Benefitting from strong stock picking: City of London

CTY has benefitted from strong stock picking and the structural advantages of investment trusts…by William Heathcoat Amory

Overview

 
Like its namesake, longevity permeates the City of London Investment Trust (CTY). CTY has the longest track record of any trust, having raised its dividend for 57 consecutive years (see Dividend section). Much of this track record can be attributed to Job Curtis who has managed the trust for approaching 33 years. Job’s investment philosophy has clearly been critical to CTY’s success, but so too is the ability to tuck away surplus income into a reserve, and thereby smooth income payouts to shareholders.

This is very much an actively managed portfolio, with an expected number of holdings between 80 and 90. Part of Job’s approach is to maintain a broad spread of investments. By not taking large stock or sector positions when compared to the benchmark, Job and his deputy manager David Smith believe that their stock selection will add value but at the same time does not expose investors to undue risks. In the Portfolio section, we illustrate how Job prefers companies that are not hostage to fortune, or ‘turn-around’ stories.

CTY’s board believes that gearing will enhance returns over the long term, and so took advantage of the previous low interest rate environment by arranging long-term, low-cost debt (see Gearing section). At 7%, CTY’s gearing level remains significantly below the five-year average, and below the average of the peer group. In our view, this chimes with Job’s cautious and practical approach to investing for the long term.

CTY’s significant size puts it at an advantage. In the recent interim results, the board announced a management fee reduction from 0.325% to 0.3%, effective 1st January 2024. Low charges are one of the contributors to the virtuous circle that CTY finds itself in, enabling it to continue to issue shares and grow its asset base.
 

Analyst’s View

 
Weathering the occasional storm is part and parcel of long-term investing, and in our view, the inherent advantages that investment trusts have, combined with Job’s stock-picking skills have clearly helped. Having been a portfolio manager for nearly 33 years, Job’s experience is one of the unique aspects of CTY. The trust has consistently delivered on its objectives for many years, and in our view—given the repeatable investment process that emphasises spreading risks and investing based on fundamentals—it is in a strong position to continue to do so.

This is an active strategy, and so positive attribution from stock selection is the hallmark of success. Whilst Job has unequivocally added value over the years from his stock picking, the unique tools employed by investment trusts have also added to returns. As we show in the Performance section, Job’s stock selection has been strong over the past decade, but gearing has also contributed to returns more years than not. We also note that share issuance has contributed consistent and significant value to shareholders, in some years making a considerable dent in offsetting the trust’s already low ongoing charges (see Charges section).

Over the last five years, CTY’s average premium to NAV has been 1.2%, which compares to the current slight discount to NAV of 0.6%. In our view, CTY’s lower discount volatility is as much a result of the board’s share issuance and buyback activity, as it is the high-quality proposition that CTY represents as a long-term investment vehicle. If the past is anything to go by, the opportunity to buy CTY’s shares on a small discount may not prove to be around for long.

Bull

• Very low OCF of 0.37%
• Consistency and experience of manager who has delivered long-term outperformance of the FTSE All-Share Index in capital and income terms
• 57-year track record of progressive dividend increases

Bear

• Cautious approach means that NAV performance can underperform in some market conditions
• Income track record highly attractive, so manager might risk long-term capital growth in trying to maintain it
• Structural gearing can exacerbate the downside

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_{Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by City of London. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}