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BMO UK High Income pleads case for continuation

BMO UK High Income Trust says that over the year ended 31 March 2022, it generated a return on NAV of 1.9%, an ordinary share price return of 0.6%, and a B share return of 1.6%, all well-behind the 13.0% return on the All-Share index. Total distributions on the ordinary shares increased by 2.8% to 5.45p.

The chairman notes that the underperformance occurred in the second half of the financial year, until then, performance was comparable to the benchmark index. In particular, following the invasion of Ukraine by Russian forces in February 2022, the oil & gas and mining sectors reacted very positively to rising oil & gas prices and a surge in other commodity prices. The investment portfolio has no exposure to the large integrated oil companies and is underweight in the mining sectors. This decision is entirely driven by the manager’s view on quality, returns and sustainable competitive advantage available within these sectors.

Revenue per share was 2.59p, insufficient to cover the dividend, and so the dividend payment required a transfer from reserves of £464,000. This leaves reserves of £2.9m or 3.41p per ordinary share.

Following Columbia Threadneedle’s purchase of BMO, a change of name is necessary and the board has agreed that the simplest and clearest change for shareholders is to CT UK High Income Trust Plc. CT is the mnemonic of Columbia Threadneedle. A number of other Investment trusts previously branded BMO and also funds managed by and branded as Columbia Threadneedle will also be adopting the CT prefix. The CT brand will receive considerable marketing support from the manager and the savings plans will also change name from BMO to CT. It is planned that these changes (which will include the renaming of the company’s website and the ticker codes for its shares on the London Stock Exchange) will take effect towards the start of July and a further communication to shareholders will be made in due course.

The annual management fee has been 0.65% of NAV since 1 April 2018. It has been agreed that with effect from 1 April 2022 the fee will be reduced to 0.6%.

Continuation vote

There is a continuation vote scheduled for this year’s AGM. However, over the five years since the last one, the trust has underperformed its benchmark by 14.6 percentage points, and ranks in the third quartile of UK equity income trusts. Over 10 years, it ranks second-last, behind the tiny and very highly geared British & American Trust. The board has tried to make the case for why things might improve. It says:

  • The five-year performance period since 31 March 2017 included a period in which substantial changes were made to the investment portfolio. Shareholders will recall that the remainder of the corporate bond portfolio was sold and there was significant change made to the structure of the equity portfolio. Consequently the “new” structure has not been running for the full five-year period. [We would note that other trusts that incorporate bonds/fixed income such as Shires Income and Henderson High Income rank towards the top of performance tables.]
  • Performance has not been consistently below the benchmark for the period and as mentioned earlier there have been periods of significant outperformance, most notably in the 2021 financial year. With only seven months until the end of the performance period remaining, the aggregate returns were comparable to the benchmark for the relevant timeframe. Unfortunately, relative performance in the later part of the financial year to 31 March 2022 has proved to be very disappointing for your company.
  • The board is supportive of the investment manager and its ability to successfully deliver the investment strategy for shareholders in the future. The board believes that the recent acquisition of the investment manager by Columbia Threadneedle Investments will also further broaden the resources available to the fund manager particularly in terms of research and corporate access.
  • As from 1 April 2022, a new and reduced fee rate for your company has been introduced and the board is pleased to note the manager’s commitment to ensuring the company remains competitive in terms of fees and total expense ratios. [Lower fees make a difference at the margin but a .05% per annum saving would have made very little dent in the underperformance.]
  • Finally, the board is much encouraged by the revenue performance of the company. In particular, the underweight/nil positions in banks and integrated oils (which recently has harmed relative capital returns) meant that the company had no exposure to sectors of the index that either substantially reduced or passed their dividends altogether in 2020/21. The buoyancy in the revenue account that has allowed the board to continue to increase distributions to shareholders against such a difficult background is down to the manager’s portfolio positioning. [However, the fund is not earning sufficient revenue to cover the dividend.]

The board is proposing that the next performance measurement period be changed from five years to three years. If approved this will mean that the current performance period that commenced on 1 April 2022 will end on 31 March 2025. A continuation vote will be required to be held at the 2025 AGM if the net asset value total return for the company for the three-year period is below that of the All-Share Index. The board does not expect any change to the fund management process to be made despite the shorter performance period.

[We would conclude by saying that there are many competing UK equity income trusts to choose from. BMO High Income trades on one of the sector’s widest discounts despite offering one of the the highest yields. It feels as though investors are already voting with their feet.]

BHI / BHIB / BHIU : BMO UK High Income pleads case for continuation

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