A recent move to a discount by the City of London investment trust made it a “no brainer” as a way to find yield when the fixed income market looks stretched, according to Investment Quorum chief investment officer Peter Lowman, who will still be adding to it at a premium.
Many investors have looked to increase equity income exposure or find alternative sources of income in recent years due to a dearth of attractive opportunity in bond markets, which have seen their yields pushed down to record levels.
This is in part down to government and corporate bonds’ rally since quantitative easing was introduced 2009 in the US and later in the UK, as shown in the graph below.
Performance of indices since April 2009
Source: FE Analytics
Lowman said the wealth management firm has been no exception in looking for yield away from bonds and has been slashing fixed income in its growth and income portfolios, replacing it with the mega and large-cap focused City of London IT, managed by Job Curtis.
“Over the last six to 12 months we have had to start to apply a different set of rules in terms of trying to get income. The fixed income market has got to a stage where bonds are a little bit toxic. Yields have got down to horrendous levels. There are really un-buyable so we have had to increase our equity element to capture the income, we are looking for 3 to 3.5 per cent yield, so we can deliver the income for clients,” he said.
“We have been adding this investment trust on the basis that there is a very qualified and experienced fund manager who runs it. Job Curtis has a done a pretty good job over his 28-year career in the financial market.”
The £1.3bn trust has been managed by the long-serving Curtis since 1991, making him one of the longest serving equity income manager in the UK’s open-ended and closed ended universes.
It has returned 390.19 per cent since 1995, which is as far as our data goes back. By comparison, the IT UK Equity Income sector average over this period is 300.69 per cent while the FTSE All Share has gained 293.82 per cent.
Performance of trust, sector and index since 1995
Source: FE Analytics
It has beaten the index in every full calendar year of the past 10 apart from the 2009 rally as well as being top quartile so far in 2015.
City of London has been able to grow its dividend in each of the last 48 years, putting it top for income growth out of the whole Association of Investment Companies universe alongside Bankers IT and Alliance Trust.
Downside protection is an important part of the income equation when it comes to investment trusts, as due to issues such as discount volatility and gearing closed-ended funds can fall a lot further than OEICs and unit trusts during times of market weakness.
City of London IT has scored well in common defensive metrics such as maximum drawdown, Sharpe ratio and beta, all of which are top quartile within the sector over the past decade.
One of the reasons why the trust scored highly is because it didn’t fall as far as the sector or the index in the crash year of 2008 and made a positive return during 2011, unlike the sector and benchmark.
Curtis has about 117 stocks in his portfolio which Lowman says “tick a lot of boxes” in terms of sector allocation.
“He is proven in terms of picking stocks. The 3.7 per cent yield comes up to our criteria. His current sector distribution means that his largest bets financials, consumer goods and consumer services we like,” he said.
“Banks are starting to look a bit stronger, consumer goods and services are being assisted by the falling oil price and putting it basically – we have a few more pennies in our pockets through the fall in petrol prices and we are spending it on the high street.”
While Lowman bought on a small discount, the trust has since gone to a premium of 2. 3 per cent but the CIO says it doesn’t matter too much and he will continue to add to it.
“The only small question mark is that it has gone to small premium of late – we like to buy things at a discount if we can – but it is understandable as a lot of people are trying to chase income and investment trusts are a way of getting yourself in the specific market but unfortunately people have been buying this trust,” he explained.
“However, we think it is a worthy investment and so we are prepared to pay a little more if we have to but we are carefully buying it. We don’t go chasing anything where the cost is too far above the net asset value as we risk losing money if there was a correction but a couple of per cent is not a problem.
The trust has an ongoing charges figure of 0.44 per cent and is 6 per cent geared.