BMO Managed Portfolio

With Income and Growth shares, the BMO Managed portfolio offers different solutions to investors with different objectives through investment in a diversified portfolio of investment companies...

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This is a non-independent marketing communication commissioned by BMO Managed Portfolio. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

BMO Managed Portfolio

Summary

BMO Managed Portfolio Trust has two distinct share classes: Income shares (BMPI) and Growth shares (BMPG), each with discrete investment portfolios. As their names denote, these portfolios are managed separately with differing investment objectives.

Both strategies are managed by Peter Hewitt, who seeks to balance exposure to a variety of investment companies where he believes there are strong long-term management processes and identifiable and distinct strategies. A total-return mindset is adopted with regard to returns, and some downside protection in more adverse market conditions is desired whilst seeking to ensure the portfolios are exposed to long-term secular growth trends, as we detail under Portfolio. Peter will also seek to balance a variety of stylistic investment approaches and assets within both portfolios, though both are likely to be tilted in alignment with Peter’s view of market trends. This is based on a medium- to long-term view, and portfolio turnover is generally low.

This investment trust offers shareholders the ability once a year to convert shares in either share class to the other without incurring UK capital-gains tax, stamp duty, dealing charges or the ‘spread’. This dual-share-class structure is also utilised to enhance the income of BMPI, and the capital growth prospects of BMPG, through a mechanism which substitutes net income from BMPG for capital from BMPI, as we detail under Dividend.

Recent performance for both share classes has been very strong, driven in large part by exposure to technology, healthcare and other secular-growth-focussed strategies, as detailed under Performance. As we discuss under Discount, the share prices of both portfolios have typically traded within a narrow band around NAV.

Kepler View

Performance has been exceptional in the past year. Whilst the Income portfolio has seen the NAV fall slightly, this is hardly surprising given the market backdrop over this time period, and Peter has commented that income generation looks robust. The income-transfer mechanism continues to support the level of distribution by the Income shares, and the progressive dividend objective of the board looks reasonably secure at a time when equity-market dividends look extremely precarious.

Having just experienced its best ever period of relative performance, it is reasonable to ask whether the Growth portfolio can replicate this in the immediate future. Statistically, this is unlikely. However, it is worth evaluating what has driven this performance, which has been the massive dispersion in equity-market returns by style.

The Bank of International Settlements has highlighted that there are presently much greater than usual ‘tail risks’ for both inflationary and deflationary outcomes. We believe the outperformance of secular growth themes, which strongly boosted BMPG’s returns, is a reflection of market expectation of these themes, but there are signs that beneficiaries of an inflationary outcome (commodities) are starting to outperform.

If this extends and broadens, BMPG could struggle in the short term, but the manager has noted that he is alert to such risks and will adjust the portfolio if there is evidence of sustained inflationary pressures. We think such an approach is in keeping with the long-term approach which has delivered good long-term returns.

Bull Bear
Strong long- and short-term returns on an absolute and relative basis
Rising inflation expectations would, in the short term, be a headwind to returns relative to the benchmark
Income shares offer a high yield of c. 5.1% covered by income on a trailing basis
May not suit investors who wish to control their own asset allocation
Share-conversion facility offers tax-efficient ability to adjust to different portfolio requirements
Gearing in BMPI can exacerbate downside as well as adding to upside

Portfolio

BMO Managed Portfolio Trust has two separate share classes – Income shares (BMPI) and Growth shares (BMPG) – each with separate investment portfolios. These share classes have differing objectives, as their names would suggest, and relatively low commonality of holdings. However, both operate on a fund-of-investment companies basis, selecting a diverse array of holdings the manager believes offers good long-term prospects. Managed by Peter Hewitt, the dual-share-class structure is utilised to enhance both distributions to BMPI investors and growth prospects to BMPG investors.

This is achieved by transferring to BMPI any net income generated within BMPG, with BMPI then returning an equivalent level of capital to BMPG. Effectively this allows the net income which has been generated in the Growth portfolio to be automatically reinvested as capital. This could be viewed as similar to an ‘accumulation’ unit of an open-ended fund, something not typically available in investment trusts. For investors, this has the benefit of avoiding potential dealing fees, stamp duty and the bid-offer ‘spread’ which they would typically incur if they were to more conventionally reinvest dividends into additional shares in BMPG.

