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Fund Profile

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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.

Overview
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Overview

BMO UK High Income (BHI) aims to provide shareholders with an attractive combination of a high yield plus capital growth via investment primarily in UK equities. Currently, BHI is the highest yielding trust in the AIC UK Equity Income sector, the historic yield of 5.8% constituting a significant premium over both the yield of the FTSE All-Share Index and peer group average, which are 3.3% and 4.4% respectively.

As discussed in the Dividend section, the trust has a dual share class structure that allows investors to receive distributions as either a dividend (for ordinary shares) or capital repayments (for B shares). This boosts the income available for distribution for ordinary shares, plus shareholders can tailor their holdings to best suit their personal tax circumstances.

The dual share class structure provides flexibility to the manager, Philip Webster, to pursue a growth focussed strategy rather than chase yield. Philip seeks high quality, best in class, innovative companies that can deliver outstanding total returns. As discussed in Portfolio, Philip believes that genuinely high-quality companies are rare, his high conviction approach making BHI one of the most concentrated trusts in the sector.

Philip’s style is contrarian and he avoids the ‘usual suspects’ of UK equity income investing, such as high-street banks and oil majors which have limited growth potential, instead tilting towards smaller companies and the expanding UK technology sector. As discussed in the Performance section, in the last year the market rotation away from small and growth orientated stocks into larger value stocks has been a drag on relative performance. However, this does imply that the growth potential of the portfolio is now available to investors at a significantly lower multiple than was the case a year ago.

Analyst's View

BHI has continued to succeed in providing investors with an attractive income, however relative returns have disappointed recently as the market rotated away from quality-growth stocks towards value orientated stocks such as high-street banks and oil majors. This follows the macroeconomic shock of higher than expected inflation and associated central bank tightening. Commodity and energy price inflation has been exacerbated by the war in Ukraine. Ultimately, these are factors outside of the manager’s control and Philip has acted prudently, holding to the longer-term strategy and not attempting to engage in short term trading around these moves. Also, the timely reduction of Gearing at the end of 2021 has mitigated losses. Furthermore, it means Philip has plenty of capital to deploy if the broad economic conditions improve in favour of his strategy.

Philip’s view is that the fundamental, underlying growth prospects of the portfolio companies are little changed and essentially an investor can now buy into these growth prospects at highly attractive valuations. For an investor with a longer-term time horizon this presents a potentially enticing opportunity. In our view, BHI could complement a more traditional or value-orientated UK equity income portfolio particularly well, hedging the portfolio if the market swings back towards quality-growth stocks, whilst enjoying an attractive income in the meantime.

Bull

  • Contrarian, concentrated, high-conviction approach provides potential for outperformance
  • High level of income enabled by innovative capital structure and gearing
  • Dual share class structure offers potential tax advantages

Bear

  • Disappointing recent total returns due to quality-growth and smaller companies underperforming
  • Use of gearing can amplify downside as well as upside
  • Relatively high OCF versus UK Equity Income peers
Continue to Portfolio

Fund History

23 Oct 2023 Fund Analysis
CHI offers an attractive yield and a unique strategy that could complement a traditional UK equity income portfolio…
11 Oct 2023 You say potato
Despite being in the same sector, investment trusts in the UK Equity Income sector could be more lowly correlated than you might think…
04 Oct 2023 To gear, or not to gear...
We examine the impact that rising rates have had on fund managers' appetite for gearing as a means to spice up returns...
21 Jun 2023 Fund Analysis
CHI’s high-conviction strategy offers an attractive yield and a very different underlying exposure…
29 Jun 2022 Fund Analysis
BHI is a high conviction strategy that provides an attractive yield and exposure to high-quality, fast-growing companies…
09 Feb 2022 The dividend dilemma
We examine the trade-off between earning a current high dividend yield and growing future dividends...
27 Oct 2021 Fund Analysis
BHI provides both an attractive yield and capital growth via exposure to high-quality, fast-growing and innovative companies…
11 Aug 2021 In at the deep end
Does seeking out wider-than-usual discounts help investors systematically outperform in the UK trust space?
07 Jul 2021 We've changed, and returns prove it...
BMO High Income's strong run during the pandemic shows the benefits of the changes which have been made since the new manager took over in 2017...
03 Mar 2021 Fund Analysis
BHI has undergone a shift towards a greater focus on capital growth, whilst also providing an attractive return by way of dividends/capital repayments...
03 Mar 2021 Strength in depth
UK Equity Income trusts have done a heroic job of maintaining their dividends through the pandemic...
View all

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