Interview with Job Curtis from City of London Investment Trust

Absolutely. So I'll run through the presentation for about 15 minutes and then obviously open it to questions. So if we can move on to the next slide, which gives you some of the background of the trust. So we actually, it was originally a brewery company. That picture you can see is the old brewery on the banks of the Thames by Lower Street, near where Cannon Street station is now. It closed down in the 1930s and we became an investment trust at that point. We were still in pubs until the early 1960s. It's always, in contrast to some of the trusts talked about earlier, it's always had a very independent board of directors. With James Dyson as chairman since 2020, the objective is to grow invested capital over the long term, with a particular emphasis on dividend income. About two billion, slightly over two billion of net assets. We've issued a lot of shares over the years at a small premium, but more recently when we got to a discount of 2 to 3%, we bought back some shares in the first half of the year, around 35 million pounds worth. And we're very well known for the longest record of annual dividend increase of any investment trust, and I'll go into that in a bit more detail. So next slide, please.

We make use of some of the structural benefits of investment trusts with revenue reserves, issuing and buying back shares, and gearing, and I'll talk more about that coming up. Next slide. So I've been manager of the fund since 1991, so it's a huge honour, 33 years as manager, and I've worked with David Smith for over 10 years, and he was appointed deputy in 2021. We have a very competitive management fee at 0.3% of assets. Given the growth of the trust's size, it was actually negotiated downwards by the board at the beginning of this year, but it was previously 0.325. So the ongoing charge, which is 0.37, which is already the lowest in our sector, we expect to go down when the new management fee rate kicks in over the full 12-month period. And we've issued some very cheap long-term debt. We took advantage of the period when interest rates were ultra-low, and so we issued a 30 million pound private placement note going out to 2046 at 2.67% annual interest, and a 50 million pound one at 2.94% annual interest going out to 2049. So we've really secured really cheap borrowings for our shareholders for investment in equities for the next quarter of a century, and obviously this is way cheaper than the government can now borrow at. Next slide.

So in terms of my investment philosophy, I won't go into huge detail, but it is valuation-driven. I really look at the share price valuations and equate them to companies' prospects, and dividend yield is the single most important factor. But I want to be in the companies that can grow their dividends and profits over the long term, so they need to be investing enough for the future and not overpaying on their dividends, and I want to avoid the high-yield value traps. And then I'm a pretty conservative personality, that's reflected in the portfolio, and we like companies with good cash generation, they're best able to pay their dividends and invest enough for the future, and we also like strong balance sheets, we particularly like physical companies. Next slide.

So to talk a bit about the performance. So the chart shows performance since I became manager in 1991, those 33 years, and we're well ahead of the index over that time, as you can see. The table below looks at the more recent performance over the 3, 5 and 10 years, and we're ahead of the index over 3, 5 and 10 years. Against our investment trust sector, we are ahead over 3 and 5. We're very marginally behind, rather annoyingly, over 10. We're 91.1, the sector average 92.7, but we're well ahead of the UK equity income sector over 3, 5 and 10 years. Next slide. And this chart, what our clients are also very keen to show you, is the discrete performance of the 12-month periods. Next slide.

So this is the revenue. So how have we achieved this dividend growth every year going back to 1966? Well, the earnings per share don't actually go up every year. And if you look back over the last five years, I mean, we don't actually have the... if you look at the year to 30 June, we're already at the year to 30 June 2020, actually, the earnings per share were down. That was the year when COVID hit and we had all those dividend cuts. I mean, FTSE 100 dividends went down by 36%. It was worse outside the FTSE, and our earnings were down, but we still grew our dividend that year. And how we managed that was we paid out reserves. So we built the reserves up over the years, and we paid out 21%, which is the most we've ever paid out in reserves in my whole 33 years as manager. And the next year there was a recovery, earnings per share got up to 17.09, 20.11, 21.3, put back into our revenue reserve. So looking at that year, the dividend was up 2.5%, which was slightly ahead of inflation, which was down to about 2.1% for the 12 months. I mean, in terms, I mean, obviously in 23 and 22 we didn't beat inflation for our annual increase when inflation spiked up to 10% plus. But we look at it, the board is keen to beat inflation over the economic cycle, which we say is a 10-year period. And over 10 years, our dividend's up about 40% compared to 33% for the CPI. Next slide.

