Job Curtis, fund manager of City of London (LSE:CTY) Investment Trust, runs through the newest names to enter the portfolio since we last caught up with him a year ago. interactive investor’s collectives editor Kyle Caldwell hears how Curtis approaches dividend cuts (such as Direct Line), and the main sector set to benefit from a higher-for-longer interest rate environment. City of London is one of interactive investor’s Super 60 investment ideas.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today, I'm joined by Job Curtis, fund manager of the City of London Investment trust. Job, great to see you again.
Job Curtis, fund manager of the City of London: It's a pleasure.
Kyle Caldwell: So, Job, could you first explain how City of London Investment Trust invests? You mainly stick to the FTSE 100 index, and you focus on dependable dividend payers, so what sort of qualities are you looking for in a company?
Job Curtis: Well, first, I should say that the investment approach is valuation led and it's crucial to me to be in shares on a reasonable valuation which reflects the prospects. But when it comes to companies, I'm looking for consistent companies, and those sorts of companies will often have some attributes like very strong brands or a very good market-leading position, which means their profits are very defendable. But it's very important that companies are also investing [in] themselves enough for the future, making enough capital expenditure on plants and equipment or their brands because, unless they're investing enough for the future, you won't get the future growth, so that's a very important part of it.
I should also say that I prefer companies with strong balance sheets. Those companies are much more resilient when times are tough and the economy's turning down. In that type of situation, companies that are highly indebted are going to be more at risk. They might well be under pressure to cut their dividends.
Kyle Caldwell: And when you're investing in dividend-paying companies, what do you do if a dividend is then cut? When we last spoke last summer, you mentioned Direct Line Insurance Group (LSE:DLG) was one of your holdings. At the start of this year, the firm unexpectedly cut its dividend, so what did you do?
Job Curtis: Yes. Well, sometimes when a dividend cut happens, it can be after a period of share price underperformance. And if you sold out of the stock, you'd be throwing out the baby with the bathwater so to speak and doing it at the worst possible moment. But, in the case of Direct Line, we've reduced the holding quite substantially and so sold more than half our holding because there are other companies in insurance and financials generally which have carried on paying and growing their dividends, so are, in the short term, more help to us.
But Direct Line has got very good recovery prospects in my opinion. It is a kind of leading insurer in motor and property insurance in the UK and it's been a very strong brand, so I didn't really want to sell out of it entirely, so we've kept a smaller holding.
A good example, of course, of dividend cuts was [during the] pandemic when there were lots of dividend cuts. I think particularly of Shell (LSE:SHEL), which cut its dividend for the first time since the Second World War, but by two-thirds, which was a massive dividend cut at the time, and we did reduce Shell.
But we switched into TotalEnergies SE (EURONEXT:TTE), which is the French-listed international oil company that came into that crisis in rather a better position than Shell and, as a result, didn't have to cut its dividend and so, with the recovery in the oil price subsequently, we benefited from having Total and we kept a decent position in Shell, so we didn't lose out given that although it was a very difficult period immediately after it had been cut, it has actually enjoyed quite a good recovery subsequently.
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Kyle Caldwell: Also, when we spoke last summer, you mentioned that you were taking a closer look at the mid and small-cap stocks given that share prices had fallen quite notably in some cases in response to interest rates going up. Have you been adding to that area?
Job Curtis: Yes, I've been trawling around, but I haven't found all that much from our perspective that meets our criteria. So, our proportion in the large companies is similar to where it has been, and we've got about 10% in medium and small UK companies. But [there are] some instances [where] we've made a new investment in a couple of companies which you could say are materials technology, a company called Vesuvius (LSE:VSVS) and a company called Morgan Advanced Materials (LSE:MGAM). These are medium-sized British companies, which are leaders in what they do, [and] they're very global. I think they're quite undervalued and they'd be more highly rated if they were on an overseas stock market.
I've also invested in the alternative fund space in a company called Round Hill Music Royalty (LSE:RHM), which owns music royalties. In that area, the market's seen some sharp share price falls, and it's on quite a big discount to its underlying asset value in my opinion and seeing a lot of growth in that area with the growth from streaming.
Kyle Caldwell: You've just mentioned Round Hill. Are there any other investment trusts that you have exposure to?
Job Curtis: The only other one is 3i Group (LSE:III), which is in the FTSE 100, which is the largest, and is purely in private equity. They've had a particularly successful investment in a discount retailer in Continental Europe called Action, which has been a spectacularly good investment. So, 3i Group over the last 12 months has been one of our best investments.
Kyle Caldwell: Among the FTSE 100 listed companies, where most of the portfolio is invested, what have been the newest holdings?
