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City of London has lucky escape with Tesco

Job Curtis, manager of City of London Investment Trust, talks to Moira O'Neill about his core positions in UK income stocks
October 8, 2014

City of London Investment Trust (CTY) is a core holding for many investors who want to seek income from UK equities. Its manager, Job Curtis, has managed the fund for 23 years and has a strong track record of outperforming the FTSE All-Share.

City of London's dividend has grown every year for the past 48 years, a longer record than any other investment trust. The trust pays an attractive yield of 4 per cent, compared with 3.3 per cent from the FTSE All-Share and has very low fees (0.43 per cent ongoing charges). We caught up with Mr Curtis to find out about his recent trades and current thinking.

Mr Curtis is breathing a sigh of relief after a lucky escape with Tesco (TSCO). "Eighteen months ago I sold half my holding in Tesco," he says. He had kept the supermarket giant in his portfolio because it was US investment guru Warren Buffett's only UK holding. However, he sold most of the portfolio's holding following the August profit warning. This turned out to be a good move because in September Tesco announced that it had uncovered a "serious issue" within its accounts and the share price plunged.

"Big retailers take a long time to turn around," says Mr Curtis. "Tesco is not going to be a big dividend stock going forward because it has a big pension deficit. A recovery or deep value type fund would be very interested in Tesco at the moment. But for a fund like CTY, where we need a dividend, Tesco won't be suitable because I can't see it paying a dividend for a while."

Mr Curtis says dividend yield is the most important factor when assessing stocks for his portfolio. "I firmly believe that share price valuation is a driver of performance. I favour companies with strong balance sheets that are able to pay dividends. I think the overall picture is massive indebtedness for consumers and governments. Companies, though, are in good shape."

Job Curtis - CV

Job Curtis manages The City of London Investment Trust and co-manages the US registered Henderson Global Equity Income Fund. He has more than 28 years of investment management experience amd was appointed portfolio manager of The City of London Investment Trust in 1991. Prior to joining Henderson, he was an assistant fund manager at Cornhill Insurance. Mr Curtis has a MA in Philosophy, Politics and Economics from Oxford University and is an Associate Member of the Society of Investment Professionals (ASIP).

City of London's portfolio has a core position in international consumer goods and pharmaceuticals.

As emerging market countries get wealthier Mr Curtis believes consumer goods will be a growth area. Holdings in this theme include Diageo (DGE), British American Tobacco (BATS) and Unilever (ULVR). However, Mr Curtis has sold 25 per cent of his holdings in Diageo over the past two years, taking profits and reinvesting them elsewhere in the portfolio.

"British American Tobacco has been the best holding of my career," he says. "I haven't added to it for many years but it has achieved a top 10 position in the portfolio by performance."

Pharmaceutical stocks AstraZeneca (AZN) and GlaxoSmithKline (GSK) are also core holdings. "AstraZeneca was a big holding for me, but it became a hot stock." When the company received a bid approach from Pfizer in April 2014, Mr Curtis says he took some profits. "When there is a big re-rating in a stock it seems sensible to take some money out," he says.

Another theme in the portfolio is defensives, which include utilities and telecoms.

When Vodafone (VOD) sold its stake in US mobile firm Verizon in February, City of London received shares in Verizon (US:VZC). Mr Curtis has kept them. "Verizon has become our biggest overseas holding," he says. "It's a very strong company and has very good technology and a good dividend. Also, the US telecoms market has only four operators. Vodafone is still an interesting stock with better regulation emerging in Europe for the telecoms market."

Oil and gas remains a very important part of the portfolio, with Mr Curtis's favoured oil stock, Royal Dutch Shell (RDSB), taking the largest position in the portfolio at 5.8 per cent.

"Royal Dutch Shell has a high asset base and scope to be managed more efficiently by the new chief executive," he says. "It's a very strong company and has made some mistakes but last cut its dividend during the second world war. I have added to it on share price weakness."

Mr Curtis has also added to BP (BP.), which now accounts for 3.7 per cent of the portfolio. "BP has put its house in order and added value by selling assets," he says. "It has also restored its dividend to a large extent."

However, Mr Curtis still doesn't like mining as much as oil and gas. The exception is Rio Tinto (RIO), where he says there have been some "interesting management changes - the chief executive had to walk the plank". Mr Curtis has added to Rio Tinto (RIO) during the year. "I'm still pretty underweight mining," he says. "But I don't hate it in the way I used to."

In the financials sector, Mr Curtis's biggest weighting is overweight insurance and real estate. Prudential (PRU) is the biggest holding in this sector, while he sold Aviva (AV.) during the year when it cut its dividends. He has also bought Old Mutual (OML) at a time of weakness of the rand.

He also really likes housebuilders. "We are still short of houses in the south-east," he says. "The housebuilders are going through a profitable period and have promised good dividends. We are in a sweet spot for the sector. Prices have gone sideways because of the interest rate threat. It's not as risky as buying some biotech company. Housebuilding is a riskier area, but there is something secure about buying your own home. The housebuilders that I own are backed up by land banks, and land is scarce."

Mr Curtis bought Royal Mail (RMG) at IPO because it has quite good dividend prospects. "Generally, I'm wary of IPOs but you do get some interesting companies." One recent IPO that he took part in was that of Card Factory (CARD) in May. "The company offers very cheap prices for cards - the highest priced card is 99p. You can't get it cheaper on the internet so it's a clever formula. It could be a good cash generator and have good dividend power eventually."

 

The City of London Investment Trust (CTY)

Price368.40pNAV32.19p
Market Cap£1073 millionPremium to NAV1.71%
AIC SectorUK Growth & Income12 Month av premium1.94%
Set up date1 January 1891Yield4.07%
Fund manager start date01-Jul-91Ongoing charge0.44%
Gearing8%More detailshttp://www.henderson.com/henderson

Source: Morningstar as at 6 October 2014

 

Performance %

Investment Trust/Index2011201220132014 (to 30 Sept)
City of London IT share price2.116.524.11.2
City of London IT NAV3.116.2261.5
FTSE All Share Total Return -3.412.320.80.6

Source: Morningstar

 

Top 10 Holdings as at 31 August 2014

Holding%
Royal Dutch Shell B5.8
HSBC Holdings5.1
British American Tobacco4.6
BP3.7
GlaxoSmithKline3.5
Diageo2.7
Vodafone Group2.5
Unilever2.4
National Grid2
AstraZeneca1.9

 

Sector allocation as at 31 August 2014

Sector%
Finance - General 24
Consumer Goods16
Consumer Services12.3
Oil & Gas10.7
General Industrials10.1
Utilities7.3
Healthcare6.8
Telecommunications6.4
Materials5.3
Technology1.1