Interactive Investor

Fund Battle: can these rivals beat City of London for income?

Sam Benstead assesses three popular UK Equity Income investment trusts with rich dividend heritages.

14th November 2023 11:10

by Sam Benstead from interactive investor

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The UK Equity Income investment trust sector is a favourite for income seekers. Not only are yields far higher than in other equity sectors, at 4.6% on average, according to Association of Investment Companies (AIC) and Morningstar data, but the sector is home to many “dividend heroes”, which have long track records of increasing their annual payouts to shareholders.

The top dividend hero is City of London, with 57 years of consecutive payouts. Managed by Job Curtis for more than 30 years, during his tenure the shares have risen 611%, assuming the reinvestment of dividends. This is well ahead of the 519% return for the FTSE All-Share and 421% for the typical UK Equity Income investment trust, according to data from FE Analytics.

At a nearly £2 billion market cap, the trust is a favourite among ii customers, and is regularly one of the top 10 most-bought investment trusts on the platform, claiming the top spot in October from Scottish Mortgage. It is also one of our Super 60 investment ideas.

Excellent stock picking and a strong commitment to dividend growth (the current yield is 5.21%) rightfully earn it a place in the portfolios of many income investors.

But City of London has a number of very credible rivals. Top among them are Merchants Trust, run by Allianz Global Investors, and JPMorgan Claverhouse. We look at how they stack up against City of London.

Performance and portfolios

Looking back to 1995, where shared data begins, there is not much to separate the three trusts on a total return basic for shareholders.

City of London is narrowly ahead, with a 688% return, while Claverhouse trails at 682% and Merchants then follows with 664%, according to FE Analytics.

However, recent returns have been best at Merchants trust, which is up 70% over 10 years and 49% over three years, compared with a 60% 10-year gain and 26% three-year gain for City of London, and a 62% 10-year gain and 24% three-year again for Claverhouse.

There are some differences in the portfolios, but generally they are comparable in terms of the sectors they invest in. FE Analytics finds that correlations between the trusts are always above 0.85, with a measure of 1 showing an identical portfolio.

However, some differences do appear. Merchants has more invested in industrials (17% versus around 10% for CTY and JCH), and less in financials (21.8% versus 27% for CTY). Claverhouse has the most invested in basic materials (20%), such as miners.

The top stocks in CTY are Shell (4.3%), BAE Systems (3.7%) and Unilever (3.7%) - the top 10 shares account for 33.8% of the portfolio.

Merchant’s top stocks are GSK (5.1%), Shell (4.5%) and BP (3.7%) - the top 10 shares account for 33.4% of the portfolio.

JCH’s top shares are Shell (8.1%), AstraZeneca (7.7%) and HSBC Holdings (5.45%) - the top 10 shares account for 44.9% of the portfolio.

This shows that Claverhouse runs a more concentrated portfolio than its rivals, which may make it more volatile. Another difference is that Claverhouse solely invests in UK equities, while City of London and Merchants have some exposure to international shares. Merchants only has a very small amount of overseas holdings, currently 2.5%, but City of London’s position is more substantial, at around 17%. Curtis holds non-UK stocks to gain greater diversification in sectors where there’s not much choice in the UK market, such as the pharmaceutical sector. UK equity investment trusts can hold up to 20% in non-UK stocks.


Merchants and Claverhouse are also AIC dividend heroes, with 41 and 50 years of payout increases respectively.

Merchants yields 5.45% and Claverhouse yields 5.36%, which puts them just ahead of the 5.21% of City of London.

The boards of all three trusts are dedicated to increasing their dividends each year to hold on to their records, so do not expect any of them to drop their dividends. Remember, trusts can hold back 15% of their income each year to build up a reserve pool, but they can also sell down capital as well to return as income to investors, so staying in the dividend hero club is achievable even if companies cut dividends.

For reference, the FTSE All-Share yields just under 4%, so income investors will be well satisfied with any of these trusts.

All three trusts are happy to invest in the high-yielding tobacco and oil sectors, which helps boost their yields.

In terms of revenue reserves, expressed in years, JP Morgan Claverhouse has the highest figure at 0.83, followed by 0.56 for City of London, and 0.44 for Merchants, according to data from the AIC. The rate of dividend growth is another important consideration. On this front, JP Morgan Claverhouse also comes out on top, having a five-year annualised dividend growth figure of 4.88% compared to 2.58% and 2.16% for City of London and Merchants.

Fees and discounts

City of London stands out for its low fees, with an ongoing charge of just 0.45%. Merchants is also competitive, with a 0.59% fee, while Claverhouse is more expensive at 0.71%.

City of London trades at a 0.26% premium, while Merchants is on a 0.57% premium and Claverhouse is on a 5.15% discount. Bargain seekers may be drawn to Claverhouse, as they can pick up a similar portfolio of UK dividend shares for a 5% discount.

TrustYield (%)5-year dividend growth rate10-year total return (%)Top stocksAnnual fee (%)
City of London5.212.5860Shell, BAE Systems, Unilever0.45
Merchants5.452.1670GSK, Shell, BP0.59
JPM Claverhouse5.364.8862Shell, AstraZeneca, HSBC0.71

Source: FE Analytics, 13 November 2023. AIC/Morningstar. Past performance is not a guide to future performance.

Succession planning

After more than 30 years in charge, investors must prepare for Job Curtis to step back from managing the trust.

However, in July 2021, David Smith, who has managed Henderson High Income Trust for nearly a decade, was appointed as deputy fund manager. This means that when Curtis eventually leaves, there will not be a big change in the way the fund is managed.

Merchants has been managed by Simon Gergel (who is in his late 50s) since 2006, while Claverhouse has two managers, William Meadon and Callum Abbot, in charge since 2012 and 2018. Succession planning is therefore less of a concern at these two trusts.

Which to buy and other alternatives

All three trusts have delivered excellent long-run returns for investors and take their dividend hero status very seriously, and also pay out above-market yields.

City of London is a member of our Super 60, and has the support of our fund research team. Dzmitry Lipksi, who heads the team, says: “The combination of an exceptionally experienced and long-tenured manager and a consistent process makes City of London compelling for investors seeking a core UK equity-income option.”

That’s not to say that the other two trusts will not make good investments, and at a 5% discount, Claverhouse could look appealing for bargain hunters.

Alternatives in the trust space include abrdn Equity Income, which yields 7.65%, Lowland Investment Company, which yields 5.65%, and CT UK High Income , yielding 6.9%. Diverse Income Trust is a member of the Super 60 and invests in smaller UK companies as well. Its yield is  5.2%.

Open-ended UK Equity Income funds include the Super 60 rated Artemis Income and Man GLG Income Professional. A passive alternative is Vanguard FTSE U.K. Equity Income Index.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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