So this gives you the whole history of the dividend going back to 1966, shows you how it compounds up. And then the chart on the right, pie chart, is quite interesting, just shows you the spread we have. So we don't, it's classic, we don't have all our eggs in one basket. We've got certain biases like consumer staples, 18% of the income, which is fairly solid. Banks has grown a bit with the growth in dividends for banks, that's up to 14%. Next slide.

So I'll talk a bit about how I'm seeing the market and the positioning. I've got two charts here. The first one is the PE of the market, and it measures a share price with earnings per share or kind of profits per share, and it's really bang on the very long-term average. So on this basis, the market's kind of neither cheap nor expensive. This chart goes back over 20 years. In terms of yields, so we've got the FTSE share yield, but we're also comparing with base rates, 10-year gilts and 30-year gilts. And actually, we've now got a situation where equity yields are yielding less than you can get on base rate or 10 and 30-year gilts. But this is nothing unusual. I mean, what was unusual really was the period since the financial crisis when equities have yielded more than fixed interest. For most of my career, equities have yielded less for a very good reason. You get growth and dividends over the long run, so you would expect equities to yield less. I'm not too bothered by that in terms of where I am. I have felt for a time that inflation, but it's back at target, slightly below. The last print was 1.7%, but I think we have got quite sticky wage growth, and in particular, we've had some big public sector wage increases with no productivity benefits. Minimum wage has been put up another 6.7%. So I think I've been in the camp, you know, interest rates are coming down, but I felt that they're going to come down more slowly than many in the market were expecting. And certainly the budget yesterday, it's a lot of big addition to public spending. I think 70 billion per annum, and that has put pressure on the gilt market. So I think the Bank is going to probably see one cut this year, but it's going to tread quite cautiously, would be my view. And I think the other factor globally is really just geopolitical tensions, with war in Ukraine carrying on, war in the Middle East, and tensions with China. So our gearing is quite low at the moment, it's down about 5.4% off kind of fixed-rate borrowings, fully invested, but our borrowing facility is pretty well unutilized at the moment. But I would say with UK equities, you are paid to hold on. It's a very attractive dividend, mixed dividend growth, and we're seeing lots of takeovers in the market. Last year we had Wincanton and Renishaw, which both got taken over. We've also got Britvic and DS Smith, which have been bid for. So we're seeing plenty of action in our portfolio and across the market generally. Next slide.

So this just talks a little bit about the structure of the portfolio and how it's evolved. And we're down to about 82 holdings. I mean, we've got a slightly longer list than some funds, but we are a portfolio of over two billion, and having the smaller holdings gives me exposure to sort of some of the mid-cap stocks, which might be tricky in terms of liquidity. Otherwise, we're predominantly in FTSE 100. I mean, one trend is we've moved away a bit from overseas-listed stocks, just because the valuations are so much cheaper in the UK. So we were like 15, 17% in ABR, that's back in 22, and we're down to about 9% at the moment. I mean, one sector where we've added a bit has been banks, where particularly NatWest, we've doubled our holding in NatWest at the beginning of this year, which has worked well, and we've now moved overweight banks for the first time in over 20 years. And I think one of the key factors here is what's called the structural hedge, and that banks, they've all kind of deposits, they hedge out on a kind of rolling basis. So they have got hedges which they took out during the period of ultra-low interest, which when they mature, they can re-hedge at much more attractive rates that you can get now. This is a positive tailwind for bank profits as we see it. So we quite like the banking sector. Second biggest sector is what's called investment banking and brokerage. It's kind of an American term, but it actually should really be called financial services. And we've got some decent holdings here, M&G, a mixture of fund manager and life assurer, IG Group. We've also got 3i in this sector, which has been a very good performer for us. We've actually reduced our holding recently, but it's, yeah, because it's done so well, but it's, that's included in this sector. And then the third biggest sector is personal care, drug and grocery stores. Unilever is our biggest holding, but we've also got Tesco, which has done well. Oil, we are underweight, but we have got a decent holding in Shell, also BP and Total, the French oil company. And pharmaceuticals, we're underweight. We've got AstraZeneca, it's always a difficult stock for a UK income manager to have a full weighting in, but we've done well in Merck of the US and Johnson & Johnson and Novartis, as well as a smaller holding in GSK. Next slide.

