- On course for 57th successive dividend hike
- Mining sector underweight detracts from H1 performance
- Numis views trust as an ‘attractive core holding’
Popular investment trust City of London (CTY) produced a positive return for the first half to 31 December 2022 despite turbulent market conditions, though performance was slightly behind the 5.1% rise in the FTSE All-Share index.
But the good news for investors is net asset value (NAV) is up 6.9% on a total return basis since 31 December compared to 6.7% for the index.
And the board is confident the Association of Investment Companies’ (AIC) ‘dividend hero’ will extend its record of unbroken annual dividend growth to 57 years thanks to its diverse portfolio, strong cash flow and revenue reserve.
WHAT WORKED AND WHAT DIDN’T?
Managed by the long-serving Job Curtis, City of London generated a 4.5% NAV total return in the face of ‘continuing turbulence in global markets and a brief period of unprecedented political volatility in the UK’ following the Truss government’s disastrous mini-budget.
While gearing made a positive contribution to returns, stock and sector selection hindered performance in the half; being underweight in mining was the largest sector detractor, while not owning mining giant Glencore (GLEN) proved the biggest stock detractor.
Also weighing on performance were City of London’s stakes in housebuilder Persimmon (PSN) and US mobile phone network Verizon (VZ:NYSE), though the three best stock contributors were reinsurer Munich Re, oil company TotalEnergies (TTE:EPA) and Hong Kong-based conglomerate Swire Pacific (0019:HKG).
Earnings per share fell by 1.7% year-on-year, from 8.94p to 8.79p, mainly due to reduced dividends from miners reflecting lower prices of commodities such as iron ore, but the trust benefited from ‘pleasing increases’ from the banks and oil companies in the portfolio.
WHICH STOCKS HAS CURTIS BEEN BUYING?
Having consistently traded at a premium to NAV, City of London raised £65.5 million in the half by issuing new shares and invested the proceeds across the portfolio, where top ten holdings include cigarette maker British American Tobacco (BATS), energy giant Shell (SHEL) and consumer goods giant Unilever (ULVR).
However, Curtis also purchased three new holdings in the half, namely packaging, paper and recycling business DS Smith (SMDS), advanced materials-to-engineering concern Morgan Advanced Materials (MGAM) and banking group NatWest (NWG).
These were partly financed by the sales of wealth manager Brewin Dolphin, which was taken over by Royal Bank of Canada (RY:TSE), and chemicals company Synthomer (SYNT), which was ditched after coughing up profit warnings and suspending the dividend.
THE NUMIS VIEW
Numis continues to view City of London as ‘an attractive core holding for investors seeking income from UK equities. Job Curtis has managed the fund since 1991 and his track record over the past 10 years has been strong, with the NAV total returns of 103% (7.3% per annum) compared to 88% (6.5% per annum) for the FTSE All Share.’
The broker added that City of London has ‘been in high demand of late and was the largest issuer within the UK Equity Income sector in 2022 and one of the larger in the universe.
‘The fund also pays an attractive yield of 4.7% compared to an average of 3.8% for the sector and the fund has increased its dividend every year since 1967’, pointed out Numis, noting that City of London is ‘the largest within its peer group, with net assets of £2 billion’ and shareholders benefiting from ‘a low ongoing charges ratio of 0.38%.’
