City of London (CTY), the biggest UK equity income investment trust, enjoyed a good year to 30 June with the mostly blue-chip portfolio keeping up with the rally in the FTSE All-Share and the company announcing a record 60th consecutive rise in annual dividends.
Janus Henderson fund managers Job Curtis and David Smith delivered a 21.9% investment return in line with their UK benchmark, although shareholders’ actual return was 21%, assisted by a string of overseas and private equity bids for insurer Beazley, sweeteners group Tate & Lyle, real estate investment trust Segro and, most notably, the acquisition of fund manager Schroders by Nuveen of the US, which generated CTY’s fifth best stock gain.
The annual results showed the managers’ best results in comparison with the All Share came from not holding London Stock Exchange or credit rater Experian, thus avoiding their sharp derating earlier this year on fears of disruption by artificial intelligence (AI). They also sold 80% of their position in 3i Group (III) before shares in the private equity group plunged on a slowdown in sales growth at discount retailer Action, its dominant holding.
IG Group was the trust’s second biggest contributor as the managers said the online trading company benefited from supportive, ie volatile, markets and an improved product offering stimulating strong customer growth.
However, shareholders lost the chance of beating the FTSE All-Share by the trust not holding Rolls Royce, the resurgent aero engine manufacturer, on account of its low dividend. Underweight positions in in HSBC bank and drugs giant AstraZeneca also curbed returns.
Nevertheless, over the latest three and five-year periods the £2.9bn trust has beaten the index with total shareholder returns of 63% and 87% ahead of the All-Share’s 52% and 69%.
That reflects the trust’s popularity with the shares consistently trading close to net asset value, a rating supported by the 3.8%-yielder’s long history of growing dividends. In July, CTY declared a final fourth dividend for the financial year of 5.7p, taking the total to 22.15p per share, a rise of 4% that was ahead of 2.6% inflation.
This was covered by earnings per share which rose 4.4% largely as a result of the growth in pay-outs from banks, CTY’s largest sector exposure. The revenue reserve supporting future dividends grew by £3.6m to £52.3m, with the board reiterating its determination to ensure that distributions almost always come from investment income.
Figures from Janus Henderson show that a £1,000 investment in CTY shares 60 years ago in 1966 would have grown to £1.3m today with dividends reinvested, nearly double the £700,000 total return from investing in the UK stock market.
Curtis, who has managed CTY for 35 years and holds 7% in overseas stocks, said: “The portfolio is designed to continue growing the dividend and provide a competitive total return, including capital appreciation. It has a tilt towards stocks with above-average dividend yield, but some lower yielding stocks are included in the mix.
“The portfolio is diversified by geography and sector, in contrast to many global portfolios which are dominated by technology shares. We believe the companies in the portfolio continue to offer good value given our view of the prospects for earnings and dividend growth, and compared with equivalents overseas.”
Our view
Matthew Read, senior analyst at QuotedData, said: “City of London has delivered a solid set of results against what was, at times, a challenging backdrop for equity markets. The managers have found opportunities amid the volatility, while continued appetite for UK companies from overseas buyers has benefitted several holdings and reinforces the view that there is still considerable value in the UK market. For many shareholders, however, income remains a key attraction and the 4% increase in the dividend, fully covered by earnings, will be particularly welcome.”
