When Job Curtis took over the management of The City of London Investment Trust (CTY) 25 years ago, the annual dividend was 4p per share. Now the closed-end pays out that amount in a quarterly dividend every three months.
Curtis and his predecessor have managed to grow the dividend for City of London for a total of 50 years – so when the manager says he believes a certain stock or sector is good for income, or struggling to meet shareholder needs, you should listen.
The trust is rated Gold by Morningstar analysts, who call it a “highly compelling option for investors”.
“There are several reasons we have such conviction in the fund. Job Curtis has been at the helm for 25 years, a length of tenure that’s rare to see. Not only has the management been consistent, but the process used by Curtis is little changed over that time, too. “Conservative” is a moniker that permeates through the management of the trust and Curtis is naturally a cautious investor; this caution has served shareholders well over the years,” says analyst David Holder.
But it is not all plain sailing, as Curtis himself admits. The shadow of Brexit has loomed large over UK stocks, and as a result the manager has increased the proportion of the portfolio invested in overseas stocks over the past year.
“When I woke up on June 24 the result was a surprise but I found the portfolio was actually well positioned for Brexit as 28% of the companies I invest in pay their dividends in either US dollars or euros. Domestic stocks were hit badly after Brexit,” he said.
Pharmaceutical Stocks and Banks
This year, Curtis has taken some profits in GlaxoSmithKline (GSK), although he has not sold out of the stock entirely.
“I have reduced the position in Glaxo, it has got a lot of great bits to the business such as consumer brands and vaccines. But my issue with Glaxo and AstraZeneca (AZN) is the dividends are not covered by earnings,” he said. Instead he prefers overseas pharmaceutical companies, Novartis, Johnson and Johnson and Bristol Meyers.
Curtis is also concerned about the UK banking sector, and what the Bank of England cutting interest rates to 0.25% will mean for troubled financial stocks. Royal Bank of Scotland (RBS) remains 70% owned by the UK Government hand has not paid a dividend since 2008, while Standard Chartered (STAN) have cut dividends last year.
“Low interest rates are not good for banks, they make their money on rates and there have been big fines levied recently too,” he said, pointing to RBS and Deutsche Bank (DBK). “I only invest in the good banks, Barclays and Lloyds in the UK and HSBC for international exposure.”
Looking to Housebuilders for Income
UK equities may no longer be cheap on a historical basis, but compared to other asset classes there is growth to be had – and on an income basis UK equities do look attractive.
One pocket of the market Curtis has recently bought into is housebuilder and construction companies, adding Ibstock (IBST) the day after the Brexit vote when the share price was depressed. He also owns British Land (BLND), Land Securities (LAND) and Hammerson (HMSO).
He also bought car retailer and distributor Inchcape (INCH) on June 24 – which benefits from lower interest rates as more people buy cars through loans than ever before.
Are Miners Pay-outs Sustainable?
Curtis holds BP (BP.) and Shell (RDSB) in the portfolio but says that BP’s 7% yield looks unsustainable.
“If Shell of BP cut their dividend entirely I would not necessarily sell as the share price may plummet and then I would be selling at the bottom,” he said. “If I look historically at BP I have held my nerve through trickier times – such as the Macondo oil spill. Having said that, the hardest thing to do as a fund manager is admit you are wrong. Having a dividend discipline is a good thing, it helps you remember why you bought it.”
In order to prepare for the uncertainty ahead Curtis has taken advantage of closed-end funds’ ability to hoard cash to pay out in the future.
“We have had a very good period for UK equity income since the global recession and as a result we have topped up the cash reserves in the trust so future dividends are protected,” he said.
