City of London 02 October 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by City of London. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
City of London Investment Trust (CTY) can claim many superlatives: the biggest – in the UK Equity Income sector, the cheapest – in its sector, and the best – at paying increased dividends for the longest consecutive period of any trust across the wider sector. Job Curtis has been the trust’s manager for over 33 years, and his style of management has clearly been key to achieving strong results for shareholders over this period. The last financial year to 30/06/2024 saw CTY outperform, having now delivered outperformance of the benchmark over one, three, five and ten years.
Job brings a conservative and cautious approach to the mandate, which is to deliver capital and income growth. As we highlight in the Portfolio section, Job aims to maintain a broad spread of exposures and to invest based on fundamentals. The portfolio has a mix of higher yielding stocks as well as lower yielders that have higher growth potential. Job remains convinced that takeovers of UK companies is recognition of the quality and value of those UK companies, and as such is optimistic. In the meantime, with the dividend yield from UK equities attractive, Job believes investors continue to be ‘paid to hold on’ to UK equities.
CTY’s board locked in long-term gearing, at what now look like highly attractive interest rates. This should confer a steady advantage to the trust over many years to come, and the weighted average cost of borrowings is 3.35%. Over the long term, given long-run expectations for returns from equities is well ahead of this, this should contribute positively to long-term returns. As we illustrate in the Gearing section, having gearing hasn’t meant CTY’s NAV volatility is significantly higher than the wider market. During 2024 CTY’s shares have traded at a small discount in absolute terms, a symptom of market sentiment against the UK.
CTY occupies an enviable spot within the UK Equity Income sector, which is reflected in its share price rating that has seen it trade on a consistently narrower discount than peers. Over time, the board has a relatively tight policy of ensuring the company’s share price reflects closely its underlying net asset value. Aside from allowing the trust to build a loyal following and therefore be in a position to issue shares and grow, our analysis in the Performance section shows that on a number of metrics, having a tight discount through the cycle improves many risk metrics relative to peers who typically don’t have such a tight control over their discount.
Job Curtis has managed the trust for 33 years, and his philosophy has clearly been critical to CTY’s success. So too is the ability to tuck away surplus income into a reserve, and thereby smooth dividend payouts to shareholders (see Dividend section). The trust has consistently delivered on its objectives for many years, and in our view – given the repeatable investment process that emphasises spreading risks and investing based on fundamentals – it is in a strong position to continue to do so. In our view, CTY is a high-quality proposition to invest in the underappreciated UK market for capital and income. If the shares slip to a discount to NAV, this could be considered an attractive entry point.
Bull
- Very low OCF of 0.37%
- Consistency and experience of manager who has delivered long-term outperformance of the FTSE All-Share Index in capital and income terms
- Track record of 58 years of progressive dividend increases
Bear
- Cautious approach means that NAV performance can underperform in some market conditions
- Income track record highly attractive, so manager might risk long-term capital growth in trying to maintain it
- Structural gearing can exacerbate the downside