The dual-share-class structure of the trust is further utilised to allow shareholders annually to convert their shareholdings between BMPI and BMPG. These conversions can be undertaken without incurring any UK capital-gains tax, stamp duty, dealing charges or dealing spreads, with the trust meeting all administrative costs. To illustrate how this might work, an investor holding shares in BMPG may, upon approaching retirement, look to switch the focus of their portfolio to income generation. This conversion facility allows them to convert some or all of their BMPG shares to BMPI shares without incurring UK capital-gains tax.

Both portfolios invest across a range of investment companies which themselves cover a broad range of geographies, sectors and management groups. Although both BMPI and BMPG are benchmarked against the FTSE All-Share, this is more of a reflection of the UK domicile of the vast majority of shareholders, and Peter looks for opportunities across the globe.

He seeks to do so through investment in investment companies where he believes there are identifiable investment processes and portfolio characteristics which lend themselves towards long-term returns. Peter also looks to identify situations where the interests of the underlying managers are aligned with those of shareholders, and to hold positions for the long term. In the case of alignment of managers’ interests with those of shareholders, this can be clearly seen in the small holding in Schroder UK Public Private Trust. Peter notes that he expects little return from this holding in the near term, but with the new manager (Schroders) effectively earning no fees until the NAV reaches 77p per share (from a current level of c. 46p), Schroders is clearly incentivised to deliver returns to shareholders.

This focus on identifying holdings for the long term has led to low turnover this year, which has itself benefitted performance. Both BMPI and BMPG have benefitted in recent months from Peter ‘running his winners’, with notable and sustained contributions from outperformance in technology and healthcare investment companies helping both BMPI and BMPG to achieve significant outperformance themselves. BMPI and BMPG both retain significant exposure to ‘structural’ growth opportunities, as can be seen in their respective top ten holdings. Even ostensibly ‘global’ holdings such as Monks Investment Trust or Mid Wynd International Investment Trust are strongly exposed to themes of secular growth.

Low turnover this year is reflective of the general portfolio-management approach, which emphasises longer-term holding outlooks. At present, the majority of the top ten positions in either portfolio are long-standing positions initiated by Peter several years ago.

BMPI's Top 10 holdings as at 31 July 2020

Holding

%

Sector
BB Healthcare

4.3

Biotechnology & Healthcare
HBM Healthcare Investments

4.1

Biotechnology & Healthcare
BB Biotech

3.8

Biotechnology & Healthcare
Scottish American Investment

3.6

Global Equity Income
JPMorgan Global Growth & Income

3.5

Global Equity Income
3i

3.5

Infrastructure
Hipgnosis Songs

3.5

Tech, Media & Telecoms
Law Debenture Corp

3.3

Global
The Bankers IT

3.1

Global
Civitas Social Housing REIT

3.0

Property Specialist
Total:

35.7


Source: BMO

BMPG's top ten holdings as at 31 July 2020

Holding

%

Sector
Monks IT

4.7

Global
Allianz Technology

4.6

Tech, Media and Telecoms
Polar Capital Technology

4.2

Tech, Media and Telecoms
Scottish Mortgage IT

3.8

Global
BH Macro

3.7

Hedge Funds
Worldwide Healthcare

3.7

Biotechnology & Healthcare
HgCapital

3.0

Private Equity
Mid Wynd IT

3.0

Global
Herald Investment Trust

2.8

Small Media, Comms & IT Cos.
Impax Environmental

2.8

Environmental
Total:

36.3



Source: BMO

What can also be seen from these top ten holdings, however, is the continued exposure to a variety of diversified and often protective strategies. In the case of BMPI, diversification is generally focussed on ensuring the sources of income come from differentiated and lowly correlated or uncorrelated assets. This leads to the inclusion of holdings such as Hipgnosis Songs (SONG), an investment company focussed on acquiring the songwriting rights to extensive catalogues of music. Once the investment company has acquired the rights to these songs, there is a significant internal focus on managing the assets to maximise streaming. This process also looks to generate other sources of income from the licensing of particular songs, increasing the revenue generated from these songs. Clearly the performance of these assets are likely to be lowly correlated to wider equity-market movements, except in an extreme economic Armageddon-like scenario. Although SONG’s shares were caught up in the indiscriminate market sell-off of March 2020, the operating environment for SONG and its NAV were unaffected, and in fact NAV was revised upwards towards the end of March. By extension, SONG has continued to contribute steady dividends without impairment, which remain well covered even as dividends from equity markets have come under severe pressure.

The market sell-off also gave Peter the opportunity to introduce other lowly correlated holdings to BMPI at attractive entry yields (or to add to similar existing holdings in BMPI). His decisions included adding to Impact Healthcare REIT (IHR), an owner of care homes which are let to operators. IHR’s shares were sharply sold off in the March panic, despite there having been no signs of severe impairments to the dividend or indications of financial stress from the underlying operators. Peter was therefore able to add to the position at a wide discount to NAV. Similar dynamics were at play in his decision to introduce positions in BioPharma Credit (BPCR) and Supermarket Income REIT (SUPR), both of which offered premium levels of yield to equity-income products with relatively low risks of impairment.

Whilst a slight majority of BMPI remains invested in equity-income products, this exposure is itself diversified by geography. Holdings such as CC Japan Income & Growth Trust (CCJI), for example, offer exposure to a Japanese market where dividends have remained resilient relative to the rest of the world. Many of these equity-income investment companies themselves tend to offer a mixture of growth and income, but BMPI also holds exposure to explicitly growth-oriented strategies such as Monks Investment Trust (MNKS) and Mercantile Investment Trust (MRC), the latter introduced in the last 12 months in place of the Temple Bar and Majedie investment trusts. The decision to exit Temple Bar preceded the recent move to put the management contract out to tender, and was instead driven by concerns over the underlying dividends, with the trust having significant exposure to a variety of suddenly vulnerable sectors.

BMPI: Geographic exposure (look-through basis) as at 31/07/2020

Source: BMO

Typically, both BMPI and BMPG will hold a minimum of around 25 different positions. Presently, both hold around 40 positions. The approach does place an emphasis on diversification, not through merely adding related strategies (and potentially diluting performance), but through exposure to a variety of managers with different investment approaches. Peter then looks to ensure the broader tilt of the portfolio is stylistically aligned with his own expectations, and generally allows position sizes to alter naturally through relative performance.

In this regard, both BMPI’s and BMPG’s equity exposure remains weighted primarily towards growth strategies. When we met with Peter, he noted that he ultimately believes there could be a future shift in performance trends in favour of value at the expense of growth, but that he does not yet believe this moment has arrived. He does not believe a mere disparity in relative valuations will be enough to drive this shift in relative style momentum, and that instead it will be dependent on the broader macroeconomic environment. Ultimately, Peter believes value outperformance will be driven by a sustained inflationary environment. In the near term, he believes that the COVID-19 pandemic-related economic shutdown has created too great a level of destruction in economic demand, and has damaged labour markets sufficiently that an immediate turn to an inflationary environment is unlikely. However, ultimately he expects this to materialise, driven by fiscal policy from governments across the world; having ‘discovered’ that they can borrow such great sums of money so cheaply, he does not believe a return to fiscal probity is likely, and that ultimately this creation of money will feed through into the economy and create inflation.

Both BMPI and BMPG continue to hold a variety of strategies, and both hold exposure to ‘value’ strategies which would benefit in such an environment. Peter notes that when he believes we are experiencing a sustained inflationary environment, BMPG in particular is likely to see higher turnover than usual as he shifts the portfolio to hold greater weightings to ‘value’ strategies whilst reducing his ‘growth’ exposure. However, he also notes that there could well be many false signals that such an environment has commenced, and he accepts that he is likely to miss the initial move in value’s favour whilst he awaits confirmation. This remains in line with the focus on medium- to long-term returns, accepting that some tactical market fluctuations may periodically present relative headwinds to his portfolios. However, Peter continues for this time to hold long-term positions in trusts such as Allianz Technology Trust, Polar Capital Technology Trust and Scottish Mortgage Investment Trust, all of which he has held for many years and all of which have produced returns which are multiples of his original investment. However, he remains cognisant of style risk after recent outperformance, and the portfolios remain tilted towards less ‘pure’ plays: for example, BMPG has a greater weighting to Monks Investment Trust than to Scottish Mortgage. These holdings share a significant amount of shareholding commonality, and a similar approach, but Monks can be understood as a slightly less high-beta play.

