The most-searched-for investment trust last year on the Association of Investment Companies website (a good source of data for retail investors, by the way) was City of London Investment Trust.
This £2 billion FTSE 250 company bagged the top spot for the second year running. Its 57-year record of raising dividends every year seems to have been catnip for investors seeking reliable and rising income in these inflationary times.
City of London is rare today in trading at a small premium to net assets. Most investment trusts have dived to wide discounts as appetite for active equity investing in general, and anything UK-related in particular, has dwindled. Even once-well-respected rivals like Finsbury Growth & Income and Edinburgh Investment Trust now languish at discounts, of 7 per cent and 9 per cent respectively.
The City of London philosophy is to provide long-term capital and income growth by investing principally in London-listed companies. The trust is chockful of large UK blue chips but with a significant “yield tilt”, in other words a preference for higher-yielding stocks and companies regarded as value plays. Oil companies, banks, insurers and tobacco abound.
The British stock market’s pariah status with investors has not necessarily been a bad thing, enabling the manager Job Curtis to snap up stocks at valuations 20 per cent lower than those on more popular exchanges, he reckons.
Last year was a disappointment. The company underperformed its benchmark, the FTSE All Share, by 3.4 per cent and lagged its peers by 4 per cent. Curtis was burnt by heavy positions in poor performers such as Direct Line and Persimmon.
Over longer periods, the record is stronger. By total share price return, City of London has beaten the UK equity income sector average over both five years and ten years.
Curtis prefers value stocks, but he is not averse to running his winners, even when public perceptions change and they turn into techy worldbeaters, like the data group Relx, which is now his third-biggest holding. He recently alighted on another stock not traditionally associated with value investors: Burberry, the luxury brand.
He also has the discretion to allot up to 20 per cent of the portfolio to overseas companies, enabling him to choose non-UK businesses in a sector when he thinks their prospects are better. He is underweight on AstraZeneca and GSK, preferring to get drug company exposure from Merck and Johnson & Johnson of the US.
More recently the trust has been buying into unloved industrials, picking up stock in Vesuvius, Morgan Advanced Materials and DS Smith.
One attraction is that the trust is locked into cheap borrowing for decades to come, having borrowed when interest rates were at rock bottom. It is paying just 2.94 per cent on a £50 million note maturing in 2049, while its interest rate on another £30 million note is just 2.67 per cent. That’s a relatively low-risk way of spicing up returns.
Investors also get an edge because of the relatively low management charge of 0.325 per cent of assets managed.
There are risks. Value investing may have made a bit of a comeback, but the emphasis is still on growth — as the eye-catching bounce in the US tech giants of the past 12 months attests. The kinds of companies City of London backs are often very much out of fashion.
Its commitment to dividend growth could become a two-edged sword if it forces it into too narrow a straitjacket of high-yielding stocks. In the pandemic it had to dip into reserves to keep the track record.
One other uncertainty is the manager. Curtis, who has managed the company for a remarkable 33 years, is now 62. While his firm Janus Henderson has others to take over in its well-regarded income stocks team, his departure might not be well received. He says he has no plans to retire.
Advice Hold
Why Generous income producer but the shares are not cheap.
Naked Wines
Rowan Gormley’s relationship with Naked Wines has been a complex one (Dominic Walsh writes).
Having founded the online wine retailer in 2008, he ended up reversing it into Majestic Wine, a bricks-and-mortar retailer, in 2015. Then four years later he decided to unwind the merger by selling the Majestic business and renaming the listed company as Naked Wines. Asked why, he said at the time: “We have two great companies, Naked and Majestic. Both of them have the potential for growth and we only have the resources to do one well.”
Like many online businesses, Naked prospered during the pandemic, but as competition from the supermarkets returned, the tide turned against it and it was struck by a series of profit warnings. Step forward Gormley. If anybody knew how to put the fizz back into Naked it was surely its founder, and last year he returned as executive chairman.
Despite his insistence that things were “fixable”, it has proved far from an easy fix, particularly with sharp declines in both new and repeat customers and soaring inflation. In fairness, he said that a fall in revenue was all part of his “pivot to profitability” strategy, and the result was a “well-executed” Christmas and new year trading period.
The cut in investment in customer recruitment, allied to a 6 per cent reduction in the workforce, made a fall in sales inevitable, he said, adding: “We have to recognise that we are a smaller company post-Covid and our cost base has to reflect this.” For the first time last month, Gormley said, the company was seeing signs of new customer acquisition “coming back to life”.
Although the South African-born entrepreneur clearly loves the cut and thrust of the wine business, he is keen to ensure it is not too long before he returns to retirement. Hence the promotion of the UK managing director Rodrigo Maza to group chief executive designate. Maza has only been with the business since last September, so is obviously a sharp cookie. Gormley claimed his experience was a “compelling combination of entrepreneurial start-ups and big company best practice”.
Advice Hold
Why The shares are down by half on a year ago but the pain may not be over.
