CT UK Capital And Income Investment Trust Plc (CTUK) Earnings Call Transcript & Summary

Good afternoon, and welcome to the CT UK Capital And Income Investment Trust Plc Annual General Meeting. [Operator Instructions]. I would now like to hand you over to your Chair, Nicky McCabe.

Ladies and gentlemen, it's now 12:30 and time to start our meeting. I'd like to welcome you to the 33rd Annual General Meeting of CT U.K. Capital and Income Plc. Firstly, thank you for attending today, both in person and we have people watching remotely via the Investor Meet company platform. And I'd like to introduce my fellow directors, Patrick Firth, Dunke Afe, Christopher Metcalfe and John Blowers. The meeting has been properly convened, and the company secretary has advised that a quorum of members is present. Accordingly, I declare the meeting open. We'll begin with the presentation by our new fund manager, Dominic Younger. There will then be an opportunity for you to ask him questions. And following that, we'll conduct the formal business of the meeting, and I'd be grateful if questions related to the proposed resolutions be saved until that formal section of the meeting. Following the conclusion of the formal business, you're very welcome to join the Board, from manager and advisers for refreshments. But before I ask Dominic to present, I'd like to talk a little about our change of fund manager. With effect on first of January, our long-serving fund manager, Julian Cane stepped down from managing the company. Julian was our fund manager for a remarkable 28 years. Over that period, the NAV and share price total return outperformed our benchmark. And the company achieved and maintained our AIC dividend hero status, increasing our dividend every year for 32 years. On behalf of you, our shareholders and the Board, I thank Julian for his commitment to the long-term success of our company. Rest assured, Julian remains with Columbia Threadneedle Investments as a senior member of the U.K. equity team. So who is Dominic Younger, your fund manager? Dominic joined Columbia Threadneedle in 2013, he's a fund manager in the U.K. equities team. He's been working alongside Julian since 2021, managing the firm's U.K. equity income strategies. He's currently the portfolio manager of the CT UK Monthly Income Fund and the CT Monthly Extra Income Fund, and he has a BA in history from Newcastle University. The Board looks forward to working with Dominic in the years to come, and we feel very fortunate that we've been able to secure someone of his talent to manage the trust. So with no further ado, I'll hand over to Dominic. The Board is going to move around to the front, so we don't block the views of the slides, and we will then listen to Dominic.

Thank you very much, Nicky, and thanks to everyone for being here today. And yes, my name is Dominic Younger. I have the privilege of introducing myself today as the person taking up the reins from Julian who, as Nicky said, I'm pleased to say, still a very important member of the team here. And in fact, sits about a yard away from me, so not too far. This has been a period under Julian's management where he's not only outperformed the market, but also grown that dividend every year as it has done for each year of its existence. And that's a formidable legacy to be taking on. I generally think a compelling proposition for savers and income seekers alike. So as I look to the future, I think there's much to be optimistic about in both the portfolio and the broader U.K. equity space. And for me, the Investment Trust wrapper for these decades and centuries later, but its unique advantages, still represents a really interesting solution for savers and investors. So to today's agenda, over the next 20 minutes or so, we'll recap -- give a quick recap of the team here at CTI, the U.K. income platform and the deep resource we have at our disposal. We'll then shed some light on how we hunt the new ideas, why we do think we can offer you something different and both when it comes to capital and income. And we'll look at how that investment approach feeds through into portfolio positioning. And then give an idea of why we think despite the market delivering strong returns last year, there's plenty left on the table. After that, I'll be delighted to take your questions along with the Board. But first, a little bit about myself, Nicky touched on it. Although I'm new to the trust, I've spent a decade on the desk here at Threadneedle, at Columbia Threadneedle or including the last few years working closely with Julian. And within the U.K. equity income strategy, we're about kind of a GBP 6 billion strategy, and I run open-ended funds as well as a couple of institutional portfolios based around the CT UK Monthly Income Fund. What do I hope to achieve as I take this trust forward? It's my hope that the shareholders will continue to regard the trust as a go-to place to park hard-earned savings investments and see that capital increase over time while also receiving a sustainably growing income stream. And whether you take that income or harness the full power of compounding by reinvesting year-on-year, I'm excited, really excited to put my energies into taking the company forward over time. So let's just recap on what the trust has delivered for shareholders so far. And to me, there's no better place to start than with the dividend. And you can see that incredible record of income delivery there, only 13 other trusts able to match this kind of vintage and many of them paying deeply submarket yields. And we have grown this again in the latest financial year as we have every year since launch. As you can see, achieving a sizable 280% increase on that starting level of 3.4p dividend with our latest dividend of 13p. That compares pretty favorably to CPI over the same period, increasing 122%. And last year's payout of 13p amount to about 3.7% yield versus the market on 3.3%. So a decent premium you're getting to the U.K. market as well. And I want to be really clear