BMO reins in fund distributions

By Dan Hallett, CFA, CFP on March 21st, 2013

I have been writing about monthly income investment funds for nearly a dozen years, putting their distributions to the test and highlighting such funds’ mythical tax advantages.   Over the past two years, I’ve been particularly critical of the BMO Monthly Income fund.  So I was pleased to discover that BMO is making some positive changes to the fund and its Global sibling.

Spring Cleaning

Early this year, BMO Asset Management announced to the advisor community that it was slashing regular cash payouts on a handful of funds.  Of particular interest to me was that both BMO Monthly Income and BMO Global Monthly Income are slashing cash distributions.

According to a BMO advisor communication, BMO Monthly Income will reduce its distribution from $0.06 per unit monthly to $0.024 – a reduction of 60 percent.  BMO Global Monthly Income will see its distribution fall from $0.055 to $0.016 per unit monthly – a 71% cut.  Both changes kick in on May 16.

This is a good news/bad news story.  This is good because it was clear the current distributions are just not sustainable.  So the cuts improve sustainability by definition.  But as we warned this cut will hurt investors who rely on the payout to pay living expense – or worse to service a leverage loan.


BMO Monthly Income’s pending distribution cut will bring the fund’s payout into a range that I estimate should be sustainable longer term.  When I first examined this fund, I estimated that the fund’s stocks would need to punch out 17% per year compounded annually for a long time just to keep up the cash payout without eroding capital.

Given that about 1/3rd of this fund’s distributions have been taken in cash over the past five years, this is a significant development.  While it’s hard for those who really depending on this payout, they can at least take comfort in the sustainability of the lower payout level.  But I’m told that a new series of units will be issued offering a continuation of today’s fatter payouts – mirroring steps taken in the past by firms like IA Clarington and Mackenzie.

Recent Sustainability Tests

BMO Global Monthly Income is much smaller fund but has long sported a more aggressive cash payout.  While its pending distribution cut is big, I estimate that it needs to fall further if long-term sustainability is the goal.  But BMO is hardly the worst offender when it comes to aggressive distribution levels.

As the table below shows (click to enlarge it), funds from IA Clarington, NEI Investments, RBC and Standard life continue to ‘over-distribute’ in my estimation.

I’m pleased with BMO’s upcoming changes.  Let’s hope more companies follow this path to sustainable payouts.