. Unlike the former portfolio manager, David is willing to invest in these stocks, something he’s already done on the open-ended side for many years, on his fund CT Select UK Equity Income. He has added some such positions for CHI, so the Portfolio is looking a little different already.
CHI’s dividend is one of its attractions, currently delivering the third highest yield in the AIC UK Equity Income sector (see Dividend section). The high yield is partly due to the structure of the trust, which has two classes of shares, but also how the portfolio manager invests. Placing emphasis on companies with attractive and growing dividends underpins the trust’s high yield and capital growth aims.
CHI continues to deliver a good income for shareholders, one above the sector average, making it an attractive investment for the high-income hunters. The innovative structure allows this high yield to be generated whilst still investing in companies with earnings growth prospects and without sacrificing total return potential. CHI is clearly differentiated in the UK equity income space and, in our opinion, could easily complement a traditional UK equity income portfolio.
We think David is bringing a bit more balance to the trust, strengthening the underlying dynamism between companies that are growing both income and capital. We would expect the trust to have less style bias, which could lead to more steady returns with less of a tendency to outperform when growth does and vice versa. We think that recent performance, and the relatively small size of the trust, are the main reasons for the trust’s discount being wider than average in the sector. However, if the changes David has made to the portfolio stick, and performance picks up as a result, then there is clear potential for this discount to narrow, in our opinion. We would therefore argue that CHI is sitting at an attractive long term entry point, which could reward patient investors by delivering a good total return over time.
Bull
- High level of income enabled by unique capital structure and gearing
- Dual share-class structure offers potential tax advantages
- Having a distinctive portfolio and strategy means it could complement a traditional equity income portfolio
Bear
- Being a small trust, with net assets around £100m, limits effectiveness of buybacks
- Relatively high OCF versus UK equity income peers
- Use of gearing could magnify the gains but also the losses
Fund History