here that there's no change to our ambitions here in extending that record and that will remain a core focus of the -- extending our record as an AIC dividend hero. And on the next slide, I think it's worth dwelling for a moment just on what the pound note implications of that performance has been over the years for an investor who had a notional GBP 1,000, which they invested at the inception of the trust. And here, we can show the steady accumulation of payouts in those dark blue bars. The light blue bar show what that same investor would have got had they just invested in an index fund and the orange bars in the savings account. So real wealth creation there in hard numbers. you would have been paid out GBP 2,631 in income versus just GBP 1,000 per the FTSE share. And of course, that is totally separate to the capital, which remains safely invested gradually compounding in step with the value of the underlying portfolio. So what would that look like in total return terms, if you've reinvested all the dividends, where you can see in the chart on the right-hand side here, looking back 25 years, you can see a picture of steady value creation and over that period of Julian's tenure, which stretches beyond that. And over the recent past, on the left-hand side, as we all know, the market of late has been unusually highly concentrated in terms of returns coming from a very narrow range of mega caps at the top of the index. This has proved less favorable than the near-term performance of the trust which although it did post double-digit returns in the financial year 2025, does tend to hunt lower down the FTSE 100 and into the FTSE 250, so headwinds there. But just by way of a quick snapshot, how things have planned out since I've taken over on the first of January, we delivered a NAV return of 9% to the end of February, broadly keeping pace with the pace of the market on 9.7%. Later on, I hope to give a sense of why we are cautiously optimistic about new tailwinds emerging for the trust and the broader opportunity set going forward. But we have every confidence in building on this multi-decade value creation story. Our investor approach in the long standard U.K. equity income franchise here at Threadneedle is grounded in core principles of investing based on fundamentals with a value-contrarian bias. And I'll touch on what that means in a moment. But first, a reminder of Columbia Threadneedle Investments, the group itself very, very steady and deeply resourced platform, about GBP 0.5 trillion of assets under management over 550 investment professionals, 18 countries, 200 research analysts. And on the U.K. desk, specifically, we are 1 of the best resource desks in the city. We've got 8 full-time portfolio managers, a 12 strong research pool of analysts, dedicated analysts to providing lots of research on European and U.K. companies. And the heritage of the team, I think it's also worth highlighting before -- since before we joined forces with the former F&C fund management business. it is a leading U.K. equity income franchise with a very well-defined DNA as bottom-up contrarian investors, and that's been decades in the making. In a minute, we'll look at how this heritage feeds through stock selection. So how do we try and do this? Well, the portfolio construction as a whole will always remain balanced, but for new positions. We look for the names that are out of favor with the market and have typically deeply underperformed. So that could be anything from up to and past 30% over a 3-year period relative to the market. And that can be for a range of reasons. But what that amounts to is a changed situation where unlike a business which is just turning out 10% earnings growth year-on-year-on-year, the market finds it much more difficult to price. This can be -- this is the kind of area where self-help is king, interrogating the financial statements over past cycles is really critical. And then also immersing yourself in the web personalities involved is critical. Often, it can mean finally middling businesses, priced as poor ones as well as finding those great businesses, prices, middling businesses. And that's our classic hunting ground for new ideas. And right now, we do see a lot of opportunity to go after. But to take the portfolio as a whole, that will always remain a bit of a balance because unlike more hair-shirted recovery fund, we'll tend to hold these recovery situations right through the evolution of their recoveries. So we put a lot of work into getting ahead of the market, feeling the benefits of that first flush of when the cash flows recover, the rating responds but also holding the company through to when it becomes big capital growth generator for years to come for the portfolio. So the portfolio will always be a balance of those vintages. And it's not just our portfolio construction where we're trying to do something different for you. It's in our dividend stream as well. I really like this chart because it means it brings out why the income stream, which we're generating is not just now an afterthought or an output for you as investors, it's a really vital part of our proposition for you, and we understand that. And what I want you to take away from this chart, which shows -- it shows the kind of the contributors in the portfolio by sector to the overall portfolio yield with some of the key companies underlying those sectors. And what I want to take -- you to take away is the resilient nature of a lot of the businesses in these categories, Aviva and Chesnara insurance companies, OSB, as you know, kind of specialty lender, Imperial Brands, tobacco company, Unilevers, another staple, Rentokil pest control company. GSK Pharma company. These are all businesses which are much less beholden to the ravages of the cycle than what you would see from the market dividend if you were to just buy a FTSE tracker. It's soap sellers, insurance sellers, beer brewers, drug makers versus a market yield where 40% of the entire market yield comes from the top 3 