Tag: City of London Investment Trust

City of London Investment Trust Review

On a quiet day for stock market announcements I took the opportunity to read the Annual Report of City of London Investment Trust (CTY). This is a share I have held since 2011 and is one holding in my portfolio that is quite boring and defensive in nature. It is an income and growth trust focussed on UK listed equities and is actively managed.

Since 2011 I have achieved 11.2% per annum average total return on this share in my portfolio. Job Curtis has been the fund manager for even longer than that and has a good performance record although the trust went through a bad patch in 2020. But last year (to end of June) it did remarkably well – a NAV Total Return of 7.5% versus its FTSE All-Share Benchmark of 1.6%.

How did Mr Curtis achieve that? Not by active trading because he is very much a buy and hold investor and with such a large trust it is not easy to move the portfolio rapidly. But the performance benefited from holding the traditional large FTSE-100 stocks.  The top ten holdings in descending size making up 32% of the portfolio were British American Tobacco, Shell, Diageo, BAE Systems, RELX, AstraZeneca, HSBC, GlaxoSmithKline, Imperial Brands and BP.

Note the big focus on tobacco stocks and oil/gas companies! Just to emphasise the lack of attention to ESG prejudices two other big holdings were an alcohol producer and a defence company.

The focus on larger companies paying high dividends and away from highly valued growth stocks and medium/small companies helped and the war in Ukraine resulted in BAE being the biggest contributor to performance. Energy shortages which resulted helped the oil/gas companies also no doubt.

It’s clear that some of these holdings have pricing power which must help in inflationary times. People won’t give up smoking and drinking in a recession and strong branding also helps.

A combination of macro-economic factors and past judicious stock picking while ignoring the public prejudices against some sectors seems to have been the cause of the good performance of the trust last year.

I will continue to hold.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

Alliance Trust Resets Dividend

An announcement this morning from Alliance Trust (ATST) says that the board has concluded that an increased dividend “will benefit existing shareholders and enhance the attractiveness of the Company’s shares”. They expect the overall annual dividend to increase by 32.5% over the 2020 dividend. The proposed increase will be well covered by distributable reserves and income it is suggested although no doubt some of the extra dividend cost will come from capital.

ATST had a reported yield of 1.43% last year according to the AIC which is the figure a lot of private investors look at when identifying good investments, when they should be looking at total return and overall performance. So far as the tax position of most private investors are concerned, turning capital growth into dividend income is a mistake as they will end up paying more tax. If they need more cash income they could simply sell some shares.

As with City of London Investment Trust I recently commented upon, and as very evident at their AGM, the emphasis on dividends paid by the trust, and growth in them, is apparently aimed at pleasing investors when investors are being fooled by the cash they see coming in when total return including capital growth is what they should really be paying attention to.

There are some interesting comments on Alliance Trust by Mark Northway in the latest ShareSoc Informer newsletter published today. He points out that the change to a “best ideas” portfolio approach managed by Willis Towers Watson since 2017 has not returned significantly above average performance after costs as anticipated. A huge amount of effort has been put in with little benefit he suggests. But perhaps that just shows how difficult it is to beat index benchmarks consistently particularly when the trust’s portfolio is so diversified. At least the trust’s performance is no worse than its benchmark as used to be the case before the revolution and appointment of a new manager.

As part of my “barbell” portfolio I am happy with the performance of Alliance Trust but I would have preferred them not to increase the dividend. I barely need to the cash as household expenditure is sharply down in the last year due to self-isolation from Covid. I’ll end up reinvesting the dividend cash after paying tax on it, when Alliance could do that for me tax free!   

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Two Unsatisfactory AGMs

This week I attended two Annual General Meetings – or at least attempted to do so. The first was of Ideagen (IDEA) an AIM company.

This was an “electronic” AGM with no physical attendance, held on the Lumiagm platform. I tried to log in with the Shareholder Reference Number given on my dividend certificates (I am on the share register) but it rejected it. Apparently the prefix needed to be ignored.

