Growth beats income but both BMO Managed portfolios beat benchmark

Growth beats income but both BMO Managed portfolios beat benchmark – BMO Managed Portfolio Trust has published results for the year ended 31 May 2020. The NAV total return for an Income share was -7.3%, outperforming the All-Share Index which returned -11.2%. Growth shares did even better, with an NAV return of +1.5%.

Income share dividend

The dividend on the income shares rose by 2.5% to 6.1p. “A key challenge for the income portfolio in the financial year ahead will be income related and there may be some further dividend disappointments from equity related investment company holdings. There may also be some holdings which utilise revenue reserves in order to sustain dividend payments. It has been heartening that a number of investees have indicated they intend to maintain dividends at current levels. Also a good portion of the income portfolio’s revenue is generated from holdings in the “alternatives” sector which are less sensitive to economic conditions. In addition, BMO Managed Portfolio Trust now has a revenue reserve of approximately 68% of the current annual dividend cost, an important buffer for the dividend in challenging times and which can be used to support the dividend payment to Income shareholders if required. Accordingly, in the absence of unforeseen circumstances, it is the board’s current intention to at least maintain the total level of dividend to Income shareholders for the year to 31 May 2021.”

Growth Portfolio – Leaders and Laggards

An interesting common thread between all the top contributors to the performance of the Growth Portfolio is that they have been holdings for more than ten years which highlights the genuine long-term perspective that is taken with investment selections. Two key themes of secular growth were evident amongst the better performers from both Portfolios. First is biotechnology and healthcare where two specialist investment companies Biotech Growth Trust and Worldwide Healthcare Trust had share price gains of 68% and 40% respectively. Even before the COVID-19 pandemic the sector experienced strong performance due to a raft of successful clinical trials from emerging biotech companies and a surge in merger and acquisition activity aided by a constructive regulatory environment. With minimal impact on drug sales due to COVID-19 and a heightened awareness of the attractive growth characteristics of many healthcare companies they continued to outperform whilst the wider equity market was badly affected by the COVID-19 pandemic. Both trusts are managed by Orbimed who have built and developed the resources and experience to be a leading global healthcare investor.

The second theme of secular growth is the wider technology sector. Again, many companies in this sector were doing well pre COVID-19 but the government lockdowns and widespread working from home highlighted the importance of major technology to modern economies. Whether it be Amazon with home shopping, Netflix with home entertainment or Microsoft and their cloud business, many of these companies have prospered. Not only that but new areas are being developed with substantial addressable markets in security, gaming and transportation to name but a few. Key long-term holdings in the Portfolio have once again performed strongly: Polar Capital Technology Trust +48%, Scottish Mortgage Investment Trust +45%, Edinburgh Worldwide Investment Trust +35% and Allianz Technology Trust +33%.

One other holding, worthy of mention, which was a leading contributor last year and has continued to be this year with a 41% share price gain, is BH Macro. The investment company invests in the Brevan Howard Master Fund which is a hedge fund which specialises in taking advantage of movements in interest rates, currency and bond markets. It should be viewed as a defensive holding which often does well in a bear phase in equity markets. With heightened levels of volatility, the managers have been able to construct trades with attractive pricing and return outcomes.

Of the laggards the biggest share price decline was experienced by Schroder UK Public Private Trust (formerly Woodford Patient Capital Trust) at -62%. All the decline happened quickly in the early part of the financial year as a result of a saga of corporate mismanagement which has been well covered in detail by the financial media. The investment was clearly a mistake however because it was always perceived as high risk it was never a large holding and so the impact on overall performance from the Growth Portfolio was limited. The share price remains at a significant discount and despite all that has happened there remains much potential within certain large holdings within the portfolio. Under new managers, Schroders the chances of recovery have improved.

Whilst it appeared the avoidance of a “No Deal Brexit” followed by a conclusive election result in December had removed the pervasive uncertainty that had for a protracted period affected the UK stock market the onset of the COVID-19 pandemic caused renewed underperformance for UK equities. In addition to widening discounts amongst UK investment trusts those with sizeable exposure to smaller and medium sized companies relatively underperformed. Examples in the Portfolio were Lowland Investment Company -26%, Fidelity Special Values -26% and Henderson Opportunities Trust -23%.

