City of London Investment Trust (CTY) announced its annual results for the period ended 30 June 2023. The company’s NAV total return for the period was 4.5%, which compares with a total return of 7.9% for the FTSE All-Share Index. Shares were flat for the year while dividends increased by 2.5%.
The adviser noted that while the underperformance was disappointing, City of London’s portfolio is managed for the long term and its NAV total return has exceeded the FTSE All-Share Index over 3, 5 and 10 years. The dividend was increased for the 57th year and covered by earnings per share.
Commenting on the market, Chairman Sir Laurie Magnus added:
“Financial markets throughout the year have remained challenging for investors, with the war in Ukraine and tensions in Asia causing fluctuations in the cost of raw materials and energy. The fight against inflation took centre stage in developed economies, with the Federal Reserve, the European Central Bank and the Bank of England all increasing interest rates (the latter by a factor of 4 times from 1.25% to 5.0% during the 12 months). UK inflation was more persistent and elevated than inflation in the US and Continental Europe, but the UK economy narrowly avoided a recession.
“The UK stock market produced a total return of 7.9%, as measured by the FTSE All-Share Index. Large companies outperformed, with the FTSE 100 Index (comprising the largest UK listed companies) returning 9.2% helped by its heavy weighting in oil companies and banks. Oil company shares outperformed despite the oil price moving down over the 12 months. Banks benefited from the positive effect of rising interest rates on their net interest margins while impairments remained at a low level. The FTSE 250 Index of medium-sized companies and the FTSE SmallCap Index underperformed, with respective returns of 1.9% and 1.2%, weighed down by their greater bias towards UK domestic cyclicals.”
Regarding the outlook, he continued:
“Over two-thirds of revenues earned by the companies in City of London’s portfolio comes from overseas. Whilst this diversification is helpful given the relative economic weakness of the UK, prospects for the global economy remain very uncertain. The war in Ukraine has no end in sight, there is continuing tension with China, the outcome of the increasingly fractious US election campaign remains in doubt and recent climatic events across the world have demonstrated the severe risks of climate change.
“A further uncertainty arises from the coordinated actions by central banks to use the levers of monetary policy, and most directly higher interest rates, to curb inflation. The implications of this will take some time to show their effect, but it is already clear that a return to the cheap lending rates that have prevailed for the last 15 years will not recur. Households will experience a significant increase in interest costs as their fixed rate mortgages are rolled over, as will businesses when their existing debt matures. Over time, although the rate of inflation should continue to fall as increases in energy prices drop out of the annual calculation, this will affect the behaviour of consumers, with consequences for corporate profits and investment.
“UK listed shares in general continue to trade at lower valuations relative to comparable businesses overseas. The reasons for this include continuing investor scepticism concerning the benefits of Brexit, the preponderance of “value” stocks (such as banks and energy companies) relative to “growth” stocks (such as technology including AI), the lack of domestic support because many UK investment institutions favour fixed interest in their asset allocations and the prospect of a more interventionist Labour government. These lower comparable valuations, however, offer potential rewards for City of London as both private equity firms and overseas businesses take advantage of opportunities to use the UK’s open markets to secure attractive acquisitions. It remains the case that UK equities offer compelling dividend yields relative to the main alternative equity markets and, on this basis, UK investors can reasonably take the view that they are being “paid to hold on” until valuations improve.
“City of London has grown its dividend for 57 years during periods of high and low inflation and, at times, political instability in the UK and overseas. Our portfolio has, at its core, good quality and cash generative companies that are well placed to deliver reliable and competitive returns.”
CTY : City of London falls short of market in 2023