Whilst BMPG retains significant exposure to a variety of high-growth strategies, this remains balanced somewhat by the protective strategies which Peter looks to structurally incorporate into the portfolio, with c. 15% presently held in protective strategies and a further c. 2% in cash. These can take a variety of forms, from relatively conventional multi-asset investment companies such as Personal Assets Trust (PNL), to BH Macro (BHMG). The latter is a long-standing position in BMPG, having been introduced to the portfolio around 12 years ago. It offers a highly uncorrelated returns structure, with the underlying traders able to benefit from market fluctuations in either direction across a variety of asset classes in G7 markets.

Returns from BH Macro often tend to be fairly flat, but can offer potentially explosive upside in periods of elevated market volatility (this is a feature arising from the underlying management strategy, where traders look to exploit asymmetric opportunities in interest rates, bonds and foreign-exchange markets). Such was the case in recent months, with BH Macro generating very strong returns in Q1 2020. The combination of strong returns from the largest protective strategy with outperformance from ‘risk-on’ strategies has helped drive the strongest period of relative performance in BMPG’s history.

BMPG: Geographic exposure (look-through basis) as at 31/07/2020

Source: BMO

Gearing

BMPI and BMPG are separate share classes for the same investment company, with the board determining the boundaries of the gearing policy. This limits the maximum anticipated gearing to c. 50% of total assets, but the board has noted it would not ordinarily expect gearing to exceed 20% of total assets.

Although Peter has the ability to gear each portfolio, in practice he has utilised a relatively modest level of gearing in BMPI, and ordinarily does not employ gearing in BMPG.

Gearing in BMPI is presently c. 6.9%. This is undertaken through a £5m borrowing facility with RBS, fixed at a lending rate of 2% until February 2022. Peter will alter the net gearing levels through adjustments to the cash position. He commonly utilises a modest level of net gearing within BMPI to boost the income yield when the cost of borrowing is below that of yields available, a gearing level which Peter believes to be sustainable and well covered. This £5m facility currently amounts to c. 8.1% of the Income portfolio’s assets (as at 10/08/2020).

BMPG remains ungeared, though the manager notes that the underlying investment companies typically are geared themselves. On occasion, Peter will look to introduce gearing to BMPG if he believes there is a truly exceptional investing opportunity that has arisen, but he has opted to keep BMPG itself ungeared at this time in light of the ongoing economic uncertainty and the exposure to gearing through the underlying assets.

Returns

BMPI and BMPG have both outperformed the benchmark and Morningstar Flexible Investment peer group over the ten years to 07/08/2020. BMPI has delivered NAV and share-price returns of c. 107.2% and c. 100.6% respectively over this period, whilst BMPG has delivered NAV and share-price returns of c. 151.7% and c. 142.4% respectively. Over this same period, the Morningstar peer group has delivered average NAV and share-price returns of 106.5% and 90.5% respectively, whilst the benchmark FTSE All-Share Index (as represented by a passive index-tracking product) has returned c. 67.7%.

We believe that BMPI’s and BMPG’s performances should primarily be considered in absolute terms, and that relative considerations should be in regard to the benchmark index and not the peer group. The Morningstar Flexible Investment sector which the trust sits within is a composite of a highly disparate variety of strategies with different investment focuses. Whilst, as noted under the Portfolio section, both BMPI and BMPG differentiate significantly from the benchmark FTSE All-Share, the focus of each share class is as a flexible and primarily equity-focussed solution for UK investors.

