BMO Capital & Income 23 June 2021

BMO Capital & Income (BCI) investment trust targets long-term growth in both capital and income primarily from UK-listed companies. Managed by Julian Cane since 01/03/1997, BCI has increased its dividend every financial year since launch in 1992 (as discussed under Dividend) and is an AIC ‘Dividend Hero’. This track record may be one reason the shares have consistently traded on a premium to NAV or a small Discount (currently c. 1.3%, as at 07/06/2021).

Over the past financial year, the challenging dividend environment meant that increasing the dividend required utilising the revenue reserves that the trust had accrued. Whilst this has reduced revenue reserve cover, we estimate that BCI retains reasonably robust reserves which should enable the board continue to support the dividend. FY 2020’s dividend, representing an historic yield of c. 3.6% at present, therefore looks maintainable to us – although there are no guarantees.

As discussed under Portfolio, in recent months the manager has continued to concentrate BCI’s portfolio further into his highest conviction ideas. The number of stocks held has fallen to 49 from 69 on 30/09/2019. Constituent companies typically exhibit a mixture of quality factors with strong management teams that Julian believes can drive sustainable growth and which he believes the market is underpricing.

With a particular focus on sustainable growth, ESG has become increasingly embedded into the investment process. As we discuss under ESG, such considerations and company ESG scores are now important considerations in the team’s calculations of fair-value and the assumed cost of capital they apply to businesses.

Under the current manager’s tenure (since 01/01/1997), BCI has outperformed the benchmark by c. 0.6% p.a. on a NAV total return basis, as we discuss under Performance. The trust has also outperformed over the past five years, though returns since the start of 2020 have proven more challenging.

Income investors looking for a ‘core’ UK equity offering will likely be attracted to BCI’s exemplary track record of consistent dividend increases since listing in 1992. Whilst an historic yield of 3.6% is slightly lower than that seen on average across the peer group at this time, this track record and the ongoing support from revenue reserves should offer comfort to long-term investors looking to ensure their income continues to grow in real terms. Revenue reserves were utilised in the previous financial year to ensure the track record of growing dividends remained in place, but we think that a recovery in income generation from UK equities later in 2021 seems highly plausible across the market as a whole, and that remaining reserves are likely to be supportive of further dividend growth.

With BCI having generated a positive information ratio relative to the benchmark on c. 61% of rolling 12-month periods over the past ten years, we think there is evidence that the manager’s stock selection has added value. Long-term outperformance is also encouraging, though ¬a resumption of ‘quality’ market leadership could hinder relative returns if historic patterns repeat. ESG-conscious investors are likely to be heartened by the systematic incorporation of ESG considerations into the stock analysis process, as reflected by the above-average score on a quantitative basis that BCI receives from Morningstar.