I contacted the support email address but by the time I got an answer the meeting was over – it seemed to last all of 5 minutes. They clearly should have provided clearer instructions. The company did send me a recording of the meeting but there seemed to be no shareholder questions which explains why the meeting was over in record time.

But the next day the votes cast at the meeting were reported and they received 63% of votes cast against the remuneration resolution with this comment added: “With respect to Resolution 4, the Company is aware that these votes against are in relation to the Company’s Long Term Incentive Plan (“LTIP”). The Company believes that the structure of the LTIP is in the best interests of all stakeholders and is fully aligned with shareholders’ interests”.

The directors would have been aware of the proxy counts before the meeting so it would have been helpful to have commented on this issue at the event. As it stands, a bland rebuttal of the obvious concerns of a large proportion of shareholders I do not find acceptable.

The second AGM I attended was that of City of London Investment Trust (CTY). I commented on this company when they published their Annual Report earlier this month. My view on the company has not changed from attending the AGM. Too much emphasis on maintaining the dividend record by investing in high dividend paying companies rather than looking at total return.

This was a hybrid AGM with attendees both present in person and electronically. I attended electronically via Zoom.

The initial words of the Chairman could not be heard and when it came to questions from the physically present attendees, he did not repeat the questions so I could not hear them – only his answers. So this was another unsatisfactory meeting in terms of electronic attendance.

Not all hybrid or electronic meetings are defective but a high proportion are in one way or another. Companies clearly have a lot to learn about how to run such meetings properly.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

City of London Investment Trust Annual Report

I have been reading the City of London Investment Trust (CTY) annual report in advance of their AGM on the 28thof October. This is one of my oldest shareholdings – first purchased in 2011 with an annual total return since of 11.5% p.a. according to Sharescope. Historically it has been a good performer, if somewhat boring. That’s OK but last year was a disappointing one. Has Job Curtis, the long-time manager, lost his touch?

Last year the trust supplied a share price total return of 20.0% but that was less than the FTSE All-Share and the 26.4% reported by the AIC UK Equity Income Sector.

CTY is a UK “Growth and Income” trust and has a focus on higher-yielding “value” shares as it says in their annual report. For the second year running they had to draw on revenue reserves to enable them to maintain their record of increasing dividends.

But one only has to look at the top ten holdings to see why performance is not brilliant as it’s stuffed full of FTSE-100 shares such as British American Tobacco, Diageo, Rio Tinto, Unilever, M&G, RELX, Shell, Phoenix, BAE Systems and HSBC. The Fund Manager’s report notes that stock selection generated -3.80% of the performance. They did well from holdings in big miners such as Rio Tinto, BHP and Anglo American, didn’t we all, but not holding Glencore was a big detractor. They had a number of other holdings that detracted.

It may be unreasonable to take one year’s performance as indicative of likely long-term performance but are tobacco and oil companies really good investments at this point in time, however generous their dividend yields? More emphasis on growth and less on income might be appropriate I suggest.

The trust also has a large number of holdings – the top 40 only represent 76% of the portfolio. It looks over-diversified although given the size of the fund there may be good reasons for this.

The Fund Management company is Janus Henderson and it’s interesting to note in the history of the company, which they expand at length on in the annual report, that it used to be called TR City of London when Touche Remnant was the manager. After they were acquired by Henderson, the company was simply renamed “The City of London Investment Trust”. A wise move to disassociate the company name from that of the fund managers which was likely to change over time. The new name might not have been ideal though as there is another listed company named City of London Group and it hardly a good or registrable trade mark. The directors of Standard Life UK Smaller Companies Trust (SLS) who are about to make a mistake over a new name should bear that in mind.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Woodford Fund and Trust News

The good news for investors in the Woodford Patient Capital Trust (WPCT) is that Schroders are taking over management of the portfolio.  The share price promptly jumped upwards on the news (up about 29% at the time of writing), but speculators need to be wary. Although the trust is still at a large discount to the Net Asset Value, I looked at the portfolio yesterday and was not impressed.

