Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Fund manager explains how his dividend-paying portfolio is constructed
Thursday 20 Oct 2016 Author: Lisa-Marie Janes

Housebuilders represent an important element of City of London Investment Trust (CTY), one of the UK’s best known investment collectives thanks to 50 years of consecutive dividend growth.

Fund manager Job Curtis believes the sector, which was hit hard by the Brexit vote, is at ‘peak profitability’ with strong margins of 20%.

Curtis is still positive about housebuilders despite being one of the biggest detractors in his fund over the past year. He highlights strong balance sheets and net cash as the reason for adding to Persimmon (PSN) and Taylor Wimpey (TW.) after the vote in June to leave the EU.

He believes house prices need to be stable and not necessarily rise to ensure these companies remain profitable. ‘I think as the UK hasn’t been building enough houses, both of these companies have enough land to build for at least five years,’ explains Curtis.

Star performer

City of London has the longest track record of continuous dividend growth of any investment trust, claims the Association of Investment Companies. It also has the lowest ongoing charges ratio of 0.42% in the AIC UK equity income sector.

Inv Hendersons1


A 4% yield will certainly interest investors looking for decent levels of income from either their ISA or SIPP (self-invested personal pension).

The investment trust aims to provide long-term growth in income and capital, mainly through investment in UK equities using a conservative approach.

Inv Hendersons3

According to Curtis, one of the biggest contributors to the portfolio’s success has been cigarette giant British American Tobacco (BATS). He says the average price paid for shares in the portfolio was £4.70 and the stock is now worth 10 times as much at £47.

Brexit boost

The investment trust has a large cap bias with just over two thirds of its assets in the FTSE 100. The blue chip index generates approximately 80% of its earnings from outside of the UK.

Higher exposure to the overseas markets particularly helped the fund following the Brexit vote in June when investors turned their back on UK domestic stocks for fear of a weaker economy caused by leaving the EU.

‘I woke up on June 24 with a portfolio well-positioned for Brexit as it turned out we’re 68% in FTSE 100 companies and they are predominately international,’ says the fund manager.

Inv Hendersons2

Top holdings in the investment trust include Vodafone (VOD), Diageo (DGE), Unilever (ULVR), National Grid (NG.), GlaxoSmithKline (GSK) and Imperial Brands (IMB).

Despite still being one of the top holdings, Curtis has scaled back the position in GlaxoSmithKline due to concerns about earnings and free cash flow being inadequate to cover annual dividend payments near term.

Interest rate pressures

The portfolio is underweight in the banking sector versus its FTSE All Share index benchmark. The sector is battling with low interest rates which is bad for lenders.

Market concerns about the health of Deutsche Bank (DBK:ETR) have also dampened investor sentiment towards the broader banking sector.

However, Curtis remains optimistic about the banking stocks that do feature in his portfolio including HSBC and Lloyds Banking Group (LLOY). ‘It’s quite nice to have something in the portfolio that’s going to benefit when interest rates eventually go up,’ he explains.

Shifting gears

There have been significant changes to the portfolio over the past year or so to find stocks with an attractive dividend yield.

Auto-related stocks have been appealing as oil prices are still relatively low and the interest rate of 0.25% has made it cheaper for people to buy cars.

Curtis has also bought new holdings in German-listed Daimler (DAI:ETR), British auto components stock GKN (GKN) and UK garage retailer Pendragon (PDG).

Also joining the portfolio has been car seller Inchcape (INCH) which is considered particularly desirable as its sales are 80% overseas and 20% in the UK so there is geographic diversification. ‘This was a good opportunity to buy into an international auto car retailer at a discounted price,’ Curtis comments.

Inv Hendersons1 chart


The oil and gas sector has been one of the biggest detractors in the fund as producers have seen their earnings hit by a lower oil price over the past few years. However, City of London still holds shares in Royal Dutch Shell (RDSB) and BP (BP.) which are currently yielding 6.6% and 6.7% respectively, based on dividend forecasts for their current financial year.

Miners are only a small part of the investment trust. They’ve had to prioritise debt repayments over cash rewards for shareholders, so miners are less attractive to income investors.

‘The story in the mining sector has been one of dividend cuts as every single mining company has had to cut its dividend,’ explains Curtis.

‘We’ve kept a small weighting in this sector of about 1.4%, mainly through Rio Tinto (RIO). Anglo American (AAL) actually stopped paying a dividend completely and so we had to sell that one.’ (LMJ)

‹ Previous2016-10-20Next ›