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Analysis: The BMO Monthly Income Fund is designed to provide investors with a monthly distribution while preserving the investor’s capital. The fund pays out a monthly distribution of $0.06 per unit, which works out to an annualized distribution yield of 9.4% at current prices. While the yield may be attractive, we do have questions as to its sustainability over the long term. The managers will have to earn a total return of more than 9.4% in order for there not to be an erosion of capital over the long term for those investors who are taking the distributions in cash.
Performance for the fund has been strong on both an absolute and relative basis, and with the exception of 2009 has finished in the top quartile in every year since 2008. The fund has also exhibited a level of volatility that is significantly below both the benchmark and the category average.
The equity portion of the fund is managed by Michael Stanley who uses a bottom up fundamental investment approach that looks for financially sound companies with high quality earnings and strong dividend growth. With the fixed income sleeve of the fund, Mark McMahon uses a disciplined approach that sets the maturity and sector weightings of the portfolio based on his view on interest rates. Security selection is determined by fundamental analysis and relative valuation.
The portfolio is fairly well diversified, holding between 30 and 40 individual stocks and more than 100 fixed income investments. The top 10 investments make up 35% of the fund. The fund is currently heavily exposed to financials, but given the emphasis on dividends, this is not unexpected.
Costs are very reasonable, with an MER of 1.57%, which is well below the category average.
As mentioned above, our biggest issue with this fund is the sustainability of the distribution. Given the long term expected return profile for a fund such as this, there will likely have to be a cut in the distribution payout or investors will continue to see an erosion in the NAV. Apart from that, it offers a solid risk reward profile, low cost and a strong management behind. It.