City of London 30 September 2020

City of London’s (CTY) objective is to provide long-term growth in income and capital. CTY has the longest track record of providing annual dividend increases in the investment trust sector, which now has 54 consecutive years of growth since 1966.

The COVID-19 crisis and market sell-off has left CTY underperforming the market over the short term. However stock selection remained positive in the financial year to 30/06/2020 – as it has been for eight out of the past ten financial years. Being geared in a falling market was the main culprit.

Job Curtis, CTY’s manager for nearly 30 years, has reacted swiftly to events by repositioning the portfolio to reflect today’s new reality. He is a fundamental stock picker first and foremost, looking for defensive companies which can deliver demonstrably sustainable cash flow to support both dividends and capital expenditure. As we discuss in Portfolio, he has increasingly been looking abroad to find companies that suit his criteria. Job has also significantly reduced exposure to sectors such as travel & leisure and energy, in our view making the portfolio a more defensive.

There are clearly no quick fixes to COVID-19, and its impact will likely be felt for years to come in company earnings and dividends. CTY has drawn on revenue reserves to bolster the dividend for the last financial year. Despite the very difficult environment, the board has reaffirmed its commitment to growing the dividend for the current financial year ending 30/06/2021. Yet, as discussed in Discount, CTY is now buying shares back on a discount of 2%, having typically traded on a premium for the past five years.

In our view CTY continues to be a low-cost poster child of the UK equity income sector.

Job’s preference for conservatively run and well-financed businesses clearly lends itself well to the mandate; he has consistently added value through stock-picking in eight years out of the past ten. Job has proven he can outperform the FTSE All Share, whilst delivering rising dividends over the medium to long term. Its statistics (see Performance section) show how powerful CTY is as a package, which perhaps explains why the trust has been able to grow so consistently over the past decade.

With an OCF of 0.36% the trust is extremely competitive in terms of cost. The fact that shareholders have historically benefitted from share issuance at a premium means that the effective ownership cost, in some years, is significantly lower than this figure.

The historic solidity of the dividend (see Dividend section) is a key selling point, in our view, which is backed up by the board’s statements of intent – and its not inconsiderable reserves. CTY’s yield is attractive relative to most equity income products, offering a historic yield of 6.1%, with the board signaling that it intends further growth in the current year.

CTY delivers on its promises with exceptionally low charges, and has a strong and consistent manager with extensive experience. Now that the trust is on a rare discount of 2%, we view the shares as even more attractive.