And I think this is a really important slide because obviously we are known as a UK equity income fund, that's what we'll always be. But if you drill down into the companies we invest in, they are quite predominantly global companies. And we've looked at the whole portfolio and drilled down, some 63% of the revenue in the portfolio comes from outside the UK. So almost approaching two-thirds of the revenue, and you see a good spread with North America, Europe ex-UK, Asia Pacific, and Emerging Markets. Next slide.

So to finish off, it's 58 years of annual dividend increase, which is the longest record of any investment trust. In fact, it's longer than any UK quoted company that I know of. There are some in America with longer records, like Johnson & Johnson, which we hold. As I said, the revenue reserves have been absolutely critical. We couldn't have achieved it as an open-ended fund. There have been some years we would have had to cut our distribution, but obviously we've also got a core of consistent companies, and that's been a big factor as well. Charges are very competitive, the lowest in our sector, and with the lower management fee rate from the 1st of January, that should be heading downwards over the next 12 months. And we've achieved a long-term outperformance of the FTSE All-Share through a conservative investment style. So thank you very much for listening. I'd be very happy to take questions.

I think it's, I mean, my whole approach is really kind of bottom-up and, you know, led by the stocks. And, you know, it's where I can buy into stocks with attractive dividend yields and good, you know, valuation, other valuation characteristics. I'm kind of willing to overlook the kind of noise, short-term noise of the market to an extent. But we do, you know, I don't ignore the macro factors. And certainly at the board meeting, we have eight board meetings a year, and we look at some kind of key valuation measures for the UK market and borrowing costs, etc. So it's something, you know, is discussed with the board, and I have some discretion on the gearing between meetings as well. So we don't ignore the macro side of things. And, you know, if the market had a sort of big correction, that would obviously immediately, you know, we'd be interested because the market would be cheaper, but also all of our stocks would be cheaper. So we would, you know, that would kind of trigger, you know, interest. So I think it's predominantly bottom-up, but it also with some macro overlay as well.

Yes, I mean, certainly, you know, we bought Microsoft back in 2013, and we held it for over 10 years, about 10 years, and it performed incredibly well. It went up 10 times, and that was a classic example of having access to a stock we couldn't kind of really find in the UK. I think also in certain sectors it gives you a bit of diversification. I mean, particularly the oil sector. I mean, when Shell cut its dividend in 2020, we actually switched some into Total, which didn't, the French company, which didn't cut its dividend, and it's done well. I mean, Shell's recovered as well, but I didn't, I sold about a third of Shell holding, so still, we still got Shell, and but by having some Total, that sort of meant I didn't lose out from recovery in the oil price and the sector generally, while still getting decent yield. And in pharmaceuticals, you know, rather than just Astra, GSK, or GSK, so, you know, we've had some interesting stocks in the US. And actually, you know, AstraZeneca is, you know, a very good company, been very successful scrubbing new drugs, but it's actually, its valuation isn't particularly cheap relative to what you can find overseas. So that's a good example of, you know, so we've done what, you know, Astra's done well, but we've benefited in the stocks we've held. And then, you know, we've seen one or two value opportunities. We've got Swire Pacific, just HK, ST listed in Hong Kong. It's actually controlled by a British family, and it's a very interesting stock. It owns 83% of Swire Properties, which is quoted on the Hong Kong Exchange, and also 45% of Cathay Pacific, the airline. And if you add the value of those stakes, the rest of Swire Pacific is in the price for nothing, and that includes the biggest Coca-Cola bottler in the Pacific region. So it's kind of a family-controlled stock. So, you know, people, it's not in the, I don't, it's in the Hang Seng index for some obscure reasons, but it's sort of, so it's kind of off a lot of people's radar screen. But I think it's a real kind of value stock, so we're all interested in, and it's conservatively run, you know, low debt, etc. So it's kind of, it's an interesting way to play the sort of Hong Kong and Asia Pacific markets. Our only stock out there, by the way.