BMPI and BMPG: Ten-year returns vs benchmark

Source: Morningstar

Although the previous 12 months have contributed significantly to this outperformance, relative performance has been fairly consistently strong in recent years, with both BMPI and BMPG outperforming in seven out of ten calendar years (including 2020 YTD). Long-standing holdings in investment companies such as Scottish Mortgage, Allianz Technology Trust and Polar Capital Technology Trust (amongst others) have consistently contributed to relative and absolute returns. 2016, one of only two calendar years in which BMPI and BMPG both underperformed, was characterised by strong outperformance in highly cyclical areas such as mining companies which were at the time associated with ‘deep value’ strategies. This was to the relative detriment of some of the long-standing secular growth themes in the portfolios (although these still typically made absolute gains).

BMPI and BMPG: Calendar-year NAV returns vs benchmark

Source: Morningstar

The previous 12 months have been a strong period of relative performance for BMPI, and an exceptionally strong period for BMPG. Whilst BMPI has suffered NAV and share-price losses of c. -3.9% and -5.7% respectively in the 12 months to 07/08/2020, this has still represented significant outperformance of the benchmark index, which returned c. -11.7%. Peer-group average NAV returns were in line with BMPI’s at c. -3.9%, though peer-group average share-price performance was significantly weaker at c. -12.3%.

BMPI has benefitted in particular from exposure to secular growth trends such as healthcare, where revaluations have in many cases been catalysed by the ongoing COVID-19 pandemic. Although BMPI’s NAV returns have been negative over this 12-month period, they still represent significant outperformance of the benchmark index of c. 7.8%.

BMPG has strongly outperformed over this period, delivering NAV and share-price returns of c. 6.9% and c. 6.7% respectively. This represents relative NAV outperformance to the benchmark of c. 18.7%. As with the current macroeconomic market and societal environment, the current level of BMPG outperformance is essentially unprecedented compared with the level of outperformance seen over the previous ten years. Returns have been boosted by stylistic tilts towards global growth trends via holdings in a variety of technology and tech-related investment companies, and also through some of the portfolio ‘hedges’, most notably BH Macro. The decision to continue to tilt the portfolio towards ‘growth’ strategies whilst maintaining significant protective exposure has benefitted returns significantly.

BMPG has generated an annualised tracking error of c. 6.1 to the benchmark over the previous ten years (Source: Morningstar), and this level of outperformance is thus a three-standard-deviation event. This is also broadly true when we look at the median level of annual outperformance BMPG has generated over the ten-year period and the standard deviation of these relative returns (with a median level of c. 3.1% outperformance p.a., and a standard deviation of returns of c. 5.3%). Whilst enormously satisfying to shareholders, some short-term caution is thus perhaps warranted.

As we have noted under the Portfolio section, whilst gratified, Peter has himself been surprised by the extent of outperformance and has been continually evaluating the holdings and their weightings. Focussing on the medium to long term, Peter believes that BMPG remains invested appropriately and is not minded to significantly shift the portfolio’s relative risk exposures. However, he is cognisant of the potential drivers of style rotation within equity markets and, by extension, the investment companies he holds, and remains alert to signals that a sustainable shift in market environment has occurred. As we have discussed under Kepler View, we think there are likely to be very binary outcomes to the current environment, and that this approach remains sensible.

BMPI and BMPG: Rolling 12-month NAV returns relative to benchmark

Source: Morningstar

Of interest in the recent market environment has been the relative performance of the two share classes in a period of market drawdown. Typically the Income portfolio (BMPI) has tended to exhibit relatively more defensive characteristics than the Growth portfolio (BMPG), though the protective strategies incorporated into both have fairly consistently helped them to offset wider downside pressures from the market. In the most recent market drawdown, relatively high exposure to technology and other secular growth assets – widely perceived as the structural winners from societal developments and changes following the COVID-19 pandemic – helped both share classes because these assets tended to outperform on both the downside and in the subsequent recovery. The greater exposure held to these assets in BMPG relative to BMPI has in large part accounted for the reversal in the historical norm of BMPI outperformance to the downside.

