Job Curtis: why I sold Microsoft, and a sector to watch

Job Curtis, manager of City of London Investment Trust, joins our funds and investment education editor Kyle Caldwell in our London studio to discuss why political stability may boost sentiment towards the UK stock market, a sector that could be a winner under the new Labour government, the outlook for interest rates, and why Microsoft is no longer in the portfolio.

City of London Ord (LSE:CTY) invests in UK shares, but has the flexibility to hold up to 20% in overseas shares.

City of London is one of interactive investor’s Super 60 funds.

Please note this interview was recorded in late July, prior to the Bank of England’s August interest rate decision.

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Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. I'm Kyle Caldwell, and today I'm joined by Job Curtis, manager of City of London Investment Trust. Job, great to see you again.

Job Curtis, manager of City of London Investment Trust: Very good to see you.

Kyle Caldwell: For several years now, the UK market has been unloved. There have been various headwinds such as Brexit, Covid, and there's been a number of UK prime ministers. Now that there's a new government in place and there's potentially going to be some political stability, will this boost sentiment towards the UK stock market?

Job Curtis: You're absolutely right, the UK stock market's been out of favour and as a result we've been seeing a lot of takeovers of UK companies from foreign companies, because our shares are undervalued relative, in my view, to the overseas market. I mean that's some of the evidence.

Yes, I think an element of political stability is helpful. Certainly the new government, has set out to be fiscally responsible, which investors would like, and they're also prioritising growth, which should be good for equities, particularly if it embraces the private sector, which they do seem keen to do.

So, yes, I think it should be a positive. The devil's going to be in the detail, really, and it's very early days as we talk today, and what they come out with in terms of new laws, etc. It will be an important factor. But obviously it's a big contrast to, say, a country like France, where they've also had elections and the parliaments ended up gridlocked with some quite extreme elements on either side. Overall, it must be a positive factor for the UK.

Kyle Caldwell: Are there any types of companies, or particular sectors, that stand out for you that may benefit from a Labour government?

Job Curtis: Well, Labour have outlined that they want to build more homes, [and] I certainly think the country is crying out for new houses. There's a generation out there renting who'd like to own and there's people still living with their parents, etc.

One of the ways Labour are going to do it is obviously by reducing planning constraints. That's what they're setting out to do, and they may be better placed to do that than the Conservatives who perhaps had too many people voting Conservative [who] didn't want the houses built in their backyard, so to speak.

So if that does happen, it should be quite good for the housebuilders and at City of London we own Taylor Wimpey (LSE:TW.) and Persimmon (LSE:PSN), two volume housebuilders, and I would certainly think they would be well placed to benefit. To a lesser extent, maybe the building materials companies as well.

We own Ibstock (LSE:IBST), which is one of the UK's biggest brick makers, and also Marshalls (LSE:MSLH), which makes paving stones and roofing products.

The only caveat on that is that some of the infrastructure projects [could] get stopped because of the tight finances. That might be a bit negative for the materials, and some producers. But I think that's certainly one area if you want to get the economy growing. It is an obvious area to boost housebuilding.

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Kyle Caldwell:Another headwind has been rising interest rates. Now it looks like the next move from the Bank of England will be a cut rather than further increases. Is that a positive for the UK market, and have you been positioning the portfolio to benefit from lower interest rates?

Job Curtis: Obviously interest rates had to go up a fair amount because inflation got very high. It got up to 11% and now inflation is back at the Bank of England target of 2%. Having said that, there's still wage increases going through substantially above that. So, I think it's tough in labour markets, quite tight.

I think it's tough for the Bank of England, they've got a decision coming up. My view is that interest rates have peaked, but I'm not in the camp who thinks we're going to get some dramatic cuts. We may get a cut in August, it's on a knife edge. But I'm not someone who sees interest rates going down to the kind of ultra-low levels they were back in the pandemic.

The portfolio's built more on longer-term factors, I don't see interest rates changing massively. I haven't built that in. We're more bottom-up, looking at the companies and their valuations, rather than running it too much on a macro theme.

Kyle Caldwell: You have exposure to banks. So [with] the prospect of lower interest rates, I'm assuming that's a position you would in theory keep due to your view that interest rates are not going back to the days of being 25 basis points?

Job Curtis: Yes, those ultra-low interest rates in some respects weren't helpful for the banks because they make a profit margin between the rate at which they pay depositors and the rate at which they charge lenders, and it's much harder when interest rates are virtually zero to earn that.

But they've had a particular advantage in that they have a lot of their funds they hedge out for, say, five years. So they've got them locked into the old, very low rates. And as those hedges come up, they can re-hedge them at [the] much higher rates that we've got currently.

