City of London IT's large-cap bias a Brexit boost

Over one year, however, the trust has failed to beat the index, delivering 10 per cent compared with 14 per cent.

The trust's underweight position to the oil and gas sector, which accounts for about 7 per cent of its assets compared with 11 per cent of the FTSE All-Share, detracted from performance as oil and gas companies did better than expected following the oil price bounce.

Although the trust owns BP (BP.) and Royal Dutch Shell (RDSA), its manager Job Curtis is sticking to an underweight position. "I think that's right from a risk point of view because there's still a lot of doubt over the BP and Shell dividends," he says. "The fact they're yielding 7 per cent implies that the market has doubts about them - so it's right not to have too much in that sector."

If either of these companies cut their dividends even by half they would still yield a respectable 3.5 per cent, he adds, although he would reconsider their position in the portfolio.

Another area that has dragged on recent performance is house construction, particularly after UK housebuilders took a beating in the immediate aftermath of the Brexit vote. Taylor Wimpey (TW.) and Persimmon (PSN) were two of the biggest detractors from the trust's performance in the year ending 30 June 2016. However, Mr Curtis still believes the sector holds some good future dividend opportunities and has been adding to both.

"The UK hasn't been building enough houses in recent years, and both Taylor Wimpey and Persimmon have enough land to build for at least five years - and they've got strong balance sheets and net cash," he says. "We've also had the interest rate cut from the Bank of England with the commitment to keep interest rates very low, so I think all the ingredients are there for the housing market, outside the upper end of the London market, to continue to do reasonably well."

Overall, the fall in sterling that followed the Brexit vote and the resultant FTSE 100 market surge has had a beneficial effect on the trust.

Mr Curtis says: "Although I hadn't expected it, when I woke up on 24 June I found the portfolio very well positioned for Brexit."

The trust has 68 per cent of its assets in FTSE 100 companies, with 20 per cent in mid-caps and 12 per cent in overseas listings. 28 per cent of the trust's dividends are paid in US dollars or euros, and 61 per cent of underlying sales in the portfolio come from abroad.

Verizon Communications (US:VZ), the trust's top-performing stock over the year to 30 June, is a good example. It is one of the big US telecommunications companies - a sector that Mr Curtis likes for its "bond proxy" attributes. Verizon's share price has increased 32.5 per cent in the past year partly because it had an attractive yield of 4.5 per cent and the dollar strengthened against the pound. Other strongly performing holdings included British American Tobacco (BATS), media company Relx (REL) and insurer Amlin, which was taken over by Japanese company Mitsui Sumitomo (Jap:8316).

Mr Curtis has been adding auto-related stocks to take advantage of low oil prices and low interest rates, which are beneficial to motorists. New holdings include German engineering company Daimler AG (DAIMLER:BUD), and UK retailers Pendragon (PDG) and Inchcape (INCH). Like much of the portfolio both these stocks have an international presence, with Inchcape in particular conducting 80 per cent of its business overseas.

City of London is underweight the mining sector and has been reducing its exposure to resources-related stocks. It sold Anglo American (AAL) after the miner stopped paying dividends and has also sold a number of other companies in the oil and mining supply chain, including Emerson Electric (US:EMR), Rotork (ROR) and Weir (WEIR).

Mr Curtis has also reduced the trust's holdings in GlaxoSmithKline (GSK) and AstraZeneca (AZN) as he is worried that their dividends are not well covered. However, pharmaceutical companies still account for 6 per cent of the portfolio. He particularly favours US-listed Johnson & Johnson (US:JNJ).

"Johnson & Johnson is an absolute world leader - one of the few AAA-rated companies left," he says. "In contrast to GlaxoSmithKline, which has £12bn in net debt, Johnson & Johnson has $20bn of cash on its balance sheet and has grown its dividend [every year] for even longer than City of London Investment Trust - since the 1950s."

His trust's own dividend growth success has been possible due to the benefits of the closed-ended structure, he says. Investment trusts can smooth out income payments by retaining up to 15 per cent of the income they receive to build a reserve. In lean years, when their investments pay out less, the reserve can be used to plug the gap.

City of London Investment Trust has continued to add to its reserve, increasing it by 8 per cent over the year to 30 June 2016 to £43,856,000. This covers 85 per cent of the value of the dividend the trust paid in its last financial year.

Source: Winterflood, as at 12/10/16,*Henderson Global Investors as at 31/08/16

Performance

Source: Winterflood, as at 12/10/16

Top 10 holdings, as at 31/08/16 (%)

Source: Henderson Global Investors, as at 31/08/16

Sector breakdown, as at 31/08/16 (%)

Source: Henderson Global Investors, as at 31/08/16