Fund manager August commentary – The City of London Investment Trust
During August, the UK equity market produced a total return of 2.4% as measured by the FTSE All Share Index. The FTSE 100 Index of the largest companies underperformed with a total return of 1.7%. This partly reflected the weakness of the US dollar, which fell from an exchange rate of 1.24 to 1.34 against sterling over the month. The FTSE 100 Index includes many large, multinational companies with US dollar earnings. The FTSE 250 Index of medium-sized companies, which has a more domestic focus, outperformed with a total return of 5.4%. This partly reflected rising optimism about the recovery of the UK economy.
The travel and leisure sector was a notable outperformer but City of London remains underweight because recovery for this sector may take longer than expected due to social distancing. Beverages was a particularly weak sector after Diageo’s full year results disappointed the market but its dividend was up by 1.9% compared with the previous year. Diageo has been a successful long-term holding for City of London and benefits from a world leading position in spirits, with brands such as Johnnie Walker whisky, as well as Guinness beer.
A complete sale was made from the portfolio of Renishaw, the precision measuring equipment company. Renishaw has been an exceptionally strong share price performer but its valuation seemed too high given the recent downturn in its trading. The proceeds were invested in existing positions in the portfolio.
It is pleasing that a number of companies in City of London’s portfolio have recently restored dividends, such as BAE Systems and Direct Line Insurance. As confidence grows in the ability of companies to grow their dividends, the attractive yield of UK equities relative to the main alternatives will become more apparent.
Dividend: A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.
Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.
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