CT UK High Income Trust: A solid choice for income and growth

This week’s investment trust pick is the CT UK High Income Trust [LON:CHI], a GBP125m fund managed by Columbia Threadneedle in the Association of Investment Companies’ UK Equity Income sector, a sector of 19 funds.

The fund appointed new manager David Moss just over a year ago, after incumbent Philip Webster left the fund management group.

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The company is benchmarked against the FTSE All-Share Index and aims to provide an attractive return to shareholders each year in the form of dividends and/or capital returns, together with prospects for capital growth. The manager’s objective is to achieve a total return in excess of the benchmark. In pursuit of this objective, the fund will invest predominantly in UK equities and equity-related securities of companies across the market capitalisation spectrum.

UK High Income’s share class split

The investment trust company is segmented into two share classes – ordinary shares and Class B shares – which pay the same level of quarterly cash distributions. Cash distributions on the Ordinary shares are paid as dividends.  Those on the B shares are paid by way of capital returns and therefore taxed under capital gains tax rules which can provide tax benefits to certain types of investors. The net asset value attributable to each class of shares is the same.

This article will focus on the Ordinary class shares.

Moss has been with Columbia Threadneedle since the acquisition of Canada’s BMO in 2021 by the American fund management group. Moss joined BMO in 1996 and is currently Columbia Threadneedle’s head of European Equities Research Strategy as well as being a fund manager for UK and European funds.

The fund holds around 40 stocks and the fund limits individual holdings to no more than 10% of the total portfolio at the time of purchase, with a soft ceiling of not exceeding 5% of assets under management (AUM). However, there are no restrictions on sector allocations. The fund can also invest up to 10% of AUM in European stocks, though at the moment has just a dash of European panache, with around three stocks. The manager makes the point that the European names that the fund holds derive a significant chunk of their revenues from the UK.

The manager has the mandate to lever up to 20% of the funds assets and can invest off-ex, but at least 85% of the fund has to be invested in listed companies. The fund has a large-cap bias, like many UK Equity Income funds, and about three-quarters of the fund in FTSE100 stocks. However, Moss will shop in other markets, with some exposure to FTSE250 stocks which has helped bump up capital returns.

Building dividend yields

CT UK High Income Trust is on the AIC’s Next Generation of Dividend Heroes list, a listing that catalogues investment trusts that have increased their dividends for at least ten years, but less than 20, with the High Income Trust increasing its dividends year-on-year for the last 11 years.

But the fund isn’t structured just to be a dividend factory.  It is also looking to offer its shareholders capital returns and, in this regard, the CT UK High Income Trust has done well over the last twelve months. The fund offered a return (on a share price total return basis to 13th December) of +25.8%, 12.3 percentage points ahead of the sector average.  This places the CT UK High Income Trust in first place in sector.

Over the longer term the fund also performed well, returning +39.7% against a sector average of +29.3%, placing it fourth in sector. Over 10 years the fund offered a +91.3% return, again just missing out on a podium finish in fourth place against a sector average of +88.2%. Moss was brought in to help pump up the fund’s total returns, something he’s been doing over the last year.

The fund delivered a dividend of 5.68%, fifth in a sector where the average dividend was 4.16%. It charges 1.08% on an ongoing basis.

The fund’s top five holdings as at 30th November 2024 were:

Source: Columbia Threadneedle

For investors seeking a blend of income and growth, the CT UK High Income Trust offers a compelling option. With its experienced management team and a focus on quality UK equities, the trust has consistently delivered attractive returns. While its large-cap bias might limit its upside potential in certain market conditions, its commitment to dividend growth and defensive stock selection makes it a suitable choice for those prioritising income and capital preservation.