The City Of London Investment Trust Plc
Unaudited Results for the Half-Year Ended 31 December 2021
Investment objective
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.
Performance
|
|
As at |
As at |
|
Net asset value (“NAV”) per ordinary share |
404.4p |
387.6p |
|
(Discount)/premium |
(2.6%) |
0.6% |
|
Net asset value per ordinary share (debt at fair value) |
400.8p |
384.1p |
|
(Discount)/premium (debt at fair value) |
(1.7%) |
1.5% |
|
Ordinary share price |
394.0p |
390.0p |
|
Gearing (debt at par value) |
8.3% |
6.9% |
|
Dividend yields |
As at |
As at |
|||
|
The City of London Investment Trust plc |
4.9% |
4.9% |
|||
|
FTSE All-Share Index (Benchmark) |
3.6% |
3.1% |
|||
|
AIC UK Equity Income sector |
4.3% |
3.8% |
|||
|
IA UK Equity Income OEIC sector |
3.7% |
3.2% |
|||
|
Sources: Morningstar Direct, Bloomberg
|
|||||
|
Total return performance to 31 December 2021 (including dividends reinvested) |
6 months % |
1 year % |
3 years |
5 years |
10 years |
|
Net asset value per ordinary share 1 |
6.9 |
20.1 |
25.4 |
27.2 |
126.8 |
|
Ordinary share price2 |
3.5 |
11.8 |
18.9 |
22.5 |
114.6 |
|
FTSE All-Share Index (Benchmark) |
6.5 |
18.3 |
27.2 |
30.2 |
110.7 |
|
AIC UK Equity Income sector 3 |
6.0 |
19.2 |
31.3 |
34.7 |
140.6 |
|
IA UK Equity Income OEIC sector4 |
5.6 |
18.4 |
26.7 |
26.3 |
115.4 |
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
Chairman's statement
Net Asset Value Total Return
The UK economy, benefiting from very accommodative monetary and fiscal policies, continued to recover from the damage caused mainly by the first lockdown of the pandemic. A similar picture was seen in overseas economies. Increasing global demand for energy, particularly for supply constrained oil, contributed to a rise in inflation, with additional pressure on prices coming from a tight labour market and shortages of materials. In December, the Bank of England, having earlier in the year considered the inflationary trends to be “transitory”, raised the Bank Rate from 0.1% to 0.25%, the first increase in interest rates for over three years.
UK equities continued to benefit from the recovery in corporate profits and dividends and produced a total return of 6.5%, as measured by the FTSE All-Share Index. City of London's net asset value total return was 6.9%, slightly ahead of the index benchmark and the averages for the UK equity income investment trust and OEIC sectors.
Both stock selection and gearing contributed positively to this result, with a key factor being our position in the food retail sector through stakes in Tesco and Wm Morrison. While it was disappointing to see a good company like Wm Morrison leave the stock market, its takeover came after a bidding war between two private equity groups and at an exit price well ahead of what had prevailed before the first bid was announced. Other important stock contributors were our shareholdings in RELX (business and professional information provider), Microsoft (software and computer services) and St. James's Place (wealth management advice and services). M&G (life assurer and wealth manager) and La Française des Jeux (French national lottery operator), which had been among the best contributors in our last financial year, were the two biggest stock detractors over the six-month period.
Earnings and Dividends
It is pleasing to report revenue earnings per share of 8.94p, 23% ahead of last year and 4% better than the same period in 2019 (just before the start of the pandemic). A highlight has been the dividend increases from our holdings in mining companies, with Anglo American and Rio Tinto also paying special dividends. There has been a significant recovery in dividends from our holdings in banks (HSBC, Barclays and Lloyds), which were stopped from paying dividends by their regulator in the first stage of the pandemic, and also from oil companies (BP and Royal Dutch Shell), which have partially restored the disappointingly large cuts made in 2020. A total of £2.8 million of special dividends was received and accounted as income (representing 6.7% of gross revenue). A further £3.5 million special dividend (from Pennon, the water utility) was accounted as capital.
City of London has declared two interim dividends of 4.80p 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 to increase the dividend for the fifty-sixth consecutive year. The quarterly dividend rate will be reviewed by the Board before the third interim dividend is declared in April 2022.
Expenses
The ongoing charge, which represents the investment management fee and other administrative non-interest-bearing expenses as a percentage of shareholders' funds, remains low compared with most other equity investment products. The ongoing charge for the six months indicates a full year rate remaining around 0.38% of net assets.
Material Events and Transactions during the Period
A total of 925,000 new shares, raising net proceeds of £3.6 million, were issued during the six months to 31 December 2021 at a premium to net asset value. The proceeds were invested across the portfolio. The Board is continuing its stated policy, subject to prevailing circumstances, of considering issuance of new shares and buybacks within a narrow band relative to net asset value. As at 31 December 2021, the Company's shares were trading at a discount of 1.7% to NAV (with debt at fair value). As at 16 February 2022 (the last practicable date before printing this report), the Company's share price was trading at a premium of 1.8% to NAV (with debt at fair value).
Two new holdings were acquired during the period. 3i is an investment company with stakes in private companies. Its largest investment is in Action, a discount retailer in Europe. 3i has a successful track record and provides City of London with exposure to a range of fast-growing private companies. The other new holding is in Holcim, the Swiss-headquartered, international building materials group. It should benefit from infrastructure spending in both developed and emerging markets.
Two companies left the portfolio as a result of takeover bids: Wm Morrison (food retailer) and Daily Mail & General (newspaper publisher and business information provider). Two other holdings, Go Ahead (transport operator) and Hammerson (shopping centre owner), were sold because of their respective poor performances in favour of better opportunities.
Outlook for the Six Months to 30 June 2022
The Omicron variant of Covid-19 appears to cause less severe illness than earlier variants, especially for those who are fully vaccinated. It is now increasingly unlikely that there will be a return to an economically damaging lockdown and the UK and other developed economies are expected fully to reopen during the next six months.
The monetary response to the pandemic currently remains largely in place, but is likely to be progressively withdrawn with rises in interest rates (albeit remaining low by historic standards) expected because inflation is proving to be more severe and persistent than had been hoped. Governments are moving to phase out the fiscal reliefs introduced in response to the pandemic and, as already proposed in the UK, to increase tax rates in order to restrain their borrowing requirements. The resulting reduction in liquidity may test equity valuations, especially at the more speculative end of the markets. International tensions are a further reason for caution, with the crisis in Eastern Europe causing particular concern.
At present, no more than a slowdown in economic growth is expected and therefore corporate profits and dividends during the rest of the current financial year should continue to increase. Households in aggregate still have a high level of enforced savings from the lockdowns to support consumption, although their discretionary real spending power may be reduced by inflation, tax increases and rising interest rates in the next financial year and beyond. The dividend yield from many high-quality UK equities remains attractive, with the continuing trend of takeovers demonstrating potential additional overall upside.
Sir Laurie Magnus CBE
Chairman
17 February 2022