The correction hitting the FTSE 100 over the past month provided a huge opportunity to load up on ‘blue chip income stalwarts’ such as HSBC, British American Tobacco and BP, according to City of London investment trust manager Job Curtis.
In case you have been somewhere very far away, due to a huge spike in concern from investors that China was heading for a hard landing in its economic growth there has been a new round of volatility in markets over recent weeks. This was most apparent on ‘Black Monday’, when markets around the world suffered a torrid trading session.
According to FE Analytics, the FTSE 100 lost 15.75 per cent between its April peak and the close of play on Black Monday of 24 August and while it has made some recovery it is still down more than 6.8 per cent over the year to date.
Performance of index in 2015
Source: FE Analytics
Curtis (pictured) is one of the longest running managers in the investment trust equity income space and thanks in part to a continuing appetite for income, the likes of his trust have been in high demand. It is currently yielding 4.1 per cent and has just increased its dividend for the 49th year in a row.
The manager strikes a bullish outlook for UK stocks and says during the sell-off he was keen to buy more income yielding stocks that had been hit. He did this by upping gearing but did not want to change the shape of his diverse portfolio, which has more than 100 stocks.
“I just added to existing names. I wasn’t really active in buying anything new in the sell-off. I did a programmed trade across the portfolio which I don’t normally do but I decided it was really important to keep my positions across the portfolio,” he said.
“It is quicker and actually makes it a bit easier if you feel a market is cheap. As our dealing is done in-house we can more or less press the button and do that within two minutes and invest the £10m proportionately to existing holdings.”
“Normally I am more of a bottom-up person but in this particularly incidence it worked quite well to do it this way.”
He added: “Overall the income attractiveness of the market is considerable and corporate earnings will in time pick up again and so I have added to gearing. As our portfolio is quite low-beta, it really lends itself to quite a bit of gearing.”
Source: FE Analytics
Gearing was raised in the £1.1bn portfolio to 9.1 per cent from 6 per cent. Curtis says the highest he would ever raise is to 20 per cent but the highest it has ever been is just 17.5 per cent, which was in the bottom of the 2003 bear market.
“We are quite a conservative fund, so realistically 15 per cent is an upper limit you might expect from us [in the near term].”
Curtis is one of the longest serving equity income managers in the UK’s open-ended and closed- ended universes having headed City of London since 1991.
His trust has beaten the FTSE All Share index in nine of the past 10 full calendar years – he lagged in the bull market of 2009 rally – and is second quartile in 2015 so far in the IT UK Equity Income sector.
The trust has returned 347.8 per cent since July 1995 – as far as our data goes back. By comparison, the IT UK Equity Income sector average over this period is 273.56per cent while the FTSE All Share has gained 243.8 per cent.
Performance of trust, sector and index since 1995
Source: FE Analytics
As City of London has been able to grow its dividend in each of the last 49 years it is among the most consistent in the whole Association of Investment Companies universe alongside Bankers IT and Alliance Trust for income growth.
The manager places much emphasis on downside protection as an important driver of income generation and City of London IT has scored well in for defensive metrics such as maximum drawdown, Sharpe ratio and beta, all of which are top quartile within the sector over the past decade. However, the trust is down in the third quartile for losses during the sell-off.
Performance of trust, sector and index since 27 April 2015
Source: FE Analytics
Ben Willis, head of research at Whitechurch Securities, says as the trust has moved to a 2.1 per cent premium it is a little hard to justify buying in the short term but long term it makes a good core holding.
“It is at a premium now because equity income is very popular and it is pretty safe equity income. It is your traditional large cap, so it is quite a core holding," he said.
"Investment trusts like this tend to be pretty solid and the income demand has been the key thing. At the moment it is trading at a premium but it seems to be quite tightly held and I don’t think you'll get much trading on it and if you buy it now you are going to have to pay for it."
It has an ongoing charges figure (OCF) of 0.44 per cent.