These are the top ten holdings by value: Rutherford Health, Benevolent AI, Atom Bank, Oxford Nanopore, Industrial Heat, Immunocore A Pref, Kymab B Pref, Mission Therapeutics, Ratesetter and Autolus. There may be some value in there but actually judging it, or confirming it, is far from easy.

One issue not raised in the recent BBC Panorama programme on Woodford was that of the naming of the Woodford Equity Income Fund. Such funds typically focus on paying high dividends to investors and to do so they invest in high dividend paying companies. They therefore tend to hold boring large cap companies. But the Woodford fund, which is now being wound up, was very different. It did have some high dividend paying holdings in the fund but not necessarily large cap ones and it also had a number of early stage companies that were unlisted. This was not a typical “Equity Income” fund. Investors might feel they were misled in that regard by the name.

For a more typical “equity income” fund, look at City of London Investment Trust (CTY) who are holding their Annual General Meeting today at 2.30 pm. You may be able to watch the AGM on-line, or see a recording later, by going to https://www.janushenderson.com/en-gb/investor/ . Their top ten holdings at the year end were: Shell, HSBC, Diageo, BP, Unilever, Prudential, Lloyds Bank, RELX, BAT and Rio Tinto.

But these were the top ten holdings in the Woodford Equity Income Fund: Barratt Developments, Burford Capital, Taylor Wimpey, Benevolent Ai, Provident Financial, Theravance Biopharma, Countryside Properties, Oxford Nanopore, Ip Group and Raven Property Convertible Pref 6.5%. That’s a very different kind of portfolio.

The AIC definition of an equity income fund primarily says that typically the company will have a yield on the underlying portfolio ranging between 110% and 175% of that of an All-Share Index (World or UK). It says nothing about the riskiness of the companies being invested in nor their size when income investors are typically looking for security of income. Surely the definition of an equity income fund needs revisiting and more information provided to investors. The latter is of course now taking place as new direct investors have to confirm they have read the KID on the fund when doing so on-line but do they read them and understand them?

Postscript: The broadcast on-line video of the City of London IT AGM as definitely promised in the notice of the meeting could not be found when required and after contacting Janus Henderson I am still awaiting a call back 24 hours later to tell me where a recording might be. This is really not good enough.

Postscript 2 (4 days later): A recording of the presentation by Job Curtis at the City of London AGM and the business of the meeting is present here: https://www.janushenderson.com/en-gb/investor/investment-trusts-live/ .

As regards Woodford Patient Capital Trust, it has been pointed out to me that one aspect I did not mention and which might affect an investors view of the valuation was the high level of debt in the company. The gearing has grown as some equity holdings were disposed of and this may be another problem for Schroders.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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City of London IT, Equals Interims, Paypoint CEO, Downing One VCT and Parliamentary Pandemonium

Having been away on holiday in the North of England last week, this is a catch up on news that impacted my portfolio.

I received the Annual Report for City of London Investment Trust (CTY) which is one of my most boring holdings. This is large cap equity growth/income trust managed for many years by Job Curtis and I have held since 2011 – it seems longer. Total return last year was 2.7% which beat most of the comparable indices. But a look at the overall return (including dividends) on my holdings in Sharescope shows an annual return of 15.0% which is very pleasing. It has reduced its management overheads to a cost of 0.39% (the “on-going” charge).

It is particularly worthy of note that the Chairman, Philip Remnant, says this in the Annual Report: “In February 2019 the AIC published an updated Code of Governance which largely mirrors the provisions of the UK Corporate Governance Code issued by the FRC save that the strict nine year cap on the Chairman’s tenure contained in the FRC’s code has been disapplied by the AIC. I see no reason why the rules which apply to the length of time which the chairman of an investment company can server should be more relaxed than those that apply to other listed companies, and so I will be stepping down as Chairman during 2020”.

I completely agree with Mr Remnant and have raised this point at AGMs of a number of trusts where directors are permitted to hang on for much too long. The AIC should not pretend that investment trusts are exempt from the UK Corporate Governance Code.

