Scottish Mortgage’s strong performance weighs on City of London

City of London highlights Scottish Mortgage as a reason why it underperformed its benchmark.

City of London (LSE:CTY) has attributed the strong performance of investment trusts listed in the FTSE All-Share Index, particularly Scottish Mortgage (LSE:SMT), as a reason behind its underperformance over the past six months.

The trust, managed by Job Curtis (pictured above), reported in its half-yearly report that it had returned 6.9% (in terms of the underlying investments held – its net asset value) over the six-month period to the end of December. This lagged the FTSE All-Share Index, which delivered 9.3%.

City of London’s share price, however, was up 12.3% over the same period.

City of London noted the biggest detractor was not investing in other investment trusts, especially Scottish Mortgage. Both trusts are members of interactive investor’s Super 60 list. 

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For 2020 as a whole, figures from JP Morgan show that it was largest-ever year of outperformance by investment trusts versus the FTSE All-Share Index. The FTSE Equity Investment Instruments Index, which contains investment trusts that invest in equities, returned 17.8% in 2020. In contrast, the FTSE All-Share Index posted a loss of 9.8%. Scottish Mortgage is the biggest holding in the FTSE Equity Investment Instruments Index. In 2020, Scottish Mortgage’s share price rose more than 100%. 

Therefore, the outperformance of investment trusts benefited the FTSE All-Share, but this weighed on the performance of City of London, as it does not invest in other investment trusts.

Also negatively contributing was being underweight the travel and leisure sector, and having above average exposure to gas, water and multi-utilities. City of London also said that some of the portfolio’s more defensive holdings were underperformers, such as Nestlé (SIX:NESN), Verizon Communications (NYSE:VZ) and RELX (LSE:REL).

But, on a more positive note, City of London reported that underweight positions in pharmaceuticals and oil and gas paid off. It also noted that its holdings in real estate investment trusts recovered well in the last two months of the year. City highlighted strong performances from M&G (LSE:MNG), Croda (LSE:CRDA) and La Française des Jeux (EURONEXT:FDJ), the French National Lottery operator.

City of London noted a significant improvement in the dividend outlook and said a number of its companies had returned to the dividend list, including BAE Systems (LSE:BA), Persimmon (LSE:PSN) and Direct Line Insurance (LSE:DLG).

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It is confident that despite the challenging backdrop for dividends, it will be able to increase its dividend for a 55th consecutive year.

“City of London’s diverse portfolio, strong cash flow and revenue reserve give the board confidence that it will be able to increase the dividend for the 55th consecutive year. The quarterly rate will be reviewed by the board before the third interim dividend is declared in March 2021,” the report stated.