Retaining a focus on fundamentals 
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Retaining a focus on fundamentals 

Political noise is a distraction in any market environment but in an election year the clamour is heightened. So, in February we had one of our holdings, Nat West Bank, reporting its biggest annual profit since the 2007 financial crisis but in the days that followed seeing its share price fall on speculation of a possible windfall tax on the banking sector. As an investor, sometimes it feels like you can’t win.
Nat West is a fairly recent addition to the portfolio. Against the backdrop of a slow economy (the UK is now officially in a technical recession), ensuring the portfolio had diversified and sustainable sources of income was an important goal. At the time we bought Nat West it was underperforming its peers. Sentiment had taken a bit of battering following the politicised ousting of its chief executive, Alison Rose, as a result of the Nigel Farage/Coutts controversy. We took advantage of the favourable share price, looking past the difficulties prevailing at that time, confident that the underlying business was fundamentally sound and well run. The recent results are testimony to that assessment.
As well as better-than-expected results, the bank delivered an uplift in its final dividend, from 10p to 11.5p1. An annual dividend yield of over 7% is very welcome given the UK’s economic backdrop. Some of the uncertainty about the bank’s leadership has also been removed with confirmation that interim boss Paul Thwaite will become its permanent chief executive. The UK lender, which is still 35% government owned, following 2008’s £45.5bn public rescue, now waits to see when the government instigates the public sale of its shares. Again, due to this being an election year, the timing will unlikely be without a political hullabaloo. As investors, we’ll hunker down on the fundamentals and wait for the noise to pass.

An eye to the future

Another relatively recent entrant to the portfolio (we initiated a position in July) was Smurfit Kappa, one of the world’s largest manufacturers of paper and cardboard packaging. In early September the Dublin-headquartered company announced it planned to merge with US firm WestRock. The combined business will have an annual turnover of around US $34bn (£27bn)2. We purchased Smurfit based on its prospects, after the inevitable dip in on-line delivery traffic following the easing of Covid restrictions and consumers pent up desire to get back into shops and the long-term tailwind of plastic packaging substitution. Over the long run we were comfortable that on-line shopping was a trend here to stay and that as a leader in its field, Smurfit was well placed to capture further market share, deliver good income and capital growth. We are pleased to see that a recovery is emerging in Europe and better returns are also being attained by its business in the US.

The potential to soar again

Engine maker Rolls-Royce was another casualty of Covid waiting for a turnaround. Mismanaged for several years (in our view) and hurt by a temporary but extended interruption to flight travel, the company was waiting to re-find its way. That recovery is now beginning to gain traction. BP veteran Tufan Erginbilgic, who assumed the role of CEO in January 2023, was an essential piece of the jigsaw. He has settled in, engine demand has increased and, more importantly, flight hours in the air have risen alongside the pick-up in consumer demand. With much of Rolls’ income earned through maintenance contracts, this is an important development. In the field of large aircraft engines, Rolls-Royce operates in a select market with only a handful of significant competitors.
Another, even more niche, area of engineering in the company’s portfolio is small modular reactors (SMRs). In the rising quest for clean, efficient, energy sources this is a valuable feather in its cap. SMRs are designed to be built in a factory, shipped to operational sites for installation and then used to power buildings or other commercial operations. We have to wait and see how production expands but the potential is there for the company to become a world leader in this space.

Sitting out the politics

It’s always a balancing act but compared to this time last year we believe the portfolio has more diversified sources of income. This has allowed us to cover the dividend with income earned by the Trust. This adjustment has also given us room to purchase select companies that are not yet delivering a high yield but which have the potential to do so, alongside achieving capital growth. In a politically uncertain world, sometimes it’s enough to settle for.

1 NatWest Group plc 2023 Annual Report and Accounts. Issued 15 February 2024.
2 Reuters. 12 September 2023.

8 March 2024
David Moss
David Moss
Portfolio Manager, CT UK High Income Trust
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Retaining a focus on fundamentals 

Important information

© 2024 Columbia Threadneedle Investments. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

 

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

 

CT UK High Income Investment Trust is an investment trust and its Ordinary Shares are traded on the main market of the London Stock Exchange.

 

English language copies of the key information document (KID) can be obtained from Columbia Threadneedle Investments, Exchange House, Primrose Street, London EC2A 2NY, telephone: Client Services on 0044 (0)20 7011 4444, email: [email protected] or electronically at www.columbiathreadneedle.com. Please read before taking any investment decision.

 

The information provided does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. An investment may not be suitable for all investors and independent professional advice, including tax advice, should be sought where appropriate. The manager has the right to terminate the arrangements made for marketing.

 

FTSE International Limited (“FTSE”) © FTSE 2024. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

 

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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Important information

© 2024 Columbia Threadneedle Investments. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

 

This financial promotion is issued for marketing and information purposes only by Columbia Threadneedle Investments in the UK.

 

CT UK High Income Investment Trust is an investment trust and its Ordinary Shares are traded on the main market of the London Stock Exchange.

 

English language copies of the key information document (KID) can be obtained from Columbia Threadneedle Investments, Exchange House, Primrose Street, London EC2A 2NY, telephone: Client Services on 0044 (0)20 7011 4444, email: [email protected] or electronically at www.columbiathreadneedle.com. Please read before taking any investment decision.

 

The information provided does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in the Funds. An investment may not be suitable for all investors and independent professional advice, including tax advice, should be sought where appropriate. The manager has the right to terminate the arrangements made for marketing.

 

FTSE International Limited (“FTSE”) © FTSE 2024. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

 

Financial promotions are issued for marketing and information purposes; in the United Kingdom by Columbia Threadneedle Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EEA by Columbia Threadneedle Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited. In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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