Curtis has managed his £900m City of London Investment Trust since 1991 and has historically had a high weighting to consumer staples as they are deemed to have reliable earnings and offer exposure to the growing middle class in the developing world.
However, he now believes investors are overpaying for those companies’ growth expectations and warns that a situation is looming similar to the fall-out in the US’s infamous ‘Nifty Fifty’ companies of the 1960s and 1970s which had – prior to their huge price corrections – regularly traded on P/E ratios of 50 times.
Curtis therefore warns that investors should be taking profits from stocks such as Unilever, Diageo and SAB Miller, suggesting they could be reaching bubble territory.
“I think there is a love affair with consumer staples for their so-called predictability. The ratings are high and the managers who have backed them performed very well, which means they have taken on inflows, so it is a bit of a self-re-enforcing cycle, so to speak,” Curtis (pictured) said.
“Valuations now look more stretched than they have been during my career. They also look very stretched compared to the growth these companies are actually achieving.”
“These companies are still going to be around in years to come and you can see the longer term argument for them based on the growth of the emerging market middle class, but I have really been taking profits in that area because in terms of valuations, it’s hard to make a case for them.”
According to FE Analytics, the likes of Unilever – the multinational consumer goods company which owns Persil, Lynx, Ben & Jerry’s and Pot Noodle; Diageo – the world’s largest producer of spirits and owner of brands such as Guinness; and SAB Miller – the brewing and beverage company which owns various emerging market breweries have all massively outperformed the FTSE 100 index since the turn of the century.
Performance of stocks versus index since Jan 2000
Source: FE Analytics
They are also very popular with fund managers.
Our data shows that 92 funds in the Investment Association universe count Unilever as a top 10 holding, including the likes of Trojan Income, Morgan Stanley Global Brands, First State Global Emerging Markets Leaders and Investec UK Special Situations.
Liontrust Special Situations, R&M UK Equity Long Term Recovery and Evenlode Income are among the 83 funds which have Diageo as a top 10 holding, while 22 funds have a major position in SAB Miller. They include Old Mutual UK Equity and PFS Somerset Emerging Markets.
However, all three stocks have a current and estimated P/E ratio of more than 20 times, according to Bloomberg.
One manager who is a big fan of consumer staples is Nick Train, who holds close to 20 per cent of his five crown-rated £1.3bn CF Lindsell Train UK Equity fund in Diageo and Unilever. The FE Alpha Manager also has 6.7 per cent in Heineken.
Those stocks went through a tough period last year as the strength of sterling and concerns over emerging market growth all weighed on investors’ minds.
Performance of fund versus sector and index since January 2008
Source: FE Analytics
However, Train – whose fund has outperformed both IA UK All Companies sector and FTSE All Share in each of the last seven calendar years – has long-defended his position in the consumer goods sector and explained to FE Trustnet in October 2013 why he held so much in those companies.
"There are currently 2 billion people around the world that use Unilever products every day. That is mind-boggling," Train (pictured) said.
"Over time, they have set the realistic target that that number could be 3 or 4 billion. There are 7 billion people on this planet and that population is growing, so over the next 10 to 15 years I think that is a realistic ambition."
"Therefore, if we do see an increase from 2 to 3 billion people using Unilever products every day, then I am confident that the company’s profits and share price will go up a lot," he added.
Curtis, on the other hand, says investors have unrealistic expectations for those companies’ future growth.
That being said, keen-eyed investors will see that Curtis does count Diageo and Unilever as top 10 holdings – combined the two stocks make up 4.9 per cent of his portfolio. However, he says that is all about to change.
“Well, I’m recycling and they provide a degree of ballast to the portfolio, but positions are less heavy than they used to be. I don’t hold SAB Miller, for example.”
“If you were to analyse my weighting now to where I have been, it is as low as it has ever been and that is only going in one direction with current prices, I have to say.”
According to FE Analytics, Curtis’ City of London Investment Trust has returned 168.7 per cent over 10 years, comfortably beating the FTSE All Share and the IT UK Equity Income sector in the process.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
It also has one of the best maximum drawdowns, which measures the most an investor would have lost if they had bought and sold at the worst possible times, in the sector over the last 10 years, thanks to its top quartile numbers in the crash year of 2008 and the fact it posted a positive return in the falling market of 2011.
The trust is renowned for its impressive dividend history, as it has increased its pay-out in each of the last 47 years. When Curtis took charge of the trust in 1991, the trust’s dividend per share was 4p and as of its 2014 dividend, it was 14.5p.
City of London has a yield of 3.8 per cent, has gearing of 9 per cent and ongoing charges of 0.44 per cent.
It is trading on a slight 1 per cent premium to NAV, though that premium is narrower than its one and three average, according to the AIC.
