Fund Manager February Commentary – The City of London Investment Trust
The UK equity market made solid gains in February, with a total return of 2.0%, as measured by the FTSE All Share Index. A key factor was the optimism engendered by the vaccination programme. The more domestic FTSE 250 Index of medium-sized companies outperformed with a total return of 3.4%. The FTSE 100 Index of the largest companies returned 1.6% with the rise in sterling having a negative translation effect on overseas profits.
A notable feature was the rise in bond yields both in the UK and overseas. While the unprecedented policy stimulus will stimulate economic growth when the lockdown ends, there are some fears of an uplift in inflation. City of London has decided to take advantage of the historically low level of interest rates and announced a £30 million borrowing, for 25 years, at a 2.67% annual interest rate.
The banks sector outperformed with rising bond yields and expectations of better economic growth being positive factors. In addition, the authorities have allowed the banks to pay dividends, unlike in 2020. City of London’s holdings in Barclays and Lloyds were among its best performers in February. Pharmaceutical group, GlaxoSmithKline, whose full year results disappointed, indicated a dividend cut next year when the company splits into two parts. A reduction was made in City of London’s holding. Additions were made to existing holdings, such as Direct Line Insurance, Persimmon, the housebuilder, and Tate & Lyle.
The season for UK companies reporting full year results has overall met expectations with some positive dividend surprises, especially from the mining sector where City of London has large holdings in Rio Tinto, BHP and Anglo American. As economic growth improves from the second quarter both in the UK and overseas, it should be a supportive background for company profits and dividends.
Bond yield: The level of income on a security, typically expressed as a percentage rate. Note, lower bond yields mean higher prices and vice versa.
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