BMPI and BMPG: Drawdown relative to benchmark

Source: Morningstar

Dividend

BMPI shares currently (as at 07/08/2020) yield c. 5.1% on a historic basis. This is based upon the financial year (FY) 2020 full-year dividend of 6.1p per Income share. This represents c. 2.5% growth on the FY 2019 dividend. The board is keen to ensure BMPI shares display a progressive dividend policy from ‘core’ dividends, and BMPI has seen nine consecutive years of increases from regular dividends. A special dividend of 0.8p per Income share in FY 2018, resulting from a special dividend from 3i, optically skewed the aim for a continually progressive dividend policy, but regular dividends have progressively increased whilst the trust has continued to accrue greater revenue reserves.

BMPI has revenue reserves amounting to c. 0.68x the FY 2020 dividend. Even in the challenging dividend environment of 2020 thus far, the trust has been able to boost its revenue reserves. Many of the underlying investment companies BMPI is invested in have strong dividend cover and revenue reserves themselves, but the accumulated revenue reserves should help to support any shortfall from the challenging macroeconomic environment in the near term. Accounting for the transfer of income from BMPG, the dividend has consistently remained covered in recent years.

BMPI: Dividend and revenue return per share

Source: BMO

As we have noted under the Portfolio section, BMPG shares do not pay dividends. Any net income generated by BMPG is transferred to BMPI, which in turn transfers back a commensurate level of capital to BMPG.

We estimate that this transfer accounted for c. 1.46p per share of the dividend in the 2020 financial year ending 31/05/2020. Revenue returns per share for BMPI were 6.69p per share including this transfer. The dividend thus remains covered when the transfer of income is accounted for. Whilst this means that BMPI is paying an uncovered dividend in a practical sense (as the income from BMPI does not entirely cover the dividend paid), the transfer mechanism is a structural aspect of the trust and the dividend should be covered when this transfer is included. As can be seen in the chart below, the contribution of the income transfer from BMPG has been relatively consistent in recent years.

BMPI: BMPG contributions to dividend

Source: BMO

Management

The trust is managed by Peter Hewitt on behalf of BMO Global Asset Management. Peter is an investment-trust specialist with over 35 years’ investment experience. Peter has managed the trust’s assets since 2002; prior to the trust being formed in April 2008, these were held in the F&C investment trust managed portfolio service. Back-office functions are managed by BMO, including operational matters and risk assessments. Top-down views are formed by the manager and drawn from his discussions with the wider BMO multi-asset team, including the large open-ended multi-manager team. Peter takes part in regular meetings on the broader market and macro environment, and inputs his own conclusions into the trust’s portfolio construction.

Discount

BMPI presently trades on a discount of c. 0.1%, whilst BMPG is on a premium of c. 0.3% of NAV (as at 07/08/2020). The board aims, under ordinary circumstances, to ensure that the share price for either share class does not trade at more than a 5% discount to NAV, and has a policy of looking to buy back shares to prevent this.

In practice, this has proven largely unnecessary in recent years, with BMPI and BMPG shares trading at a discount of greater than 5% to NAV on only 0.5% and 0.2% of occasions in the five years to 07/08/2020. Shares are only bought back at a discount to NAV. However, BMPI and BMPG both have very substantial special reserves of c. £19.1m and £17.0m respectively. This special reserve cannot be distributed as dividends, but can be utilised to fund share buy backs .

The board also seeks to grow the trust through issuance of shares in either share class when they trade at a premium to NAV, and the board has been active in this regard in the past year.

Issuance and repurchases are also used to lower discount volatility. Over the course of the previous financial year to 31/05/2020 the board issued a total of c. 2.7m new shares in BMPI at a weighted average premium to NAV of c. 1.6%.

It also repurchased some shares in BMPG in the previous financial year, though net issuance remained positive at c. 295,000 shares at a weighted average premium to NAV of c. 1.7%. This net figure included the board repurchasing c. 200,000 BMPG shares at an average discount of c. 3% to NAV in the previous financial year to 31/05/2020, subsequently reselling them at a premium to NAV of c. 1.6%.

