There is a rich and interesting history behind the original formation of several London-listed investment trusts. If you look deep enough, you'll find links to the likes of Robert Fleming, the hugely successful Scottish financier and the grandfather to Ian of James Bond fame, the economist John Maynard Keynes, and the inventor Alexander Graham Bell, amongst many, many others. The City of London Investment Trust dates back to 1860, originally a business formed to acquire a family brewing business on Upper Thames Street, before evolving gradually over time into the investment portfolio-focused company it is today. Last week, I was delighted to catch up with the long-term steward of this portfolio, Job Curtis from Janus Henderson. Welcome to the Investor Insights podcast hosted by Killik & Co. My name is Gordon Smith, and in each episode, I'll be interviewing portfolio managers from across the investment industry to gain from their expertise in the specialist areas in which they invest and to question them on topical issues. You can access the full series of interviews via the playlist on the Killik & Co. YouTube channel or by searching for Killik & Co.'s Investor Insights on Spotify, where you can subscribe and be notified of future episodes. We hope you're enjoying the discussions so far, and you can get in contact with us about any of the topics discussed via the email address
[email protected]. Killik & Co. is an independently owned wealth manager which opened its first office in 1989 and provides services to help families save, plan, and invest. And you can find more details on the unique ways in which we do that at our website, killik.com. In this week's episode, I was delighted to be joined by Job Curtis, who's been the lead portfolio manager of the City of London Investment Trust portfolio since 1991. Job is a member of the 14-person global equity income team at the asset manager Janus Henderson, and that team is responsible for managing circa £15 billion of assets under management across a range of strategies and fund structures. City of London, ticker CTY, employs a conservative, long-term, valuation-based approach to investing, largely in UK large caps, with a sharp focus on assessing the sustainability of cash generation to ensure resilient dividends can be achieved alongside necessary capex. City of London ticks several boxes for us. With a market cap of around £2.8 billion, it's one of the largest and most established investment trusts across the UK equity-focused sectors. The company uses the advantages available to it as an investment trust structure to very good effect, in my opinion. The company has a hugely impressive track record of having increased its annual dividend payment in 59 consecutive years. This payment is still covered by underlying income generation, but it uses reserves when necessary in periods of temporary setbacks, the pandemic period being a recent prime example. This ensures the investors maintain that dependable income each year. The board implements a strict discount control policy, initiating buybacks and issuance when required, and the adherence to this policy has meant the shares have rarely deviated from a range of around plus or minus 3% from the prevailing net asset value over the last decade. The locking in of low-cost, fixed-rate debt with facilities running through to the mid-2040s also sets this company up excellently to extending its long-term track record of outperformance against both the benchmark and the various sector peer groups. Job is a hugely experienced investor, and the sensible approach to generating compounding returns over the long term, I think, comes across really well in this conversation. Perhaps for some, a welcome interlude from the intense focus on space exploration within the market we've had to digest for much of this month. I hope you enjoyed the discussion, and please get in touch if you'd like a copy of our recent note on the company for further detail. Hi Job, good afternoon. Thank you so much for spending some time for this. I really do appreciate it. How are you doing today?
Very well. Very good to be talking with you.
So we've got this standard first question to these, and I really should think about perhaps changing it because we have done it since the very start, but all it really aims to do is get a bit of an insight into you, really, and kind of how you go about your work. And so what we do is we ask the speaker to maybe share an anecdote from a recent meeting, or even just an insight into something they're working on, or even an article or book. We've had some book recommendations. Is there anything you can just share, just to give us a bit of an insight into you?
It's like I look up very much to Warren Buffett, who many people would think is the most successful investor, you know, of our age, and he's done age 95. So he's been investing quite a long time, and I always find his annual letters to shareholders, you know, very instructive, and anyone can read them on the internet. He's just recently retired as chief executive. He's still chairman of Berkshire Hathaway, and certainly has a very good biography written by... there have been several books written about him, but by Alice Schroeder, which is probably the kind of most recent biography, which is well worth reading. You can learn a lot from him, even if one doesn't sort of copy him at all, you know. But I think, you know, he has just got a great attitude and incredible mind, and I'm reminded of something he said in the middle of the financial crisis, and he said that, and because Berkshire Hathaway entered the financial crisis with a lot of cash, and so he was in a position to rescue... actually ended up rescuing, providing equity injections on very favourable terms to a number of companies. And I remember him saying at the time, you know, when things look pretty bleak, that you should be greedy when others are fearful. And then he went on to say, but you should also be fearful when others are greedy. And I think, you know, right now, you know, possibly the second half of that statement, it was definitely right in 2009 or 2008 when he said it to be greedy when everyone was fearful, but right now, you know, maybe one should be a little bit fearful when others are greedy. Yeah, so that famous quote from Buffett did come to mind over the last week or so with huge equity raisings in America, you know, for billions and billions, you know, in the tech and AI area.
Yeah, no, absolutely. No, yeah, great quote. Yeah, thank you for that. Yeah, it's interesting you say it, even if you choose not to copy him, because I agree. I think there's a lot of read across to every investment style that you can learn from someone like Buffett. Yeah, absolutely. I was thinking of this next question. What I'm aiming to do here is just kind of set the scene for the rest of the discussion, really. I wondered if I could ask you to summarize some of the key features of your own investment approach. And I know at City of London, one of the kind of standout things is that great record of dividend progression, and I know there's ways that you'll use the investment trust structure to kind of help with that. Perhaps we'll touch on that in a slightly later question, but I wondered if I could ask you to talk through how you look to do that when you're choosing or selecting investments or constructing a portfolio, those kind of key characteristics you're looking for?
