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City of London Investment Trust: February 2021 update

Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of City of London Investment Trust.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Job Curtis is one of the most experienced UK equity income investors and began managing this investment trust in 1991
  • He is part of a large and experienced team of income investors at Janus Henderson Investors
  • He is a prudent investor who aims for sustainable income and long-term capital growth

How it fits in the portfolio

City of London Investment Trust aims to provide long-term growth in income and capital by mainly investing in large UK companies. Curtis looks for companies that generate plenty of cash to pay dividends and are conservatively run, in his view. This trust could form part of an income portfolio or a broader portfolio looking to add investment in larger UK companies.

Manager

Curtis has managed City of London Investment Trust since July 1991. This length of tenure is rare to see. He began his career in 1983 as a graduate trainee at Grieveson Grant stockbrokers, before joining Cornhill Insurance as an assistant fund manager from 1985 to 1987 and then Touche Remnant as a unit trust and investment trust manager. Following Henderson’s acquisition of Touche Remnant he subsequently joined Henderson in 1992.

He works within a well-resourced and experienced team of 13, which includes highly regarded income investors such as Alex Crooke, Ben Lofthouse and James Henderson.

Process

The trust invests in good quality, well-managed companies, which can be bought at a reasonable share price and contribute to the trust’s dividend. He believes companies with sustainable and rising dividends will see their share prices grow over time too. He likes larger, more stable companies that are robust enough to weather economic storms and still pay dividends.

Curtis mainly invests in UK companies, although he can invest up to 20% overseas when he finds good opportunities. As at January 2021 14% of the trust was invested overseas. This is mostly in the US and Europe in areas like technology, consumer goods and health care.

In late 2020 Curtis made further investments in companies offering above-average yields, which were also attractively priced. Examples include Direct Line Insurance, British American Tobacco and SSE. He also invested in Cisco, which makes network equipment for the internet and is an example of an overseas company.

Curtis sold Halma, Renishaw and Spirax-Sarco at good share prices as they had performed well. Sales were also made where the COVID pandemic had affected business prospects, for example Greggs and National Express. The number of holdings fell from 90 to 85 in the second half of 2020 as the manager focused the trust on his highest-conviction companies.

Investors should be aware the trust can borrow money to invest with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. The manager can also use derivatives, which if used adds risk.

Culture

Janus Henderson Investors is a large investment firm with offices all over the world. It was formed in 2017 from the merger of two long-established groups – US-based Janus Capital Group and Henderson Global Investors.

It values experience, and so fund managers at the group have on average over two decades of investment experience. Sharing knowledge and ideas between investment teams is an important part of the culture. Managers have the flexibility to tap into the wider group’s resources for ideas and insights, but also have the freedom to do their own research and form their own views without having a ‘house view’ placed on them.

Curtis integrates environmental, social and governance (ESG) factors into his company analysis. As a long-term investor, he believes this helps to highlight businesses that use more sustainable practices and could thrive over the long term. This could drive long term dividends and it could also uncover risks that are less obvious through more traditional company analysis. There is an ESG team at Janus Henderson to assist and there is also a dedicated ESG analyst within this team.

Cost

The ongoing annual charge over the trust’s financial year to 30 June 2020 was 0.36%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

Part or all of the annual charge is taken from capital rather than income generated. This could result in a higher dividend yield but can limit capital growth.

Performance

The trust has performed strongly over the manager’s tenure, and is ahead of the FTSE All Share index. In addition, the company has increased the dividend it pays every year since 1966, which is the longest record of any UK investment trust. As always past performance isn’t a guide to the future.

UK equity income funds had a tough first half to 2020 as the COVID pandemic severely impacted many companies’ ability or willingness to pay dividends. In the first half of 2020 dividends fell by 38.2% in the fund (compared with the same period in 2019). The second half of 2020 saw some recovery as dividends in the portfolio fell by 15.6% (compared to the same period in 2019). Holdings such as BAE Systems, Persimmon and Direct Line Insurance all resumed dividend payments. Currently around 7% of the portfolio is not paying dividends, mainly accounted for by UK banks such as HSBC, which Curtis expects to be reinstated.

In the year to the end of June 2020 the trust paid dividends totaling 19p per share, a 2.2% increase from the prior year. The trust could do this by using revenue reserves. These are used by investment trusts to boost income during tough times for the market. The Board, which oversees the running of the trust for investors, has indicated the dividend will increase again (for the 55th consecutive year) for the year ended June 2021. Dividends are variable and not guaranteed.

In the first half of 2020 the trust’s share price fell 21.4%* compared to -17.5% for the FTSE All Share index. Companies whose prospects were linked to the health of the economy (cyclical sectors) were in the eye of the storm and fared the worst, such as travel & leisure, banks and oil.

The second half of 2020 saw markets recover. Positive signs of a COVID vaccine, a Biden victory in the US presidential election and the perceived resolution of Brexit helped to improve investor sentiment. Some of the more cyclical sectors such as mining, travel & leisure and general retailers performed strongly whilst healthcare, utilities and oil & gas underperformed. In this period the trust’s share price returned 12.3% vs the FTSE All Share return of 9.3%.

Over the last six months, having less in travel & leisure and utility companies than the index hurt performance. Some of the traditionally defensive companies such as Nestlé and Verizon also failed to keep up in the recovery. On the positive side owning less pharmaceuticals and oil & gas was helpful. More broadly, medium-sized companies outperformed UK large companies during this period and the manager’s preference for larger companies held back relative performance.

Over the last 12 months to the end of January 2021, the trust’s share price returned -12.0% vs the FTSE All Share return of -7.6%.

Annual percentage growth
Jan 16 -
Jan 17
Jan 17 -
Jan 18
Jan 18 -
Jan 19
Jan 19 -
Jan 20
Jan 20 -
Jan 21
City of London Investment Trust Plc 10.5% 11.8% -3.4% 12.4% -12.0%
FTSE All-Share 20.1% 11.3% -3.8% 10.7% -7.6%

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2021.

Find out more about City of London Investment Trust, including charges

City of London Investment Trust Key Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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