CT UK High Income: We’ve changed, and returns prove it

Fund manager, Philip Webster, has said the trust’s stronger run during the pandemic shows the changes he has made since taking over in 2017 are delivering a turnaround.

The pick-up in returns has come from a more concentrated portfolio, with big stakes in non-banking financials and a slug in tech ‘platform’ businesses to inject growth into the 5.6% yielding income strategy – positions which Webster intends to keep running during the recovery from Covid.

The portfolio delivered a net asset value (NAV) total return of 37.4% in the year to the end of March versus a 26.7% return for the FTSE All-Share benchmark. Holders of the ordinary ‘A’ shares – there are three effectively identical share classes, with around £130m of total assets – saw a slightly higher 40.8% return helped by a slight narrowing of their discount from just over 9% to under 8% to NAV.

According to Webster, the improved performance was ‘the culmination of several years of work we have done to differentiate the portfolio through concentration’, as the number of holdings have been halved to a little over 30 today.

‘We cut some of the weakest sectors pre-Covid, namely oil and gas and banks, increased the quality and contrarian views in the “mid-cap” space, added to our European exposure and upped our technology weight to around 10% of the portfolio,’ he added.

A total dividend of 5.3p per ordinary share has been paid, an increase of 1.7% on the previous year, supported by relatively resilient revenue from the underlying portfolio.

Investment income earned by the trust from its holdings fell by 22%. In the results, chairman John Evans said the board was ‘much encouraged’ by that outcome, given the scale of reduction in UK dividends in 2020, estimated by Link Group to be down 41.6% year on year.

The distribution was supported by revenue reserves – which investment trusts can use to top up dividend payments in fallow revenue years – which stood at 3.96p per share at the end of the financial year, or 75% of the dividend.

Wealth and asset managers were key contributors to the returns. Brewin Dolphin (BRW), Close Brothers (CBG) and Intermediate Capital Group (ICP), all around 4-5% positions, are the biggest overweights relative to the UK market.

Webster acknowledged the bounce that banks had seen recently, which he characterised as inevitable given how cheap they had become, rather than representing any improvement in their growth prospects. He believes the likes of Close Brothers can generate much higher returns while the shares remain good value.

‘The UK’s got fantastic mid-cap financial businesses where you can build what I think are the right qualities and sustainable competitive advantage,’ the fund manager said.

Leading names in the tech sleeve include Asos (ASC), 3.1% of the portfolio at the end of March, and Just Eat Takeaway (JET).

Webster said the former represented an underappreciated reopening play, given 30-40% is about ‘going out, dresses, fashion’, as opposed to leisurewear which has prospered during the pandemic. ‘My feeling is that’s got a lot of pent-up demand sitting there, as a business,’ he said.

For the likes of Just Eat, he acknowledged growth will moderate in the next six months as consumers return to eating out. But he pointed out the Anglo-Dutch business has, courtesy of Covid-19, effectively won a huge number of ‘sticky’ customers for free.

Webster also said the company was ahead of competitors on workers’ rights and is clearly doing down the ‘employment model’. He looked at rival Deliveroo (ROO) before its London listing earlier this year, but, like many other investors, was concerned about the business’s approach to the issue as well as its route to profitability, so decided to stay on the sidelines.

Whilst Webster says he does not forecast or provide an outlook, especially given the backdrop of the pandemic, he states that he is very happy with the shape of the portfolio, the names held and the value on offer. This is a clear signal of the potential returns seen in the holdings over the next 3 to 5 years.