Income seekers know it is not enough to simply invest in dividend paying shares. In order to beat the eroding effect of inflation, the best kind of investment will grow its dividend each year.
The City of London Investment Trust has managed just that - every year since 1966. Fund manager Job Curtis has run the trust since 1991, and he says the most important driver is to find good quality companies with strong balance sheets.
City of London trust is Morningstar Analyst Gold rated, with closed-ended fund analyst Jackie Beard calling it a "stand-out trust".
In the latest "Why Should I Invest with You?" video, Curtis explains how he filters appropriate stocks and how to effectively use gearing within an investment trust.
Emma Wall: Hello and welcome to the Morningstar series, Why Should I Invest with You? I am Emma Wall and here with Job Curtis, manager of the City of London Investment Trust. Hello, Job.
Job Curtis: Hello. Thank you for inviting me.
Wall: So you have successfully managed to grow the dividend on the income trust for quite some time. How have you managed that?
Curtis: Yes. Well, it has grown for long time. It's actually grown every year since 1966, but I haven't managed it that long. I started in 1991 and I think, first and foremost, it’s investing in good quality companies with strong balance sheets and with visibility of profits and dividend growth. That’s what I look for first and foremost. But, in addition as an investment trust, we don't have to distribute all our income every year. So in the good years we build up a revenue reserve, which we are able to distribute – dip into in the tough years for dividend growth across the market, and I think that's a secret feature which – or not so secret feature; which the older investment trusts are able to use.
Wall: Another feature that's unique to investment trust is gearing. How do you successfully manage this within the fund?
Curtis: Well, gearing, it's a very good question. I mean, gearing does help performance in a rising market, but obviously it will aggravate a fall in a falling market. So you have to use it with care, but certainly gearing – or using a little additional debt on top of the assets – is something that investment trusts can use which open-ended funds can't use. In the case of City of London, we have a pretty conservative portfolio. I'm a conservative fund manager, and so that means that it lends itself to have a little bit of gearing to enhance the performance in rising markets. Because we’re in the less volatile shares, it tends to be what in the trade we call lower beta portfolio. It holds up relatively well, historically has in falling market. So a small amount of gearing, I think, is appropriate. Certainly, if you look at the companies we invest in, they actually are fairly geared. So I tend to favor strong balance sheets, but with the cost of borrowing as low as it is, it is advantageous for companies to gear and investment trusts can follow that to a degree.
Wall: You have a U.K. focus. What would you say that the main challenges facing the U.K. stock market are at the moment?
Curtis: Well, admittedly the fund is predominantly in U.K. listed shares and currently we’re about 93% U.K. listed shares, but the U.K. is the second biggest stock market in the world after the U.S. is much the biggest, then the U.K. is just bigger than Japan these days and it’s full of international companies, even actually around 70% of U.K. stock market earnings come from overseas. So we're not overly dependent on the U.K. economy, but actually the recent signs are that the U.K. economy is going to pick up again and recent economic data has been quite encouraging. I mean, I think the biggest challenge at the moment is stock markets had a good rally since the depth of the financial crisis. Certainly over the last year to some extent share prices have risen slightly faster than underlying profits growth. So it has been a degree of re-rating. I think two years ago the market was very cheap. It’s still reasonable value – I don't think we're by any means in expensive territories. But, obviously, when you had a long rally like that, then within your portfolio there are opportunities to take profits in some areas and recycle into other areas, and that's a constant challenge.
Wall: Job, thank you very much.
Curtis: Thank you.
Wall: This is Emma Wall for Morningstar TV. Thank you for watching.
