City of London Investment Trust (LON:CTY) has today provided its unaudited half year report for the period ending 31 December 2022.
The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. The Board fully recognises the importance of dividend income to shareholders.
31 December 2022
30 June 2022
|Net asset value (“NAV”) per ordinary share||395.4p||390.9p|
|Net asset value per ordinary share (debt at fair value)||400.9p||393.5p|
|Premium (debt at fair value)||2.4%||1.8%|
|Ordinary share price||410.5p||400.5p|
|Gearing (debt at par value)||7.2%||7.1%|
|Dividend yields||As at|
31 December 2022
30 June 2022
|The City of London Investment Trust plc||4.8%||4.9%|
|FTSE All-Share Index (Benchmark)||3.6%||3.5%|
|AIC UK Equity Income sector||4.5%||4.2%|
|IA UK Equity Income OEIC sector||4.5%||4.2%|
|Sources: Morningstar Direct, Bloomberg|
|Total return performance to 31 December 2022||6 months %||1 year %||3 years|
|FTSE All-Share Index (Benchmark)||5.1||0.3||7.1||15.5||88.2|
|AIC UK Equity Income sector3||5.1||-2.4||5.8||16.2||108.6|
|IA UK Equity Income OEIC sector4||3.8||-2.2||3.1||10.8||84.5|
Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream
1 Net asset value per ordinary share total return with debt at fair value (including dividends reinvested)
2 Share price total return using mid-market closing price
3 AIC UK Equity Income sector size weighted average NAV total return (shareholders’ funds)
4 The Investment Association (“IA”) peer group average is based on mid-day NAV whereas the returns of the investment trust are calculated using close of business NAV
INTERIM MANAGEMENT REPORT
City of London is reporting a 4.5% net asset value total return for the six months to 31 December 2022 despite continuing turbulence in global markets and a brief period of unprecedented political volatility in the UK.
During the six months under review, UK inflation reached a 40-year high, driven by spiralling energy prices. The UK base rate, which was 1.25% at the end of June, was increased four times by the Bank of England, ending at 3.5% in December and with a further rise to 4.0% in the New Year. The 10-year Gilt yield, which was 2.2% in June, rose to 4.5% in September, partly due to rising inflation but also the unfunded tax cuts which were announced by the Truss government. The situation was made worse by a steep depreciation in the value of sterling and by selling from some pension funds to pay margin calls on derivative products. By the end of December, the 10-year Gilt yield had fallen back to 3.7% and the fall in sterling had reversed, with the new Sunak administration pursuing a more conventional fiscal policy. The trend of increasing inflation and tightening monetary policy also prevailed overseas with, for example, the US 10-Year Treasury yield rising from 2.9% to 3.9%. In contrast, UK equities were resilient, producing a return of 5.1%, as measured by the FTSE All-Share Index, helped by a strong performance from the mining sector (in anticipation of the reopening of the Chinese economy) and the oil and gas sector.
Net Asset Value Total Return
City of London’s net asset value total return was 4.5%, slightly behind the FTSE All-Share and the AIC UK Equity Income average, but ahead of the IA UK Equity Income OEIC sector average. In terms of attribution, gearing contributed positively by 95 basis points (bps) due to the beneficial effect of the rise in Gilt yields on the fair value of the secured notes we have issued in recent years. The £30 million 2.67% 2046 and £50 million 2.94% 2049 notes provide borrowings at fixed low interest rates for City of London, for the next quarter of a century, to finance investment in equities.
Stock and sector selection detracted by 147 bps, with being underweight in mining the largest sector detractor and not owning Glencore, the mining company, the biggest stock detractor. The next biggest stock detractors were our stakes in Persimmon, the housebuilder, and Verizon, the US telecommunications company. The best stock contributor was Munich Re, the reinsurer, followed by TotalEnergies, the oil company, and Swire Pacific, the Hong Kong-based conglomerate.
Earnings and Dividends
Earnings per share fell by 1.7%, compared with the same six month period last year, from 8.94p to 8.79p. A principal reason was the reduction in dividends from our stakes in mining companies Rio Tinto, Anglo American and BHP, reflecting lower prices of some commodities, such as iron ore. On the other hand, there were pleasing increases from the banks and oil companies in the portfolio, including special dividends from NatWest and TotalEnergies. In total, special dividends of £2.4 million were received and accounted as income, representing 5.5% of gross revenue.
City of London Investment Trust has declared two interim dividends of 5.00p each so far during this financial year. The Company’s diverse portfolio, strong cash flow and revenue reserve give the Board confidence that it will be able, in line with its objective to provide shareholders with long-term income and capital growth, to increase the total annual dividend for the fifty-seventh consecutive year. The quarterly dividend rate will be reviewed by the Board before the third interim is declared in March 2023.
The ongoing charge, which represents the investment management fee and other administrative non-interest bearing expenses as a percentage of shareholder funds, remains low compared with most other equity investment products. The ongoing charge for the six months indicates a full year rate remaining at approximately 0.38% of net assets.
Material Events and Transactions during the Period
A total of 16,560,000 new shares, raising net proceeds of £65.5 million, were issued during the six months to 31 December 2022. The proceeds were invested across the portfolio. The Board is continuing its stated policy, subject to prevailing circumstances, of considering issuance of new shares within a narrow band relative to net asset value. As at 31 December 2022, the Company’s shares were trading at a premium of 2.4% to NAV (with debt at fair value). As at 14 February 2023 (the last practicable date before printing this report), the Company’s share price was trading at a premium of 1.7% to NAV (with debt at fair value).
Three new holdings were acquired during the period. DS Smith is a leading paper and packaging producer in the UK and Europe with an emphasis on recycling. Morgan Advanced Materials develops, manufactures and markets technological materials and components across international markets. NatWest is focused on the UK, where it is one of the leading banks and financial services groups. These purchases were partly financed by the sales of Brewin Dolphin, the private client wealth manager taken over by Royal Bank of Canada, and Synthomer, the chemicals company, after profit warnings and the suspension of its dividend.
Outlook for the Six Months to 30 June 2023
Inflation should fall over the next six months as the sharp upward movements in oil and gas prices at the start of the Ukraine war are timed out of the 12-month inflation calculation. The combination of a continuing tight labour market, higher wage settlements and strikes in various sectors of the economy is likely to keep inflation above the Bank of England’s 2% target for some time. This will result in continuing elevated interest rates when compared with recent years since 2009, albeit remaining below the higher rates prevailing before the financial crisis in 2008.
The reopening of the Chinese economy, after its Covid lockdown finally ended, is positive for global growth, while lower oil and gas prices are helpful for consumers in the UK and overseas. The dividend yield premium of UK equities over bank deposits and 10-year Gilts has narrowed, but equities offer the prospect of dividend growth and can therefore provide some element of hedge against inflation.
Sir Laurie Magnus CBE
16 February 2023