Subsequently, in the current financial year since 31/05/2020 to 07/08/2020, the board has issued a further 400,000 shares in BMPI and 150,000 shares in BMPG at weighted average premiums of c. 2.0% each (Source: London Stock Exchange).


When the trust was launched, c. 95% of eligible retail share plans (with assets totalling c. £42m) opted to roll over into the trust, giving an initial shareholder register of over 2,250 shareholders. Whilst the shareholder register is thus ostensibly dominated by the BMO retail savings plan, in reality this is spread amongst a large number of individual accounts.

The current discount of BMPI puts the shares trading below its five-year median premium of c. 1.1%. Some extreme discount volatility was seen in mid-March, primarily as a result of underlying market conditions. However, this was anomalous relative to the portfolio’s history and a result of the extreme market activity at this time. As we can see in the chart below, BMPI has typically traded in a relatively narrow band around the reported NAV level.

BMPI: Discount/Premium

Source: Morningstar


BMPG: Discount/Premium

Source: Morningstar

Charges

Although BMO Managed Portfolio Trust is a single investment trust, there are two separate share classes, and BMPI and BMPG have slightly different ongoing charges.

BMPI presently has ongoing charges of c.1.1%, compared to a peer-group average of c. 0.85% (Source: JPMorgan Cazenove). However, as we have noted elsewhere, we do not regard the Morningstar Flexible Investment sector in which these trusts sit as an accurate comparative tool given the eclectic and diverse array of strategies contained therein. The management fee is charged at 0.65% on the assets of each portfolio, though if the manager chooses to invest in another product managed by BMO, the fees on this proportion of the capital will be reduced to 0.325%. Within BMPI, this management fee is charged 60% to capital and 40% to revenue. BMPI has a KID RIY of c. 3.17%, compared to a peer-group average of c. 2.86%. The disparity between the ongoing charges and KID RIY is attributable to charges on the underlying investments.

BMPG presently has ongoing charges of c. 1.03% (Source: JPMorgan Cazenove) with the same level of management fee. Within BMPG, this management fee is charged 80% to capital and 20% to revenue. BMPG has a KID RIY of c. 2.71%.

Both share classes have potential performance fees attached to them, equivalent to 10% of the monetary amount by which the portfolio outperformed the benchmark index. This is capped at 0.35% in any one financial year, but outperformance in excess of this will be taken into account in the subsequent four financial years. However, should either portfolio outperform the benchmark in a given year but end it down in absolute terms, this performance fee will be deferred until the subsequent financial year, assuming NAV per share is by then higher than the initial level. If this is not achieved within four financial years, the performance fee will no longer be payable.

Underperformance to the benchmark in any financial year must also be recouped in subsequent years before a performance fee is payable, incentivising the trust to focus on long-term returns.

With both portfolios having outperformed in the previous financial year, a performance fee will be applicable on both share classes. When this is accounted for, the ongoing charges for BMPI stand at 1.46%, and for BMPG at 1.39%. However, the payment of the performance fee of BMPI will be deferred as the NAV per share at the end of the financial year 2020 was below the level at the start of the year. With very significant outperformance from BMPG in particular, some of the performance fee may be accounted for in the coming financial year; however, it would be capped at 0.35% of the total assets of the portfolio.

ESG

The investment approach adopted for both BMPI and BMPG has a long-standing focus on corporate governance, with the manager seeking to ensure the boards and managers of all holdings are aligned with shareholders in their interests. In general, Peter looks to follow AIC guidelines on corporate governance with regards to the underlying investment companies held within BMPI and BMPG, and in particular will tend to vote against renewal of directorships if this is at a period exceeding the AIC’s guidance.

Peter is also cognisant of the potential impact from wider market considerations on the valuation of different investment vehicles and strategies. He is aware there can be a natural revaluation higher of certain strategies which score well on an ESG basis, resulting from large institutional investors being increasingly focussed on ensuring alignment with these criteria. However, he believes this revaluation trend has largely already been experienced, and does not wish to inhibit shareholder returns from an eschewal of, for example, commodity holdings during a global reflationary macroeconomic environment.

Fund History

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

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The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
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A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
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Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.