This article is part of Morningstar’s Guide to Investment Trusts, highlighting the benefits of these unique investment vehicles – busting the investment trust jargon, revealing potential pitfalls and celebrating those experienced managers who have earned the top ranking from Morningstar fund analysts.
Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I Invest with you?' I am Emma Wall and here with me today is Job Curtis, Manager of the Gold-Rated City of London trust (CTY).
Hello Job.
Job Curtis: Hello.
Wall: So, I thought we'd look at the challenges and the opportunities facing your sector today. You invest predominantly in U.K. equities. Last year was not so great for U.K. equities; it was sort of flat. What can we expect this year?
Curtis: Well, the U.K. equity market is an international market in that over 70% of the profits come from overseas, so it reflects global markets. It has quite a big resources sector, I mean the oil sector and the mining sector, are components of over 15% of the market and I think that waded down last year because of course the U.K. economy was quite strong.
Looking forward, I mean, there are some attractive yields available in the oil and mining sectors, but they are still not a sector which I'm particularly enthusiastic about. I've got some exposure to BP (BP.) and Shell (RDSB) where the dividends are attractive, but I'm actually below average relative to the indices as I was last year which helped the relative performance. But I think going forward the dividend flow from the U.K. equity market is pretty attractive and the domestic economy looks strong. So, I think those are two definite positives, particularly against the background of very low interest rates.
Wall: How important are dividends when looking at total returns for a trust such as yours?
Curtis: Well, I think dividends are important. I mean, there are lots of different ways to skin a cat as they say and different firm managers have different ways of managing money. But the dividend yield is a real return that shareholders actually receive and as a valuation yardstick I think it is very helpful and often you can buy into stocks that are out of favour and if you are paid a decent dividend you are being paid while you wait and if the yield drops at very low level, that's an indicator that the shares are becoming quite expensive and in addition it's a good tool for corporate managements.
If they have to pay a rising dividend to shareholders, that's a good benchmark to measure CapEx and acquisitions against.
Wall: You've mentioned there some of the sectors that perhaps didn't do so very well last year and perhaps will continue not to because of the oil price. What about where you are seeing opportunities, what's exciting you in that sector?
Curtis: Well, I think some of the domestic sectors do look quite attractive, in particular, housebuilding. As a country, we are very short of houses at the moment. There is a huge demand that's not being met for new houses and the housebuilding sector has consolidated a lot post the financial crisis and I think the leading house builders quoted on the stock market are in a good position at the moment and I'm invested in three of them which got long land banks and I think that's an area where you'll see decent growth and good dividend flow.
Wall: It's also a sector that can be quite highly politicised and we can't really talk about the U.K. without talking about what's coming later this year, general election, maybe even two. Does that weigh in your mind as a fund manager?
Curtis: Well, I think the politics is important. It can have an influence. But when you think about it, I mean, the opinion polls have pointed to a hung parliament. Well, that's what we've had at last election. So, in some respects it's not a huge difference. I mean it is uncertain, but I think you have to remember U.K. equities are – over 70% profits are from overseas and I think, except something like the house builders, yes, it may have an effect, but I think all the politicians want more houses to be built.
So, I think some of the underlying fundamentals don't change and if there is a hung parliament, it means arguably it will be difficult for sort of hugely radical moves to be put forward if they have to build coalition between the parties. So, it's hard – I'm not a profit you can completely predict what's going to happen and say, like everyone I'm watching it. But I think it's something that is important, but we have got an independent Central Bank as well as setting interest rates. So, I think there are reasons to be relatively calm and sanguine about it.
Wall: So, would you say that you're bullish on U.K. equities at the moment?
Curtis: I think the equity market is attractive for its dividend flow. It has – in terms of some of the other valuation measures we look at, it's not as cheap as it was. But I think relative to the alternatives, it does look solid value to me.
Wall: Job, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
