City of London Investment Trust’s Job Curtis talks to interactive investor about fund performance, top holdings and high income.
Lee Wild, head of equity strategy at interactive investor:
Lots to talk about, as always, but I’d like to start with a recap of the trust. City of London Investment Trust (LSE:CTY), it’s been a great performer over the years. It generates high yield for investors. Could you briefly explain the trust’s investment philosophy and how that’s fed through to share price performance and total returns?
Job Curtis, manager of the City of London Investment Trust:
Yes. It’s partly valuation-driven. I believe in buying shares at a reasonable valuation and taking into account the growth prospects. And secondly, it is a conservatively-managed trust. It’s fairly diversified. It’s mainly in the large companies. And I like companies with strong balance sheets and good cash generation, and companies that are able to both pay dividends and invest enough for the future. So that’s the type of company I’m looking for in the portfolio.
City of London has had a very impressive track record over the years, and a good record of increased dividend payments for the past 53 years. There’s an average payout ratio of just under 94% since 2014. I’m assuming it would be a very difficult decision not to continue that trend of dividend growth. Would you ever consider sacrificing performance, if necessary, just to maintain that dividend record?
Well, part of the reason for the record is we have a core of very good companies that are consistently growing their dividends. But also, in difficult years of the stock market, we’re able to use our revenue reserves. So we save some of our dividend – we can hold back up to 15% in a good year – so that builds as a revenue reserve which we can use in a difficult year. So we’re not completely dependent on dividends in any one year, if you see what I mean?
But I firmly believe that our strategy does work in the long-run. In the long-run, we’ve significantly outperformed the index. We won’t necessarily outperform in every year. In some of the years which are led by growth stocks, we will make decent returns, but we may not actually outperform the market.
But I think our philosophy holds very well during periods when the market is turbulent. And we’re able to preserve capital, in my view, better than pure growth outfits. And so I firmly believe in the philosophy for the longer term.
And how much might you hold back in the good years to cover the leaner periods?
Well, the maximum you’ll hold back is 15%, so you’d never hold more than that. But in the good years, we might typically hold back, sort of, 5% to 7% would be a typical type of … And that builds into the revenue reserve which we can draw down in the more difficult times.
The trust currently yields about 4.4%. There’s a few questions here. One, is that sustainable? We’ve heard for quite some time now that reliable dividend income is becoming harder to find. So a lot of your dividends will also be received in dollars, given the nature of the investments you make in big FTSE 100 overseas earners. Is that an issue if sterling strengthens further, as the Brexit negotiations continue?
I mean, I would disagree. I think there is plenty of dividend growth out there in the market. Obviously, my job is to select those companies, that combination of companies, which are a reasonable share price valuation and growing their dividends. But our portfolio’s pretty diversified, so it’s the whole philosophy of not having all your eggs in one basket.
So we do have some big global companies, which have been great shares in the long-run, but we’ve also got small domestic sectors. I mean, one sector where we’re quite heavy in is the house builders, which have done very well recently, and they’re also paying very good dividends. So we’re not looking for our dividend growth or our dividends in any one part of the market, but we think there’s a fair amount of opportunities out there if you’re careful enough to look.
More recently, you also slightly concentrated your portfolio down from about 117 stocks to around 97 holdings. What’s the reason behind that decision?
Well, that process took place over two and a half years. But, I mean, I believe, as I said earlier, in diversification and having a broad spread of shares. But on the other hand, if you have too many, then the smaller ones don’t really have enough of an impact. So I think there’s a kind of balance between having a good spread and also a focus so that each investment really counts. And so, at around 97, or slightly under 100, I think we’re striking a better balance in that respect.
Recently, your portfolio has become more correlated with value and less so with growth. Is that decision based on your current view of the market, and should we witness the return of value investing any time soon?
Well, I think our portfolio’s always traditionally been a bit more biased towards value. I mean, I think the out-and-out growth stocks often don’t even pay dividends, so we’re bound not to have so much exposure to that area. But certainly, at the moment, areas of the growth stocks seem a bit overheated in terms of their valuations, so there are opportunities in value.
But overall, I wouldn’t want to make too much of it. I mean, if you look down our list of stocks, it’s a good spread, and there are some very good growth stocks, which I’ve got a lot of confidence in, as well as our more value and income-type holdings.
Job Curtis, thank you very much.
This interview was recorded on 4 February 2020
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