Equals (EQLS), formerly called FairFX, issued their interim results on the 26th September. Revenue was up by 21.4% and Adjusted EBITDA up by 78% but EPS was down. The share price fell, although the Chairman bought some shares soon afterwards.

However as reported on at the AGM (see https://tinyurl.com/y5j58dd6 ) there is a large amount of software development work being capitalised at this company and as expected, it went up in the half year. Another £4.8 million to be exact. That is a very large amount of development work and suggests either a very large team or an expensive one. It does raise doubts in my mind, and possibly others, about the accounts.

Paypoint (PAY) reported a “temporary leadership change” on the 26th September. CEO Patrick Headon is taking a leave of absence to receive treatment for a medical condition and he is expected to be absent for 3 months. The share price barely moved during the week but these kinds of reports which give no details can often conceal worse news. I recall the recent events at Wey Education where Executive Chairman David Massie received some open-heart surgery and subsequently died. Shareholders were not informed of this problem until he resigned and this was a significant problem for the company. I suggest there should be some clear rules developed on when medical incapacity needs to be reported to shareholders, and what level of detail is provided so that investors can judge the risks and possible impacts.

Downing One VCT (DDV1) issued a circular concerning the raising of up to £40 million in additional equity. This is justified so as to increase the size of the company to better cover the fixed running costs and to enable the company to make new investments and diversify its portfolio.

It always surprises me how Venture Capital Trusts can often raise more money even when they have a very patchy performance record. According to the AIC, this VCT achieved a NAV total return of 9.4% over the last 5 years. I won’t be increasing my holding in this company therefore by subscribing for it. However, how should I vote on the fund raising? Should I support it on the basis of pulling in more suckers to support the overhead costs? Or oppose it on the basis that giving more cash to the manager will hardly improve performance in the short term and simply give more fees to a poorly performing fund manager?

They are also proposing to introduce a Performance Incentive Fee – 20% of gains subject to a hurdle rate. But performance fees do not improve performance so I always oppose them. I hope other shareholders will do the same.

It was of course difficult to get away from events in Parliament and Brexit issues while on holiday. But I did manage to read a book in the hotel library – The History of the Decline and Fall of the Roman Empire by Edward Gibbon – just a part of it of course as it’s a multi-volume book. Gibbon was a Member of Parliament in the 1770s but disliked the place which he called “Pandemonium”. Nothing changes it seems.

As regards the decision of the Supreme Court over Prorogation, having read the full Judgement of the Court, I do not find it particularly surprising. People do tend to jump to conclusions about court judgements, often declaring they are biased, when a full reading often shows that the judges are not so perverse as imagined. I fear the advice of the Attorney General on prorogation was defective in that it cannot be purely at the whim of the prime minister to suspend Parliament for a long period of time and without good reason.

It was also unnecessary as Boris Johnson has other options to ensure that Brexit takes place on the 31st October as he wishes. Most investors are surely now of the same view of many of the public that we need to get this matter settled. Delaying resolution by a further extension of the Brexit date or by another referendum would simply cause more uncertainty and difficulty for businesses and for investors. Businesses cannot plan adequately and the value of the pound is dropping while investors are nervous. None of these things are helpful to investment returns.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Earthport Accounts, City of London IT and Patisserie

Earthport (EPO) is the latest AIM company to report that its past accounts are not all they should have been. Following a review by the new CEO and CFO, it seems there have been errors in reporting of forward foreign exchange transactions. This will result in fair value adjustments and a reduction of £6.3 million to £16.6 million in the net assets of the group at June 2017. Likewise adjustments are required to previous years. Reported earnings are also reduced although there is no cash impact.

This is a payments business which has been consistently loss making despite growing revenue. The former Chairman and CEO (who was still on the board as a non-exec director) have departed “with immediate effect”. This is surely yet another case of audit failure. Who were the auditors? Answer: RSM. But it’s worth reading their audit report in the 2017 Annual Report where they highlight some problems in the same area.

I do not currently hold shares in Earthport and this latest news is hardly likely to inspire confidence in the company from investors. After many years, the company has not proved it has a business model that can generate any profits.