Banking is obviously quite complex, as we all know, and it's also very dependent on the state of the economy. So, it's the extent [to which] interest rate cuts help growth and stop companies going under, that's positive for the banks.

So, there's a host of factors, but overall, I'm quite positive on the bank sector at the moment. I'm more positive than I have been for over 20 years.

Kyle Caldwell: Investment trusts have the ability to gear, which is borrowing to invest. Could you talk us through your approach to gearing? If you became very confident about the prospects for the UK market, would you significantly increase those gearing levels?

Job Curtis: We are quite a conservative investor, but as you say, gearing is an advantage investment trusts have in rising markets. It will help amplify returns. [It] would [have] the opposite effect in falling markets.

We were able to take out some very cheap long-term borrowings in the period when interest rates were very low. We actually borrowed £50 million at a 2.94% annual interest rate. That goes out to 2049.

We've also borrowed even cheaper at 2.67%, this is £30 million, going out to 2046. So, those interest rates are locked in, and that was done when the base rate was 0.5% or something. So, we took advantage of that and our investors, our shareholders, will benefit from those really low interest rates.

And we can reinvest in our portfolio yielding, the sort of shares we buy, 4.5%. And that we consider a strategic gearing.We've got roughly about 6% and then we've also got a bank facility, and that's based off where current interest rates are, so that's a lot more expensive. So, we can use that, but we have to be a bit more confident that we're really going to make money on that one.

I think those longer-term borrowings, unless the market gets really expensive, which it isn’t in our view at the moment, are kind of strategic and they're locked in and will, in my opinion, give our shareholders a decent benefit over the years to come and next quarter of a century.

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Kyle Caldwell: You have some exposure to overseas listed companies. A company you have held for a long time, but no longer hold, is Microsoft Corp (NASDAQ:MSFT). Could you explain why you sold it?

Job Curtis: Microsoft is a great company. I bought it when it was quite out of favour back in 2011, when people hadn't really heard of the cloud, and people thought Windows was kind of going ex-growth, etc.

When I bought it, it was on a 3% dividend yield and [on] various other valuation measures, it was really quite good value. It's done extraordinarily well and gone up more than 10 times.

I still think it's a great company. I've nothing against the company at all. In one example, its market capitalisation, which is the value of all its shares, is worth more than the whole of the FTSE 100 index when I sold the final part of the holding.

So, I've sold it, just because of the opportunities available in UK equities. So I could reinvest in really good-quality companies paying dividend yields of 3% to 4%. It was more that type of move, and our fund is predominately in UK shares.

We are allowed to go, as you say, 20% overseas listed. Obviously, if you're in a global fund, you're almost bound to be holding it, or a technology-type fund. But we certainly were able to improve our dividend-paying potential with reinvesting back in some good-quality UK shares.

Kyle Caldwell: Could you give us a flavour of the international exposure that you do have? Could you name some of the biggest holdings?

Job Curtis: Yes. So, in the oil sector we have TotalEnergies SE (EURONEXT:TTE). When Shell and BP sadly cut their dividends in 2020, Total didn't. It is a French-based international company. So, I switched some of the holding from Shell into Total, which was the right decision because [it] was a low point for oil shares generally. So, if I just sold Shell I would have lost out by that. So, we've kept in the sector through Total, which has delivered for us quite nicely.

In pharmaceuticals, AstraZeneca (LSE:AZN) is a great company. It's always been quite a low yielder. It's a top 10 position for us, but we're under-represented relative to the market average. We've actually got Merck & Co Inc (NYSE:MRK) of the US, which is also a leader in the cancer field, immunotherapy field. We've had that for a number of years.

We've also got Novartis AG Registered Shares (SIX:NOVN), which is a Swiss-based pharmaceutical company. So, there's a couple of areas where we find the oversea holdings very helpful.

Kyle Caldwell: Finally, I've asked you the 'skin in the game' question before, so I'll slightly tweak it this time around and ask: when was the last time you increased your personal holding in City of London? Have you been attempting to try and take advantage of these low valuations for the UK stock market?

Job Curtis: Well, as you know, I've got slightly over 300,000 shares in City as of today. Share prices worth almost £1.4 million.

We disclose it once a year in the annual report, which comes out in September, and so we don't really disclose it between annual reports.

All I can say is that every year it's either gone up, or stayed the same. It's never gone down. And I think you can take it from me that it won't go down while I'm manager of City of London.

Kyle Caldwell: It's great to hear. And, Job, thank you very much for your time today.

Job Curtis: Pleasure.

Kyle Caldwell: That's it for our latest Insider Interview. I hope you've enjoyed it. Please let us know what you think. You can comment, like, and do hit that subscribe button. Hopefully I'll see you again next time.