BMO UK High Income 29 June 2022

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.

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.