sectors, which are all very cyclical banks miners and oil companies versus the trust as only about 20% exposure to those. And in fact, if you take the top 30 contributors to the overall market yield, we are only exposed to about 1/3 of them. So I think what we're trying to deliver for you is something that looks a bit different. So turning to how this approach is already being put to work for you, the shareholders. I want to emphasize the high degree of continuity that will come from the handover from Julian to myself and the majority of the names that were in the portfolio before continue to drive returns for you and should do for years to come. The activity since taking over as centered around really tilting the portfolio in line with the refreshed contrarian approach but what has -- how has that played out in practice? Much of the work has been around flexing, waiting and exposures to fine-tune the trust for making the best of the period ahead as we see it. So there's been some names which we've reduced to take an example, OSB, specialist lenders has alone delivered a 480% return since the trust picked up the shares on float in 2014. But one that we -- that had become a very large part of the trust and we've looked to recycle a slice of those profits into names that we think can drive that performance in the years to come. Some of the positions we're existing, we've added to, to take the example of Rentokil we think a really interesting pest control business, 1 that we own already in the monthly income fund and I think is a really, really contrarian prospect. So we've taken the chance to build that up -- and then we've recycled some. So Experian, a credit scoring company, generally very highly regarded. The valuation reflected that when we chose to recycle it also low yield where we want to -- the choice we want to rotate in to enhance the yield of the portfolio. And of course, there's some new holdings in there as well. So how does this sort of shake out for the look of the overall portfolio? Well, there it is. Many of those names will be familiar as long-term holdings, Unilever, GlaxoSmithKline, London Metric, Rio Tinto, Smith & Nephew, Pearson. And then there's some new positions in there, as precision engineering company, IMI, there's tobacco name, Imperial Brands, Asian-focused bank, Standard Chartered. These are some of the very highest conviction ideas in our monthly income strategy. which I've started to introduce the trust and should begin to deliver in performance. And in terms of sector exposure, we'll look to always retain a balance and it will always be an output as of the stock level value opportunities we see. But as you can see, we think there's plenty to be interested in consumer discretionary, real estate staples, which have been deeply depressed levels and the use of source of funding versus hotter sectors globally. Now just touching on some of the key characteristics, we are focused conviction investors. So the number of holdings will stay in the range of 45 to 55. This allows us to back our conviction in size when we need to, while also leaving enough oxygen at the smaller end of the weighting range for newer or slightly higher risk investments to move the dial. Market cap is, of course, another factor we take into account in position sizing and the range of investments across the spectrum, as you can see, has a slight bias to what we often refer to as the lower 80 of the FTSE 100 and the top half of the FTSE 250. That said, we are -- if you take the weighted average of the market cap in the portfolio, it's about GBP 38 billion, which puts you kind of on the edge of the top 20 of the FTSE 100. So we -- this is a large cap strategy. And dividend yield on the portfolio are currently running at 3.6% on a backward-looking basis versus the market on 3%. Our best guess on a forward-looking basis of the underlying portfolio is not the trust, but the underlying portfolio is roughly about 3.8% versus the market on 3.2%. So a handy premium and one that you should expect us to continue to deliver. Next chart, this shows the geographic revenue exposure of both the market and the portfolio. And the key point here, which is one that you've heard from other U.K. managers is that the U.K. market does not equal the U.K. economy. We'll know this only 75% of revenues come from overseas in the U.K. market. We continue to be a very global market underpinned by world-class institutions and professional services. We have the benefit of unalienable property rights and the rule of law, which is surprisingly a scatter investment environment than it was a few years ago. And our exposure to the domestic economy and the portfolio is slightly higher than the market at about 40% of underlying revenues. And it's important to highlight, I think, that we've not gone out by a load of U.K. exposed companies, but it is somewhere where we see a lot of value. And we found opportunities to invest in market-leading businesses, which can -- the genuine market leaders can expand their own categories, Travis Perkins, Marks & Spencer, Land Securities, morgan Sindall, all brilliant businesses, which represent great value to us at the moment, which brings us more broadly to how we see the world at the moment. And I won't spend too long on these bullet points but it does seem clear to us that we are shifting to a new paradigm on both geopolitical and technological fronts. There's profound changes that will continue to wash through markets and a separate size mix shift, which I think is certainly of at least equal importance to this is one that has been playing out already for a couple of years, but I think has more to run is that we're still adjusting to the world where money costs money again. We're out of the 0 interest rate era, and we won't be going back anytime soon in our view. And I think the implications of that are still very profound. And we have started to see it play out in the stylistic trends where investors with a more of a quality or growth bias have found life a