Solid performance from the City of London Investment Trust

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Solid performance from the City of London Investment Trust
Master Investor Magazine

Master Investor Magazine Issue 59

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The City of London Investment Trust (LON:CTY) is one of the most reliable sources of equity income and has continued to generate stable returns despite the uncertainty surrounding Brexit.

According to the interim accounts for the six months to the end of 2019, the £1.9bn fund produced a NAV total return of 5.9%, which was marginally ahead of the 5.5% achieved by its FTSE All-Share benchmark.

City has more of an international portfolio than many of its UK equity income peers with 77% invested in FTSE 100 companies, compared to an average of 57% across the sector. These businesses tend to generate a higher proportion of their earnings outside of the UK with the fund also having ten percent invested directly in overseas stocks.

This bias towards the blue chips is a key differentiator, with a number of its competitors having a more significant weighting in the mid and small caps. Stocks like these are usually more reliant on the domestic economy and acted as a drag on the performance of the multi-cap funds during most of last year until sentiment improved after the election.

Safe pair of hands

Manager Job Curtis has been in charge since 1991 and has built up a strong track record during his tenure. Over the last ten years the share price total return of 181% is well ahead of the 125% produced by the fund’s FTSE All-Share benchmark.

His main focus is currently on consumer companies, with Diageo, British American Tobacco and Unilever all amongst the ten largest holdings. New additions during the six month reporting period included Wm Morrison Supermarkets and Royal Bank of Scotland, both of which are more domestically-oriented.

Wm Morrison has a good record of free cash flow generation, a strong balance sheet and a differentiated strategy, while RBS has strong capital ratios and should benefit from an improvement in UK economic growth. Another recent addition was La Française des Jeux, which operates the French national lottery. It has a 25-year license and good cash flow characteristics.

Core holding

City of London is yielding an attractive 4.4% with quarterly distributions. The fund’s commitment to income is reflected in the fact that it has successfully increased its dividend for 53 consecutive years – partly thanks to the use of its revenue reserves during more challenging periods – and the board is confident that it will be able to raise the pay-out again this year.

Its popularity means that the shares consistently trade at a small premium to NAV and this has enabled the board to regularly issue new shares to meet the demand. It also benefits from one of the lowest ongoing charges ratios in the investment trust universe with an annual cost of just 0.39%.

Like the rest of the market the performance since the start of 2020 has been negatively affected by the impact of the coronavirus with the shares down around three percent year-to-date. Long-term equity investors who are looking for a consistent source of income would struggle to find a better core holding.

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