Pressure of business meant I missed attending the City of London Investment Trust (CTY) Annual General Meeting on the same day as the Patisserie General Meeting. This is one of my most boring holdings as it’s mainly invested in large cap UK companies. But no problem in not attending the AGM in person because there is a recording of it available here: https://www.janushenderson.com/ukpi/content/trustslive?o_cc=c3926 . That even includes the question/answer session which was omitted in a previous year. If you watched it while it was taking place you could also submit questions. This approach is to be highly commended.

The interesting comment I noted from fund manager Job Curtis was that they had recently put more money into the market and were gearing up. He clearly perceives there are value opportunities in the market after recent declines. Others seem to agree with him because the market is now picking up.

Just one postscript on the Patisserie (CAKE) General Meeting. Lombard in the FT (Matthew Vincent) questioned this morning whether placings were the only option. He suggests the company could have delayed and done a rights issue. This is basically the same issue that was raised at the Meeting by some shareholders. But it’s very unrealistic to suggest that was a viable option. In reality I think the appetite for a rights issue would have been very low because of the lack of financial information on the current position of the company. I certainly would not even have participated in the placing! Undertaking a rights issue when there was great uncertainty about the level of support would hardly have been recommended by any advisors. In addition it would have taken a lot longer to do that than it took to do the first placing. Time is of the essence in the circumstances the company faced and looking for bankers to fill the delay hardly looks realistic to me either.

I suggest Luke Johnson took the only reasonable steps available and he should be thanked for saving the business. Shareholders should be very glad that the company did not get stuffed through a pre-pack administration which is what I rather expected would happen, in which case they would have lost everything.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Interest Rates and the Gig Economy

You probably don’t need to be told that interest rates are at their lowest for several centuries, if not in recorded history. The fact that the Bank of England is making noises about possibly raising base rate could just be a way to try and rein back inflation (a higher base rate, or prospect of it, causes the pound to rise and that makes imports cheaper – and import costs have been one of the factors in inflation rising). But unemployment is also at its lowest level for 40 years which usually indicates a booming economy and the prospect of higher inflation to come.

Inflation is now at 2.9% measured by the C.P.I., or 3.9% based on R.P.I. which a lot of us like to use instead. Now to me the really astonishing item of news last week was that the large City of London Investment Trust managed to borrow £50 million at a fixed rate of 2.94% for 32 years (I do hold some of their shares). That’s must be one of the best deals ever surely, and shows how investment trusts have the advantage of being able to gear up by borrowing money – and why not when interest rates are so low?

In reality, the lender is not even getting a real positive rate of interest at current inflation rates, and is also betting that it won’t get any worse for the next 32 years. Astonishing, and just shows how the world economy is awash with cash.

Another couple of interesting items of news last week were that Deliveroo lost £129 million in 2016 according to accounts filed at Companies House, on revenue of £129 million. In other words, for every pound paid by customers, they lost a pound. It’s raised $472 million from investors to achieve this wonderful business model (source: FT).

Deliveroo use “self-employed” bike couriers to deliver restaurant meals. Another exponent of this “gig-economy” model is Uber who received the bad news last week that Transport for London were terminating their license to operate in London. More information on that in this blog post I wrote for the ABD: https://abdlondon.wordpress.com/2017/09/23/uber-kicked-out-of-london/ . In there I praised the merits of the service and suggested people sign the petition against it (which is rapidly heading for a million signatures).

But one reason that it is so low cost is because like Deliveroo, Uber loses money in a big way at present. To quote from one report on its financials, “Uber is cheap because the company is heavily subsidising each trip” where it was suggested that Uber’s losses as a percentage of revenue were 129% in the last quarter of 2016. Like Deliveroo, revenue is rising rapidly though.

Do we mind if these companies lose money hand over fist? If they are fool enough to do so in the race to dominate a new market why not let them. But the long term viability of both when there are obviously lots of competitors providing similar services does raise doubts about these businesses, even if London Mayor Sadiq Khan relents over Uber’s license.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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