Income Portfolio – Leaders and Laggards

As with the Growth Portfolio, exposure to a sector with secular growth characteristics has been a key factor behind the relative outperformance of the Income Portfolio. In this case it has been achieved through investment companies which are specialists in biotechnology and healthcare. Underlying companies which operate in these sectors (especially biotechnology) often do not pay dividends however the ability of investment companies to pay a dividend to shareholders from capital reserves permits these trusts to offer an attractive dividend yield to investment company shareholders. From an investment management standpoint this allows assets (in this case in biotechnology and healthcare with very attractive growth characteristics) to be included in an income portfolio. This has meant that the total return characteristics of the Portfolio have been differentiated and improved. The top three holdings in the Income Portfolio are investment companies which are specialists in these sectors. The best performer has been Swiss based HBM Healthcare Investments with a 50% gain in share price. HBM has achieved very strong performance over a number of years and has about 45% of its portfolio in later stage private companies or specialist funds with the rest in listed companies. Around 20% is invested in Emerging Market healthcare companies with the balance in the US (70%) and Europe (10%). Six of its top ten holdings were held as private companies and continue to be held after listing. Its main area of focus is biotechnology, diagnostics and medical technology. BB Healthcare Trust had a 23% gain in share price and was a top performer last year as well as repeating the feat this year. It has an unconstrained approach across the wider healthcare sector through a focussed list of 35 holdings with a bias to smaller and mid cap companies.

Another holding which was a top performer last year as well as this is Assura which could be viewed as a specialist healthcare property company. It is an owner of primary care properties leased mainly to General Practitioner Partnerships across the UK, typically for between 20 and 25 years. With the NHS as the ultimate guarantor of the lease payments of which many are indexed linked, the attractions of a very secure and rising stream of dividend payments at a time of great uncertainty helped the share price to a 28% gain.

Last year Civitas Social Housing REIT was one of the laggards in the Income Portfolio. However, this year the shares recovered strongly with a 35% rise. Last year the new regulator raised concerns over the financial strength of certain Housing Associations which enter into long-term leases with Civitas as the owner of the properties. This fear has proven unfounded and the Civitas management have done much work with some of the Housing Associations to improve their reporting systems. This has been recognised in the stock market and as with Assura the characteristics of long-term indexed linked leases in a sector not directly exposed to the general economy was behind the share price recovery.

Finally, it is good to see long time holding Bankers Investment Trust contribute with a 11% share price gain. This holding was in the Portfolio at inception in April 2008 and has consistently delivered good capital and income returns. It has increased the dividend for 53 consecutive years and with revenue reserves amounting to one year of dividend payments, as the Board has indicated it is prepared to use them to support the Company’s dividend policy, it is expected this will continue over the next year.

Looking at the laggards and similar to the Growth Portfolio a number of UK equity investment companies populated the list of underperformers. UK smaller company specialist Aberforth Split Level Income Trust experienced a 44% fall in share price. A value-based investment approach, which has been out of favour in the stock market, alongside gearing from a zero-dividend preference share and a focus on smaller companies combined to cause the underperformance. Perpetual Income and Growth Investment Trust was again amongst the laggards with a 28% share price decline and would have been sold however the Board opted to change the investment manager and it was decided to wait and see who the new investment manager would be before making a decision. Secure Income REIT had a 35% share price decline almost all of which happened in recent months as a result of the COVID-19 pandemic. The trust aims to buy a portfolio of assets with very long leases often with an index linked element to the rental charge. Unfortunately, one of the operators is Travelodge where Secure Income owns a portfolio of the best hotels but which under the current circumstances stopped paying rent due to the lockdown. The shares have fallen in expectation that the dividend will need to be rebased and the asset value written down.

BMPG / BMPI : Growth beats income but both BMO Managed portfolios beat benchmark

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