The manager of the BMO UK High Income Trust told investors that he would own more tech stocks if he were not constrained by running an income product.
Philip Webster, who runs the £185m trust, said: “My stock-selection style means I don’t own the traditional income sectors. The pandemic has proven how weak these businesses models are in volatile times.
“I have always run decent exposures to technology. This is a space generally where they do not yield, so it's been an area where a lot of my peers have not had exposure.
“But these are the business models that have performed best during the downturn and have been contributors to performance: ASOS, most notably, which was about 5.5 per cent of the portfolio at one point in time.”
Webster said that ASOS has successfully pivoted its business to working-from-home apparel and fixed US stock inventories, which makes the company “well placed” to invest for growth in 2021 thanks to its net cash balance sheet.
The trust supported ASOS’s capital raising at £15 per share last year, which now trades at over £47 a share.
BMO UK High Income Trust also has exposure to ‘coronavirus winners’ like Delivery Hero and Just Eat, as well as some “quality cyclicals” that the manager believes will come out the other side of the pandemic stronger.
These included firms such as Close Brothers Group and Cairn Homes, of which the latter he said is seeing “a huge amount of supply coming out of the market currently”.
The manager noted that tech is an area that is very under owned within the UK equity income space, which is why he takes a barbell approach to investing in them.
“I have big positions in big yielders yielding 5 and 6 per cent. Big yielders but I believe sustainable ones,” he explained.
“Then I supplement that and use the gearing in a Just Eat, or a Delivery Hero or an ASOS at that end of the market.”
“In an unconstrained world, I’d own more of these. I think these are going to be very, very good businesses to own over the next three to five years, hence why I own them – but this is an income product.
“These businesses tend not to yield or don't yield. They will [yield] at some point in the future because they are market leaders, they are monopolistic in a lot of ways and they will kick off a lot of cash because capex [capital expenditure] requirements are pretty low, but they are not today.
“This is an ongoing and constant discussion that I have with the board and I have to I have to balance that.”
Since Webster took over BMO UK High Income Trust in March 2017, it has returned 2.33 per cent versus 11.15 per cent from the IT UK Equity Income sector and 8.07 per cent from the FTSE All Share benchmark.
Performance of trust vs sector and index under Webster
Source: FE Analytics
However, Webster conceded that at some points some of these technology stocks have gotten ahead of themselves and he must be mindful of where valuations are as well.
He said: “It's really fundamentally based: if I think things are good value and I have an opportunity and scope within the revenue account, I will continue to add to technology because I really think these are businesses we need to own.”
Likewise, if he sees opportunities across Europe to add names that can that yield, then he will also look at that as an opportunity.
One position the trust added recently was The Hut Group, which went public in September 2020. Webster described it as a “completely unique asset in the UK space”.
The firm is a direct-to-consumer (D2C) business with three divisions: beauty brand Lookfantastic, nutrition brand Myprotein and in-house D2C software provider Ingenuity.
Share price performance of The Hut Group since IPO
Source: FE Analytics
The firm’s beauty division is the market leader, according to Webster. “They’ve got a fantastic portal in the UK and they've recently acquired the market leader in the US dermstore.com for about $350 million, but this is still a hugely fragmented market,” he explained.
He believes the company has a lot of room to do mergers and acquisitions and continue to grow the businesses proposition over time.
The nutrition business sells mainly sports nutrition, protein powders and vitamin supplements.
Webster said: “They've been very smart in keeping this out of the US market, which is super competitive and where Amazon is really a seller of choice through that market. Now they control the direct to market channel. They focus mostly on UK, Europe and in particular Asia. I think Japan is now the largest market.
“The sales growth has been incredibly strong as they focused on the sort of wider gym door with around about 52 per cent of sales to male and 48 per cent to females, so it’s a very balanced business as a whole.”
However, he believes the real “jewel in the crown” is Ingenuity. “They do web hosting, web design, warehousing, distribution and they have an influencer network,” he explained.
“Customers like Nestle, Glaxo Consumer and Coke, have signed regional deals with them, where they will run your whole product portfolio from you from front to back end. What they're doing is a sort of land and expand model where they're growing websites, growing products and growing regions as they build out this product with their customers.”
Discussing the impact on dividends, he said the trust aims to keep the dividend flat and that the board will likely “want us to get back to a position where we would at least trying to cover or closer to covering the dividend before they would look to raise [the dividend] again”.
BMO UK High Income Trust currently pays 5.9 per cent yield and is trading at a 9 per cent discount to net asset value (NAV). It is 7 per cent geared and has ongoing charges of 0.96 per cent, according to the Association of Investment Companies (AIC).