little bit harder over the last 2 or 3 years versus having had a very strong long run after the global financial crisis. And here on the left, I've charted a growth stock index, the MSCI World Growth Index versus the value stock index, both at a global level in the light blue line and a European including U.K. level in the dark blue line. And what that shows you is when the lines are going up, the growth style is outperforming. And you can see that incredible run from post-GFC, particularly in the dark blue line and see how that trend has started to really reverse over the last 2 or 3 years. And I mean there's all sorts of very sensible reasons for that, but higher borrowing costs have a lot to do with it. And a really simple one is that those far out cash flows of a growth business just worth less if you're discounting them at higher interest rate, which is what you need to do when the base rates are going up. And we think that the asset prices in certain markets still haven't really adjusted to that. And the chart on the right shows a similar picture where the so-called quality businesses. They have made hay for many years with the strong pricing power in particular and deep moats in a world of low nominal growth have found life a bit tougher. They took pricing too far post-COVID. We all saw how much more expensive consumer goods got because we're all stuck in size and didn't have anywhere else to go. And the valuation unwind from that is still playing out and through some adjustments to your portfolio, we expect to be right on the right side of that trend going forward. And in this destabilized environment more broadly, the attractions of the U.K. market do often tend to grow with our perfusion of slightly more old-fashioned, certainly lots of defensive old economy names, that's something I'm sure we can get on to. But the U.K.'s attractions, I think, are continuing to grow for a number of reasons even though we're often accused of not having those shiny tech-driven future-facing businesses. But what they are is tried and tested, and they generate predictable cash flows and typically operate in sectors of the market, which are out of favor. And I think that's really -- it's the perfect hunting ground for a U.K. income strategy. And that's why we feel like we're in the best place we can be to deliver for you guys here. And it's a hugely fertile hunting ground for contrarians, and there's lots of opportunities out there. So with this in mind, as we consider the starting points of where we are. I think these charts are a very good one. You've got the U.K. market on the left and the S&P, the U.S. equity index on the right. And this is looking back over 40 years and taking hundreds of starting points of saying what would be my average annual return over the next 10 years if I invested at this starting P/E. So taking the -- the U.S. current valuation, your implied annual return, so your return each year for the next 10 years, if you invested the S&P at this level is just barely above that line, that 0 line. And that's going back 40 years. The U.K., by contrast, is actually a surprisingly respectable 7.5%, which I think a lot of people wouldn't be too upset with if they got every year on average for the next 10 years. So that's -- we think that's a very good starting point. But ultimately, we're alive to the idea that what's going on in the U.K. does disproportionately impact people's perceptions of our market despite it being a very global market. But we think there are reasons to be more constructive on the U.K. than perhaps the Daily Mail headlines would have you believe. What we're not saying is we think the U.K. domestic economy will uncover some kind of economic miracle or suddenly take the edge in AI CapEx or development. But the critical point is that we don't need to for us to do really well from here. Why do we say that? Well, it's something, again, we'll be happy to get more into more detail in, but with borrowing costs edging down consumer and corporate balance sheets in retail and the multiplier effect from any substantial uptick in the housing construction market could yet underpin a very strong consumer-led recovery. And whisper it with Rachel Reeves hasn't put her fit in it for at least 3 months now. Now there absolutely is jeopardy out there, fiscal political, market-driven or White House-driven. You can pick your poison. But in the balance of probabilities, we feel cautiously optimistic to the setup for a lot of those domestically exposed names and the broader U.K. market as a whole. So just to close on our North Star of valuation, I think this chart, what we're trying to say is you haven't missed despite the 24% return of the market last year. But you may not be the only ones thinking about adding or increasing, otherwise increasing your exposure. We've seen M&A activity picking up. We've had the reopening of the IPO market after a long winter. And this is all boldened by the general course of monetary easing, economic recovery, more rate cuts supporting the easing of credit conditions, housing market starting to show signs of life and consumer confidence, showing the ingredients for a much-needed rebound. This will support strong ongoing shareholder returns, the U.K. market, if you combine the dividend yield and share buyback yield already delivers the highest shareholder return yield, if you like, of any developed markets and all building blocks for our optimism that your company is in good shape and fighting fit for the year ahead and we have the resources and the opportunity to take that forward and keep on delivering on our core objectives, keep on growing that dividend year-on-year and hopefully continue to be what we think will be a compelling proposition for savers and income seekers alike. So I'll stop talking there. I hope that's given you a flavor. I'll give the board a chance to come and sit back down and I'm delighted to take any questions.

Thank you to the Board. That concludes today's meeting and good afternoon to you all.