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City of London Investment Trust - Annual Financial Report

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City of London Investment Trust

Annual financial results for the year ended 30 June 2020

This announcement contains regulated information


The Company's objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. The Board continues to recognise the importance of dividend income to shareholders.


"At a time when many of our investee companies cut their dividends, we increased ours by 2.2%. In respect of the current year ending 30 June 2021, we expect to pay a greater amount, thereby increasing the dividend for a 55th consecutive year."





Total Return Performance:



Net asset value per ordinary share ("NAV")1



Share price2



FTSE All-Share Index (Benchmark)



AIC UK Equity Income sector3



IA UK Equity Income OEIC sector









NAV per ordinary share



NAV per ordinary share (debt at fair value)



Share price






Premium (debt at fair value)



Gearing at year end



Revenue earnings per share



Dividends per share



Ongoing charge for the year4



Revenue reserve per share



1 Net asset value per ordinary share total return with debt at fair value (including dividends reinvested)

2 Share price total return using mid-market closing price

3 AIC UK Equity Income sector size weighted average NAV total return (shareholders' funds)

4 Calculatd using the methodology prescribed by the Association of Investment Companies ("AIC")

Sources: Morningstar for the AIC, Janus Henderson, Refinitiv Datastream


This has been an extraordinary year for financial markets reeling from the economic impact of Covid-19, and particularly for equity income funds faced with a significant fall in dividend income received from investee companies. Almost half of FTSE 100 companies, in which the Company is principally invested, have passed or cut their dividends in 2020.

City of London's net asset value total return was a negative 14.6%, which was behind our benchmark, the FTSE All-Share Index, which returned a negative 13.0%. The Board decided to raise the dividend to shareholders by 2.2%, the 54th consecutive annual increase, partly funded from revenue reserves.

The Markets

It was a year of two halves. In the first six months, there was steady economic growth for the UK and overseas economies. The decisive general election victory for the Conservatives removed the risk of nationalisation of the utilities and various other measures which would not have been helpful for UK businesses. The FTSE All-Share Index returned 5.5% for the six months to 31 December 2020. The second six months was dominated by the emergence of Covid-19 in China and its spread to other countries. The unprecedented lockdowns caused a big fall in economic activity. At its lowest point, on 23 March, the FTSE All-Share Index had fallen by 35% from where it had started the year. Massive fiscal and monetary support from governments and central banks to support the economy helped the markets, as did the easing of the lockdowns. By the end of June, the FTSE All-Share Index had made a significant recovery from its lowest point, but had still produced a negative return of 17.5% for the second six months.



The height of the coronavirus crisis in March coincided with the season for UK companies with 31 December financial year ends to report results and declare final dividends. Given the huge uncertainty and the need for many companies to prioritise conserving cash, there were widespread dividend cuts, cancellations and omissions. This has had an obviously negative impact on City of London's revenue earnings per share, which fell by 20.4% to 15.7p. Special revenue dividends, which made up 2.2% of gross revenue, were £1.5 million compared with £3.7 million last year.

Expenses remained under tight control and the ongoing charge ratio was 0.36%, down from 0.39% and reflecting last year's cut in the management fee rate. Our costs remain very competitive compared with other actively managed equity funds.

Net asset value total return

City of London's net asset value total return for the 12 months was a negative 14.6%, which was 1.6% behind the FTSE All-Share Index, mainly due to the negative impact of gearing. Stock selection outperformed by 0.9%. The biggest stock contributors (relative to the FTSE All-Share Index) were being underweight in Royal Dutch Shell and HSBC. Two overseas listed stocks, Microsoft and Nestlé, were respectively third and fifth biggest stock contributors. Greene King, the pub group which was taken over by CK Asset Holdings of Hong Kong, was also a notable contributor. The biggest stock detractor was AstraZeneca, which is held in the portfolio but in which we are underweight. The second biggest stock detractor was not owning London Stock Exchange, followed by the holdings in insurance group Hiscox and Lloyds Banking.

The ability to gear is an advantage that investment trusts have in rising equity markets. With falling markets, it had the opposite effect over the 12-month period. In addition, the fair value of our Private Placement Notes rose due to the fall in gilt yields. Gearing, which was in an 8% to 11% range during the year, detracted by 2.4%. By historical standards, the cost of the £85 million of long-term debt which we have taken out since 2014 is extremely low and should enhance shareholder returns in the mid to long term. The last of our expensive debenture stock is due for redemption in January 2021 and the Board is currently considering how best to refinance this.

City of London is behind the FTSE All-Share Index over the last five years, which has been a period of outperformance for lower yielding shares. Over ten years, City of London is well ahead, with a total return of 120.1% compared with 91.8% for the FTSE All-Share Index. Against the AIC UK Equity Income sector average and the IA UK Equity Income OEIC sector, the Company was behind by 0.3% and 0.9% respectively, but is ahead of each of these comparators over three, five and ten years

Share issues

For most of the year, City of London's ordinary shares were in strong demand, such that by May 2020 we had issued a total of 37.3 million shares at a premium to net asset value for proceeds of £148.6 million. This all but exhausted the authority granted by shareholders at last year's Annual General Meeting, so we took the opportunity to renew it at a general meeting held on 11 May 2020. Paradoxically, since then the market supply and demand for the Company's shares have been broadly in balance, the shares have settled at a small discount and only a further 225,000 shares have been issued.

Our Investment and Dividend Philosophy

The past ten years

The Company's objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange; the Board continues to recognise the importance of dividend income to shareholders. Consequently, we place emphasis on dividend returns to shareholders but net asset value and share price growth are of equal importance in terms of our objective and hence our investment strategy.

