Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Job Curtis, Manager of the City of London Trust (CTY).
Hello, Job.
Job Curtis: Hello.
Wall: So, over three, five, 10, almost every multi-year metric you can look at, the Trust is exceptionally well performing compared to peers and the benchmark. But both the underlying benchmark and the Trust has had a difficult couple of months since the start of the year. And I was wondering what were those challenges and how did they shake out for the rest of 2018?
Curtis: Well, I think it's two factors. There's the international factors and in particularly, you've got rising bond yields in the U.S. and a rising interest rate environment. And so, we've had a very calm period of low volatility and suddenly people are waking up to the fact that shares can go down as well as up. So, that's put some nervousness in the market.
And I think this second factor is more domestic to the U.K. and the fears about Brexit out there. So far, the economy has performed well since the referendum, much better than some had feared. But there are kind of fears about Brexit, also political worries about the stability of the government and those some things are weighing on some of the domestic sectors within the stock market.
Wall: I suppose it's also a reminder to not be short-term-ish. It's something that we advocate here at Morningstar as well as I know that you do in your investment process that a couple of months does not make it a longer term. But presumably, some of these challenges are going to be around for the medium term and there will be more volatility to come?
Curtis: Yes. And I think we've had an unusually long period of low volatility. But I stick to the fundamentals and in particularly, the dividend yields you get from shares which still remain very attractive. I mean, the U.K. has got a dividend yield of about 3.5% which is way above interest rates. I mean, the Bank of England is signalling one or two more increases this year. We had the first increase for about 10 years last year. But we're still only at 0.5% and if you've got two increases, then you to 1%.
So, the dividend yield attractions from shares is positive and also, we've got a lot of growth out there. It's one of the reasons why the central banks feel safe in raising interest rates is there's so much growth and that is feeding through to corporate profits growth and dividend growth. So, it's not only a 3.5% dividend yield for market, but it's also a growing dividend yield.
Wall: And how much does the point in the market cycle matter to returns as well? Because you know with the greatest will in the world we cannot expect to have the returns over the next years that we have over the last three years.
Curtis: Yes. We've had a long period of bull run for stocks really going back to 2009, with some blips admittedly. And you have to be careful. That's why valuation is very important. But you are seeing profits growth come through from companies. So, that is positive. But clearly, equities are the more volatile asset class, the most volatile. And so, if you put extra risk, you do in the long run get extra reward. But as you said at the beginning, it's not something for the short term unless you're a speculator. You need to take a longer-term view.
Wall: And you mentioned the negative implications of the Brexit uncertainty. But I know that some of your holdings have benefited from sterling weakness. Is that something that you expect to continue for a while?
Curtis: Well, in fact, very interestingly, because we had a huge fall in sterling after the referendum and against the dollar it went from about 1.48 on the eve of the referendum and it bottomed at about just in the low 1.20s. And actually, over the last nine months, the pound has actually clawed back quite a lot of those losses. So, as of today, it's about 1.38. It has fallen against euro, but not by quite a much as the dollar. And euro is benefiting from the stronger European economy.
So, it's very difficult to predict currencies. But I think down in the 1.20s the pound was looking very good value against the dollar in terms of some of the purchasing power type of calculations which people make. But I think the sterling is a barometer partly of people's market expectations about Brexit. And so, I think, if we went to sort of hard Brexit or a cliff-edged type of scenario, you could put some further weakness on the pound which actually would be quite positive for equities. Because as you said, many of the U.K. equities at least have big overseas interest and you get a translation benefit immediately.
Wall: It sounds like there are so many factors that you can't predict, you may as well just stick to stock picking?
Curtis: Yes. I think valuation is very important. And the great thing about, if you are taking a long-term view, if you are investing in dividend-paying shares and you are being paid while you wait, so you can sort of pick up your twice-a-year dividends or quarterly dividends and that's getting a better income than you get in the bank. And that makes the volatility that might happen much easy to take as long as you have faith in the longer-term returns from equities, which I certainly do.
Wall: Job, thank you very much.
Curtis: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
