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City of London IT benefits from property exposure

City of London IT has beated its benchmark but lagged rivals focused on smaller companies
October 1, 2015

IC Top 100 Fund City of London Investment Trust (CTY) made a net asset value (NAV) total return of 6.4 per cent and share price total return of 7.2 per cent over its last financial year to 30 June, well ahead of its benchmark, the FTSE All-Share's 2.6 per cent over that period. The trust also beat the Association of Investment Companies (AIC ) UK Equity Income sector average of 6.2 per cent.

376.5p

The trust is ahead of the FTSE All-Share over one, three and five years both in terms of its NAV and share price performance. However, it lags the AIC equity income sector average over these time periods. "A key factor is our large-cap bias," says Job Curtis, manager of City of London. "Trusts in our sector focused on smaller companies have done better."

City of London has about two-thirds of its assets in FTSE 100 companies. Over one year the FTSE 100 is down 7.4 per cent, while the FTSE 250 is up 9.4 per cent and the FTSE Small Cap is up 5.2 per cent.

City of London's outperformance against the FTSE 100 in its last financial year was mainly due to stock picking. The three best-performing holdings were housebuilders Taylor Wimpey (TW.), Persimmon (PSN) and Berkeley (BKG), which made respective total returns over the year to 30 June of 71, 64 and 49 per cent.

"Quoted housebuilders benefited from strong demand for new houses given low interest rates and the shortage of available homes," says Mr Curtis. "All three housebuilders in the portfolio have land banks of over five years and are committed to returning a substantial proportion of profits to shareholders in the form of dividends."

Real estate investment trusts (Reits) Land Securities (LAND) and British Land (BLND) made respective total returns of 19.4 and 17.2 per cent. These benefited from strong investor demand for good-quality property and rising rents for London offices.

During the trust's last financial year Mr Curtis bought Hansteen (HSTN), a specialist in high-yielding industrial property in the UK and Europe, and Tritax Big Box Reit (BBOX), which owns large warehouses needed by retailers for online shopping orders. Tritax was bought when it was trading at around NAV but this is now on a premium to NAV of around 8 per cent. It has a 12-month yield of about 4.8 per cent.

Hansteen yields about 3.9 per cent.

"The portfolio's overweight position in UK housebuilders and Reits should continue to benefit from strong market conditions," he adds. "But they have had a good run so it is an area to keep an eye on."

Being significantly underweight oil and mining shares relative to the FTSE All-Share helped the trust's performance over its last financial year, during which it sold Statoil (Nor: STL) and ENI (It: ENI). It still holds Royal Dutch Shell (RDSB) and BP (BP.), as they offer attractive yields and Mr Curtis needs them to have a diversified portfolio, which he says helps maintain a conservative risk profile.

He also expects the oil price to go back up in time as long-term supply and demand should become more favourable: oil is depleting and fewer fields are being developed.

"Royal Dutch Shell and BP should benefit from improved profitability of their downstream refining and marketing operations," he says. "In addition, both companies will be looking to preserve upstream oil exploration and production profit margins by reducing the costs they pay to suppliers."

Another area the trust is underweight is banks. "US fines put some people off the sector and investment banking is very unpredictable," explains Mr Curtis.

However, in March he bought Lloyds (LLOY) and has been adding to it since. Since its acquisition of HBOS it has rebuilt its capital base and the UK government has significantly reduced its stake, while in May Lloyds restarted dividends. It has a leading position in UK retail banking and Mr Curtis expects significant dividend growth, and says there is scope for its share price rating to improve.

He adds that as capital rebuilds and dividends improve, banks become more interesting.

City of London paid dividends of 15.3p over its last financial year - an increase of 3.7 per cent on the year before. This is the 49th consecutive year the trust has increased its dividend - the longest of any trust. It also added £3.83m to its revenue reserve, which is now worth about £38.4m, or 12.5p a share.

CITY OF LONDON INVESTMENT TRUST (CTY)

PRICE:376.5pGEARING:9%
AIC SECTOR:UK Equity IncomeNAV:365.5p
FUND TYPE:Investment trustPRICE PREMIUM TO NAV:2.40%
MARKET CAP:£1.2bnYIELD:4.10%
No OF HOLDINGS:119*ONGOING CHARGE:0.43%*
SET-UP DATE:1891MORE DETAILS:cityinvestmenttrust.com

Source: Morningstar & *Henderson

 

Performance

 1-year share price return (%)3-year share price cumulative share price return (%)5-year share price cumulative share price return (%)10-year share price cumulative share price return (%)
City of London IT2.634.269.4148.6
AIC UK Equity Income sector average3.454.290.2120.5
FTSE All-Share TR GBP-4.522.138.977.1
FTSE 100 TR GBP-7.416.331.263.9

Source: Morningstar, as at 21 September 2015

 

Top 10 holdings, as at 31 August 2015 (%)

British American Tobacco4.0
Royal Dutch Shell 'B'3.8
HSBC3.6
Vodafone3.1
BP2.4
Diageo2.2
GlaxoSmithKline2.1
AstraZeneca2.0
National Grid2.0
Unilever1.9

 

Sector breakdown (%)

Financials26.9
Consumer goods17.9
Consumer services14.1
General industrials10.4
Telecommunications6.9
Utilities6.5
Oil & gas6.2
Healthcare5.8
Materials3.9
Technology1.4