CT UK High Income 22 January 2025
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.
Since taking over as portfolio manager in July 2023, David Moss has made significant strides in reshaping CT UK High Income’s (CHI) Portfolio. His focus has been on bolstering the level of sustainable income generated as well as diversifying the sources of capital growth. He has exited smaller, unprofitable businesses with limited growth prospects and no near-term dividend potential, such as Asos and Delivery Hero, reallocating capital to cash-generative companies offering attractive yields, consistent dividends, and growth potential, including NatWest, Smurfit Kappa, and Dunelm. These changes have led to underlying earnings growth from the portfolio supporting the trust’s higher interim Dividend payments in the current financial year.
David has also aimed at diversifying the portfolio’s income sources and improving the trust’s dividend cover. A key area of focus has been banking exposure, as certain UK banks are now generating low- to mid-teen returns on equity alongside offering significant returns to shareholders through growing dividends and buybacks. Believing the sector has reached a turning point, David initiated new positions in NatWest and HSBC.
Despite ongoing economic challenges, CHI has delivered competitive returns under David’s leadership, delivering excess returns relative to the FTSE All-Share Index over the past 12 months (see Performance). Notable contributors to the NAV total return of 19.5% include NatWest and Smurfit Kappa.
At the time of writing, CHI offers investors an attractive dividend yield of 5.9% (6.1% on the B shares due to the wider Discount), well above the FTSE All-Share Index’s 3.6% yield. This high yield reflects the trust’s dual share-class structure and David’s emphasis on companies with attractive and growing dividends, underscoring its appeal to income-focussed investors.
We think that David has made good strides during his time as manager, putting his own stamp on CHI’s portfolio. In our view, he has approached things sensibly, refining areas that needed adjustment following a particularly difficult period during the pandemic. The result is a more diversified portfolio of companies with robust sources of both income and growth, strengthening the trust’s appeal to investors seeking high, sustainable income, in our view.
Beyond income generation, David has also focussed on enhancing the portfolio’s potential of providing capital growth alongside income. Whilst he has added strong domestic businesses, he has also leveraged the trust’s ability to invest overseas for opportunities not available in the UK market, such as SAP and ASM International. Although the overall exposure to non-UK stocks has decreased, due in part to the sale of Mercedes (see Portfolio), these additions bring diverse revenue streams and growth drivers, supporting his aim for a well-balanced portfolio.
Whilst some investors may take time to build confidence in a new manager, CHI has delivered improved performance under David’s leadership. Furthermore, with a 5.9% yield for its ordinary shares (6.1% for the B shares), both at a premium to the market, we think CHI offers a compelling proposition for income-focussed investors. As interest rates fall and the appeal of high-yielding bonds and bank accounts wane, CHI appears as a well-positioned destination for investors seeking higher-yielding opportunities with potential for capital growth.
Bull
- High level of income enabled by unique capital structure and gearing
- Dual share-class structure offers potential tax advantages
- Distinctive portfolio and strategy means it could complement a traditional equity income portfolio
Bear
- Being a small trust, with net assets of around £100m, limits the effectiveness of buybacks
- Relatively high OCF versus UK equity income peers
- Use of gearing could magnify the gains but also the losses