Job Curtis: Last summer we bought NatWest Group (LSE:NWG), the leading UK bank, [and] we think the dividend stream is going to be very attractive. We've got some existing holdings in the banking sector. We're still slightly underweight relative to the index in banks, but we think the conditions for banking are quite good now.
And more recently we've made a switch in the mining sector. So, this year, in 2023, we've switched out of BHP Group Ltd (LSE:BHP) with the Australian listing, well, it was 50% listed in the UK [and] it's now become 100% Australian-listed. It's done very well for us over the years, but it's very biased towards iron ore. Over half the profits come from iron ore, which is a key component in steelmaking and the predominant demand comes from China. We think the outlook there is somewhat uncertain.
Glencore (LSE:GLEN) is 100% UK-listed and quite well positioned for some of the metals for the future. I mean, 37% of their profits come from copper, for example, [and] we're going to need a lot of copper going forward [given all the talk about] electrification. In addition, Glencore's got a very world-leading commodity trading business, it's around 20% profits, and we think that's a good-quality business, so that's a new holding for us and replaces BHP.
Kyle Caldwell: Investors are having to contend with a very different macroeconomic backdrop compared to the past decade or so. Inflation is at a very high level, and interest rates have been going up to try and cool inflation. There seems to be a growing consensus that those interest rate rises could be higher for longer. What's your view on that, and how does it impact how you select stocks?
Job Curtis: I think obviously we had a lot of monetary stimulus in the pandemic, as well as fiscal stimulus, the furlough scheme, etc, which was all necessary at the time. But that and the supply disruptions with the Russia invasion of Ukraine have [led to] much higher inflation than we've been used to for a long period in the UK and in other countries.
And in addition, we've got a very tight labour market still and we have a second order effect of wage increases, which people obviously need to keep up with the cost of living. So, overall, it is a situation more like what we had in the 1980s, and before in the 1970s, [of] much higher inflation. I certainly believe that interest rates are going to stay higher than people have expected for longer.
But I think some of the features we had in the 1970s, like very powerful trade unions, aren't here this time around, so inflation will start to come down. Some of those energy price increases [will] come out of the 12-month equation. So, I do see inflation heading down, but it is stickier than a lot of people first assumed.
You've got to be careful [with] companies that are highly indebted. If companies have got a lot of debt, they're going to, at some point, pay much higher interest rates on that debt as their loans come up. So, I think that's one area to be wary of. There are other parts of the market which can benefit from higher interest rates. One area is pension funds, [which] can de-risk their pension funds by moving into bulk annuities. Some of the big insurance companies provide that service for them. So, a company such as Legal & General Group (LSE:LGEN), which is the leader in that area, will have very good business prospects as a result of the new interest rate environment in that particular area. So, there are opportunities out there, but also certainly things to be wary of.
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Kyle Caldwell: And are there any other sectors or types of companies that you would highlight that are potential beneficiaries from a higher-for-longer scenario for interest rates?
Job Curtis: Yes. As I mentioned, quite a few of the insurance companies do benefit from higher interest rates in terms of their solvency ratios. And the banks also, to some extent, it means they can price their deposits much more easily. Certainly, when interest rates were virtually zero, it was very difficult for them to offer bank deposits with any kind of interest rate, while now they can offer a proper interest rate and they can manage the margin between what they're lending and the deposit rates more easily, so it should be a good environment for banks.
If the economy tips into a big recession, although the banks are much stronger in terms of their capital ratios than they were pre-financial crisis, it still will not be good for the banks and their leveraged institutions. So, I wouldn't be 100% confident, but certainly in some respects, it could be slightly better conditions for the banks.
Kyle Caldwell: As you've mentioned, the big danger is that these interest rate rises tip the economy into recession. In that scenario, would you be wary of investing in consumer-facing companies?
Job Curtis: Yes. We're fairly low in what you might call consumer discretionary stocks. And they're obviously going to be affected. Obviously, most people are on fixed mortgages for over two years, so it takes a while for these increases to feed into the economy. But I think certainly retailing still has quite big secular pressures from the growth of online shopping. And still, it's been a big adjustment that has taken place, but [it’s] still putting a lot of pressure on retailers.
Travel and leisure had a very strong period as people started to go back on holiday again, after an enforced stay-at-home period during the pandemic. But I think that could be another area that could be a bit vulnerable, and we're quite light in travel and leisure stocks.
Kyle Caldwell: Job, thank you for your time today.
Job Curtis: It's a pleasure.
Kyle Caldwell: That's it for this episode. I hope you've enjoyed it. Please do like, comment, and subscribe and I'll hopefully see you again next time.
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