And so, I mean, our approach is valuation-driven, and in terms of share price valuation, it's really important for me. And, you know, we obviously start with dividend yields, but look at a whole range of valuation factors. But we want to be in companies that are growing their profits and dividends over the long term and investing enough for the future. So we want to avoid the kind of high-yield value traps. And so, you know, we do a lot of fundamental analysis on the companies. We, Janus Henderson, we've got outstanding analysts, and named as Henderson the best analysts on the buy-side or sell-side, and they're very helpful. And my deputy, David Smith, and myself, you know, we do our own work based around, you know, the ideas we get internally and externally. But so it's valuation-driven, but also it's a very conservative approach. I mean, I'm a conservative character, as is David, and, you know, we're looking for companies with good cash generation, and they're best able to both pay dividends and enough for the future. And we're like trying to avoid highly indebted companies in cyclical industries. I mean, they tend to, when you get a downturn, you know, they're the companies that hit real problems and, you know, end up certainly having to cut their dividends, you know, as well. So, um, so I think it's a mixture of sort of valuation-driven and quite a conservative approach as well.
Yeah, no, thank you for that. I mean, the investment trust structure is another thing which can really help with implementing the strategy, and I think that comes across. I wonder if you can maybe talk us through some of the levers that you can pull with that closed-end structure.
Absolutely. I mean, I think really three real major levers. First of all, we couldn't have achieved the dividend record without the investment trust structure. I mean, certainly, obviously, we need a core of consistent companies in the portfolio, which we have, but also in the difficult years for dividends, like 2020 during COVID, when FTSE 100 dividends went down 36%, we can draw on our revenue reserve, which we build up in the good years. We can add a bit to the reserve in the good years, and we can draw that down in the difficult years and keep our dividend going. And that's how, you know, in addition to having good quality companies, we've had the 59 years of dividend progression. Second factor is gearing. And, you know, when interest rates were ultra-low, we did buy, we did issue some very cheap debt. So we've got two private placement notes. We borrowed it for 25 years at 2.67% and 2.94%. So this is kind of way below what the government can now borrow at, as you know. And so those coupons, you know, if we can't beat those over the next 25 years, you know, we might as well all give up, and they will add a lot of value to our shareholders over the next 25 years. And yeah, and probably another thing to mention in an investment trust sense is that, you know, we do issue shares, but at a premium to NAV, as we have been. And so we issued at a 2% premium, and that is accretive to NAV in a small way. But City of London, we also have a policy of also buying back on a 2% discount, which is also, because you're buying at a discount to NAV, is also accretive to NAV. And it's quite a technical thing, but I think the most important thing to draw from that is that our relationship between our share price and our NAV will range in a very tight range. Over the last 15 years, it's been within a 3% premium and a 3% discount. So, you know, we haven't suffered the big kind of moves in discount that you sometimes get with other investment trusts.
Yeah, and I thank you for that. Yes, some really important points in there, and just how everything kind of pulls together to enhance the return. Yeah, the very valuable long-term gearing. Very, very useful. Job, but I've got a couple of macro questions, if I may, to kind of move the conversation on, and then I promise we'll move on to talking about the portfolio and some of the elements in there. But I mean, it is difficult at the moment to kind of get through some of the financial press without talk of the uncertainty around whether it's the kind of political leadership in the UK or the kind of stresses and strains on the UK economy. I wonder if I could ask you, obviously this is a largely UK-listed portfolio, kind of how you would address that kind of understandable investor caution, I guess?
I mean, the key point is that the UK stock market does not equal the UK economy or the UK. In fact, just as an illustration, City of London's portfolio, some 60% of the underlying sales or revenues of our companies come from overseas, so only 40% come from the UK. And, you know, we've got, like, if you look at our top 10, it's loads of kind of global companies which just happen to be listed in the UK. So I think that's the key point. But I would also say, because of these worries about the UK and, you know, sort of political instability we've had in recent years, you know, the UK is on a discount rating relative to the rest of the world. And, you know, if you look at, you know, we look at all sorts of different valuation methods, but I mean, one of the main ones, on a price-earnings ratio, the UK, even if you strip out the differences of sectors, it's still very cheap relative to global markets. And on a dividend yield, we have one of the best dividend yields of all markets. Our market's yielding around 3% at the moment, but in addition, companies are, you know, engaging in a big share buyback at the moment. And the share buyback of the UK is worth some 2% of the market cap of the UK. So if you add the dividend yield and the share buyback of 2%, the 3 plus 2 gets you to at least 5%, which is a pretty attractive total distribution yield, we call it. And, you know, the share buyback yield is now bigger than the American equivalent share buyback yield as a percent of their market, and we've got a much better dividend yield. So as a result, you're seeing a lot of takeovers of UK companies because we've got an open system for corporate control. And in City of London's portfolio in recent months, we've had a bid for Beazley from Zurich Insurance, of course, of Switzerland. We've had a bid for Schroders from Navient, which is an American company, and just recently a bid for Tate & Lyle from Ingredient, which is another American company. And, you know, there've been loads of other takeovers. So I think, you know, I would say with the UK stock market, it isn't the same as the UK economy or the UK. It's mainly global companies, and you're being paid while you wait.