On 30 June 2010, City of London's net asset value was £511 million (245p per share) and the share price 240p. Ten years later, on 30 June 2020, the net asset value was £1.43 billion (344p per share) and the share price stood at 340p. During that time, shareholders have received 155p in dividends and share price appreciation of 100p, an appropriate balance, I believe, given our objective. Total returns have comfortably exceeded those from the FTSE All-Share Index, the Company's benchmark, and our dividend has grown by significantly more than the rate of inflation.

Over that same ten-year period, City of London's share capital has almost doubled, from 209 million to 416 million shares. Given that our share price has stood at a modest premium to net asset value for all but short periods within that time, we have been a regular issuer of shares throughout. This has enabled us to achieve our aim for the Company's share price to reflect closely its underlying asset value, and also to reduce volatility and have a liquid market in the shares. We believe this to be in the best interests of both current shareholders and those wishing to make new investments in City of London.

Recent months

We have made several announcements in the last few months, emphasising various points:

  • Over the last ten years, we have set aside over £30 million into revenue reserves to underpin future dividends in circumstances such as we face now, when our annual income has come under pressure from the dividend cuts made by many of our investee companies. These reserves stood at £58.3 million at 30 June 2019. If, at the end of June 2020, we needed to draw on those reserves to maintain our unique record of dividend growth, then it was our intention to do so.

In the event, in paying total dividends of 19p per share for the year, an increase of 2.2% over last year, we will have recourse to those reserves to the tune of £14.4 million.

  • In respect of the current year ending 30 June 2021, we would expect to pay ordinary dividends in excess of those paid last year, thereby increasing the dividend for a 55th consecutive year. This was likely to be funded from a combination of income received during the year and revenue reserves.
  • The Company holds capital reserves arising from gains realised from investments sold, and therefore available for distribution to shareholders, calculated to be in excess of £270 million at 30 June 2020.

Now that our accounts for the year have been audited, these reserves have been confirmed at £271.8 million.

The future

At the end of my Chairman's Statement last year, I wrote of my confidence in the future given the quality of the companies in which we are invested and the advantages which our closed end investment trust status gives us. Despite the recent market turmoil and the inevitable uncertainties this creates, this remains my view today.

Job Curtis focuses on companies with cash generative businesses able to grow their dividends with attractive yields. The portfolio is well diversified, biased towards international companies invested in economies likely to grow faster than the UK. This is an investment approach which has served shareholders well over the longer term, as our ten-year record shows.

Shareholder returns will continue to be derived from a mixture of capital growth and income. The dividend cuts which abound in the market today have an inevitable impact on the income received by City of London, and so on the dividends which we ourselves can pay out of current income. Our open-ended cousins have no choice but to cut the amounts which they can distribute to their members. By contrast, one of the benefits which we, as an investment trust, enjoy is the ability to supplement our annual income with income both from revenue reserves, squirrelled away in past years, and, if required, from capital reserves established through realising gains on our investments.

The ability to do this allows the Fund Manager additional flexibility in how he manages the portfolio for the long term. He will continue to have a bias towards income producing stocks, but he has no need in the current environment to chase a dwindling group of higher yielding corporates, running the inherent risk of dividend traps, in order to build on City of London's unique dividend record. He can continue to focus too on holdings selected for their above average growth potential, albeit on lowish yields, some of which may well be listed overseas, providing greater diversification and which have contributed positively to City of London's outperformance over the years.

The Board

After serving as Chairman for nine years, I shall be retiring at the Annual General Meeting on 27 October 2020. It has been a huge privilege to be associated with City of London and I have enjoyed the support, and benefited from the wisdom, of all my fellow Directors during this time. I have been a shareholder for over 50 years and intend to follow the Company's fortunes in the future as closely as you all do. I shall be handing over to Sir Laurie Magnus who joined the Board earlier this year and who has deep experience of the investment trust world.

Annual General Meeting

Due to the ongoing restrictions on large gatherings, it will unfortunately not be possible for shareholders to attend the Annual General Meeting on 27 October 2020 in person. Voting on the resolutions to be proposed will be conducted on a poll, and shareholders are encouraged to submit their Forms of Proxy. If you have any questions in relation to the Annual Report or the Company's performance over the year, please email in advance of the meeting. All questions received will be considered and responses will be available on the Company's website. A presentation from Job Curtis, our Fund Manager, will be available to watch on the Company's website on the day of the Annual General Meeting.


Looking forward, there are an unusually large number of uncertainties, which mainly relate to Covid-19. It is possible that there could be a second wave of infections in the autumn/winter. If so, governments are likely to try to implement local rather than nationwide lockdowns which would be less damaging for the economy. Alternatively, it may be that the worst of the virus has been seen and there are strong hopes for an effective vaccine in 2021. The policy response to the lockdown has been extraordinary, but it is not clear what will be the long-term effect of the build up of government debt or how the central banks will ever reduce their stock of government bonds. Another major uncertainty remains the future trading relationship between the UK and the European Union, which is scheduled to have been agreed by the end of 2020.

UK companies responded to the crisis with a wave of dividend cuts, omissions and cancellations. In the July/August half year reporting season, there were tentative signs of an improving mood with several of our investee companies restoring dividends, including BAE Systems, Direct Line Insurance and Persimmon. The large fall in dividends paid has taken down the true yield of the UK equity market to between 3% and 4%, and in line with our objective City of London's yield stands at a premium to that. This remains significantly in excess of the main alternatives of fixed interest and bank deposit rates. To the extent that confidence grows that a base has been found and the market is set to return to dividend growth, UK equities could achieve pleasing returns.