City of London outpaces its benchmark and ups dividend

The Super 60 investment trust returned 5.9 percentage points ahead of the FTSE All-Share Index in the year to 30 June 2022.

City of London Investment Trust delivered market-beating performance for shareholders in the year to 30 June 2022, posting a net asset value (NAV) increase of 7.5% compared with a 1.6% gain for its benchmark, the FTSE All-Share index.

Shareholders gained even more, with City of London (LSE:CTY)’s share price rising 7.7% over the reporting period, finishing on a 2.5% premium to NAV. City of London is on interactive investor’s Super 60 investment ideas’ list.

The typical UK Equity Income investment trust fell 1.5% over the same period, in NAV terms. The FTSE 100 index (comprising the largest UK-listed companies) produced a total return of 5.8% during the year.

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City of London announced that its dividend would be increased for the 56th consecutive year. It will pay 19.6p per share for the year to 30 June 2022, compared with 19.1p the year before, a 2.6% increase.

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The trust has increased its dividend by 41.2% over the last 10 years compared with a cumulative increase in UK CPI inflation of 26.5%. City of London chair Sir Laurie Magnus said the board understands the importance of growing the dividend in real terms through the economic cycle.

The increase means it keeps its “dividend hero” status, as calculated by industry body the Association of Investment Companies (AIC). AIC dividend heroes are investment companies that have consistently increased their dividends for 20 or more years in a row.

In a recent video interview with interactive investor, City’s longstanding fund manager Job Curtis pointed out that with inflation at high levels there’s a greater appreciation for dividends.

City of London’s focus on large, high-yielding companies, rather than highly valued growth stocks and medium-sized and small companies was the main driver of performance.

The biggest stock contributor was BAE Systems (LSE:BA.), the defence equipment manufacturer, followed by Imperial Brands (LSE:IMB), the tobacco company. Brewin Dolphin (LSE:BRW), the private client wealth management group, which received a takeover bid from Royal Bank of Canada, was the sixth-biggest stock contributor. The underweight position in Shell (LSE:SHEL) was the biggest stock detractor over the 12 months.

Curtis made a number of key portfolio changes during the year. He initiated a new holding in wealth manager Rathbones Group (LSE:RAT), which he said was at a cheaper valuation than the takeover price paid for rival Brewin Dolphin.

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Curtis said: “Private client wealth management is enjoying secular growth as people choose to take more control of their pension assets.”

Another change was reducing its position in BHP (ASX:BHP). Curtis said: “The most important commodity that BHP mines is iron ore, which is very dependent on demand from China. After the strong performance of the iron price in recent years, there were grounds for some caution and therefore a reduction was made in BHP.”

Curtis argues that the portfolio is well set up to deal with high inflation. Consumer staples companies, which make and sell everyday products, constitute 20.5% of the portfolio. 

He said: “They tend to have a degree of pricing power to cope with inflationary cost pressures. Three of the 10 largest stocks in the portfolio are consumer staples companies.”

HSBC (LSE:HSBA) is the seventh-largest holding and there are also smaller positions in Lloyds Banking Group (LSE:LLOY) and Barclays (LSE:BARC) in the portfolio.

Curtis says: “Banks should benefit from the rise in interest rates as they are able to improve rates for deposit accounts and the margin between deposits and loans.”

City of London shares are flat since 30 June and trade at a 1.5% premium. They yield 4.9%.

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Numis, the investment trust analyst, said following the results that it continues to view City of London as “an attractive core holding for investors seeking income from UK equities”.

It points out that over the past decade its track record has been strong, with the NAV total returns of 102% (7.3% a year) compared to 85% (6.3% a year) for the FTSE All-Share.

It adds: “The fund also pays an attractive yield of 5.0% compared to an average of 4.1% for the sector and the fund has increased its dividend every year since 1967. The fund has been active in issuing shares to meet demand during the period, which has continued post-year end, and benefits from a low ongoing charges ratio of 0.37%.”