CT UK High Income 21 June 2023
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CT UK High Income (CHI) has a very distinctive portfolio and strategy, which uses the structural advantages of investment trusts to the full. With the manager, Philip Webster, having reshaped the portfolio since taking over in 2017, his approach rests on pure stock-picking to deliver the objective of a high income and capital growth over time.
Philip is solely responsible for each holding. With the range of investments typically between 35 and 45, this is a high-conviction strategy. Philip is firmly in the quality-growth camp, but has a strong valuation discipline. He has no qualms about not holding stocks or sectors that form a big part of the benchmark if he feels that the returns on capital do not look attractive. Philip’s exposure to small and mid-caps is a key differentiator to the benchmark and peers. CHI will, therefore, likely complement traditional equity income portfolios.
In Performance terms, until around mid-2021, Philip’s approach had delivered decent relative returns. Part of his success was down to adroit timing on gearing (see Gearing section). But the trends that helped CHI’s performance during and after the pandemic reversed very suddenly in 2021, which has led to CHI underperforming over the latter part of 2021 and during 2022. As we highlight in the Portfolio section and elsewhere, Philip has become increasingly positive on prospects for his holdings, especially given valuations are, in his view, at very depressed levels.
CHI’s dividend is one of its attractions and the dividend yield of 6.5% is very much at the top end of the AIC UK Equity Income peer group’s yields. As discussed in the Dividend section, this high yield is partly due to the structure of the trust, which allows Philip a degree of flexibility to invest in a way that balances both capital growth and yield generation.
CHI’s unique structure allows the manager, Philip Webster, to pursue a dynamic strategy, investing for the highest total returns possible, rather than chasing yield. Philip seeks high-quality companies with the ability to grow the top line, as well as fund a growing dividend. He invests using a high-conviction approach, which makes CHI one of the most concentrated trusts in the sector.
CHI continues to deliver an attractive income for investors. However, relative returns over 2021 and 2022 have disappointed with the market rotating away from quality-growth stocks towards value-orientated stocks, such as high-street banks and oil majors, neither of which is represented in the portfolio. This is a very different portfolio to that of the benchmark and peers, yet if Philip’s investment thesis holds true, then there are good reasons to be optimistic that CHI will deliver on both the income and capital sides of the trust’s objective, while at the same time offering useful diversification from the typical equity income trusts and funds.
Despite, or because of, the challenging period for performance (see Performance section), Philip’s view is that the fundamental growth prospects of portfolio companies are strong and investors can buy these growth prospects at highly attractive valuations. That Philip has added to exposure through Gearing recently, illustrates his conviction. As such, with the discount to NAV at historically wide levels, this may be a potentially interesting opportunity for investors to add complementary exposure to equity income portfolios, whilst locking in an attractive dividend yield.
- Contrarian, concentrated, high-conviction approach provides potential for outperformance
- High level of income enabled by unique capital structure and gearing
- Dual share-class structure offers potential tax advantages
- 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