City of London cuts fees and targets another annual dividend increase

City of London investment trust delivered strong returns over the past six months, with its net asset value (NAV) rising 6.5%, higher than the FTSE All-Share Index (5.2%) and the UK Equity Income trust sector average (5%). CTY shares rose 3.1% as the premium to NAV fell from 3.1% to 2% in the six months to 31 December 2023. 

Underweight positions in pharmaceuticals and AstraZeneca were the biggest sector and stock contributors. The second-biggest sector impact came from being overweight real estate investment trusts, with Land Securities a notable contributor.  

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The biggest detracting sector was food producers, with Nestlé dropping over the six months. The second-biggest detracting sector was aerospace and defence, where the trust missed out on the rise in Rolls-Royce Holdings (LSE:RR.), but benefited from its position in BAE Systems (LSE:BA.). 

The board of the trust stated that it “recognises the importance of dividend income to shareholders” and said it was on track to deliver another annual dividend increase, taking its dividend hero status to 58 consecutive years.   

City has declared two interim dividends to date of 5.05p each in this financial year. A third interim dividend will be declared in April 2024. Its financial year ends on 30 June 2024. 

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As of the beginning of the year, the trust yielded 4.9%. This compares with 3.8% for the FTSE All-Share index and 4.7% for the typical UK Equity Income investment trust. Shares currently yield 5.12%. 

Fee reduction

In another announcement, City of London chair Sir Laurie Magnus revealed the trust is cutting its fees for the first time since 2019. Given that the trust has grown its assets from £1.3 billion to £2 billion since then, the board has agreed with the trust’s investment manager, Janus Henderson, to reduce the investment management fee rate from 0.325% to 0.3% with effect from 1 January 2024.  

The consequence of this change is that the ongoing charge, which represents the investment management fee and other administrative non-interest related expenses as a percentage of shareholder funds, is expected to be lower for this financial year than last year, when it was 0.37%. 

Furthermore, if assets under management exceed £3 billion, the management fee on any such excess will be reduced to 0.275%. 

Investment trust analyst Numis says it continues to view City of London as a solid option for investors seeking income from UK equities.  

“Manager Job Curtis has managed the fund since 1991 and his track record over the past 10 years is strong, with NAV total returns of 72% (5.6% a year) compared with 66% (5.2% a year) for the FTSE All-Share. 

“The fund is the largest within its peer group, with net assets of £2 billion and shareholders benefit from a low ongoing charges ratio of 0.37%, which will reduce following the fee reduction to 0.3%.”  

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Portfolio activity

Three new holdings were bought during the six months: Burberry, Hilton Foods and Eni.

Burberry is a luxury British fashion company with around half its stores in the Asia-Pacific region. Hilton Foods is a packer and distributor of meat products, with operations in the UK, Europe and Australasia. ENI is an Italian oil company.   

City sold Cisco, the information technology and networking services company; Ferguson, the US building products distributor; Sanofi, the pharmaceutical company; and Round Hill Music Royalties Fund, which was taken over. 

The trust also said it would delist from the New Zealand stock exchange, citing increased costs of maintaining the listing, which accounts for just 1.2% of the company shares in issue.

City of London is a member of ii’s Super 60 list of recommended funds.