Yes, I mean, sometimes you get a kind of a company suspending the dividend, and you wouldn't just immediately sell it because it could be the worst possible moment. And, you know, we've got something called XP Power, very small holding, and they've stopped paying a dividend, but actually, you know, I hung on to that one. It would have been difficult, been a big holding, and they did get a bid approach actually earlier in the year as well, which they've rejected. And I think that one will eventually recover. But I think in general, I, you know, I wouldn't sort of be buying anything on a dividend, any on less than two percent. I mean, we've got some big holdings. I mean, Relx has been one of our best holdings. I think at the end of September, it was our second biggest or third biggest holding. It's right up there, and that only yields 1.7 percent. And but I've, you know, I believe in that stock, and I think it's one of the best stocks in the UK market in terms of, you know, the quality of its business. But then we can balance that by, you know, also in our top ten, we've got British American Tobacco, which yields kind of nine. And so, you know, people complain, why do you hold BATs and Imperial Group? But, you know, we've got those ones to provide the kind of dividend income, which is really important and allows us to have exposure to lower yields. So overall, the portfolio's got a tilt in terms of its yield above average market. It kind of, you know, usually it's between about twenty to thirty percent more than the index yield. But within that, we can hold some low yielders as we do. Difficult though to have, I mean, I tend to rule out non-dividend paying stocks. I wouldn't contemplate buying a non-dividend paying stock, to be honest. And, you know, you wouldn't see me buying anything yielding less than two, I mean, adding to anything that I already got. But we can run our winners, so, and as we do with really good quality companies.

Well, I think, I mean, I think they've got two interesting strategies. I mean, BAT is kind of investing quite heavily in less harmful products and is the leader in vaping in the US. But they've got an issue in that there's kind of lots of semi-legal disposable Chinese vapes which are eating away their share at the moment. But Imperial is kind of more focused on kind of share buybacks. It's got less debt, and it's actually performed better. So, I mean, I think the kind of existing business of cigarettes is still very profitable for both companies, and, you know, it does throw off a lot of cash. And so I think it's, I mean, I got to know, you know, ultimately, you know, the cigarette smoking will end, you know, at some point, hopefully. But I think there's quite a long runway. And in the meantime, I mean, Imperial has been buying back its shares for eighteen months, and it's bought back around approaching ten percent of its equity in that period. And so at the same time, it can be growing its dividend by four percent. So the actual cost of the dividend for the company is going down because it's reducing its share count rapidly. So when you're incredibly cheaply rated as these companies are, you know, it is very advantageous to buy new shares, you know, for the existing shareholders. And, you know, people have talked about the, I mean, the Conservatives brought in this idea that people, I think, born in 2009 will never be allowed to buy cigarettes in the UK, and Labour are going to do the same thing going forward. But I think curiously, they're not going to be banned from smoking itself, but they're just going to be banned from buying cigarettes. But in any case, the way Imperial brand is going, by the time this really kicks into action, I don't think there'll be any shares left. You know, if they're buying ten percent every eighteen months, it's going to sort of... So I'm not too worried about it, to be honest.

Yeah, I mean, it's, it's Lloyds in particular. I mean, Barclays, NatWest has no exposure, hasn't been doing car finance. Barclays has got very modest exposure. It's not a factor for HSBC either. So those are the four I hold. But it has, I mean, certainly this judgment, if it has got implications for all commission, you know, including, you know, whole, not just car finance. So, you know, I think there are, you know, it could have a quite a, it's already might well be having an effect on people buying cars. You know, if you could, you know, in S, a lot of people have withdrawn, are staying off, still offering car finance, but several of the people previously have actually halted offering it. So I think there need to be some urgent discussions. I'm sure there are going on with the authorities because I think it could have some kind of unintended consequences, this ruling, and, you know, leading to, you know, real impact on the economy. So, so Lloyds is the only one of these four banks I've got which has got a material exposure. But I think the share price has reacted negatively to last Friday's court judgment. So I wouldn't, I'm not planning to take any action at these levels on the shares, but obviously it's something we're watching closely as events unfold. I mean, there will be an appeal to the Supreme Court, so that'll be interesting to see, you know, what happens with that. That'll take, that may not, I mean, that could take a few months for any verdict on that to come through. And in the meantime, to see what kind of, what kind of the FCA comes out with in terms of, you know, how they're reading it. I mean, certainly Sir Howard Davies, previously a very senior regulator, he was a bit critical of some of the FCA's wording in his testimony to the House of Lords a couple of days ago.