Fund Manager October 2021 Commentary – City of London Investment Trust
In October 2021, the UK equity market produced a total return of 1.8%1, as measured by the FTSE All Share Index. Large companies outperformed, with the FTSE 100 Index of the largest 100 companies producing a total return of 2.2%, compared with 0.5% for the FTSE 250 Index of medium-sized companies.
A key factor behind the strong performance of the FTSE 100 Index was the banks sector, where investors anticipated the benefit from rising interest rates on banking profitability. Contrary to expectations, the Bank of England did not raise the base rate in November, although increases are expected over coming months given the rise in inflation. City of London’s best performing bank holdings in October were HSBC and Lloyds.
Wm Morrison Supermarkets left City of London’s portfolio in October as a result of the agreed takeover by Clayton, Dubilier & Rice, a US private equity firm. It is sad to lose a company of Morrison’s quality, given its high freehold property ownership of its supermarkets and differentiated, vertically integrated food strategy, sourcing and manufacturing a large proportion in the UK. On the other hand, after the bidding war between two private equity firms, shareholders probably received fair value for their shares. City of London retains a large holding in Tesco in the food retailing sector.
Despite some tax rises in the Budget, the overall fiscal position remains expansionary as does monetary policy with record low interest rates continuing in the UK and overseas. Overall, this should be positive for the growth of the economy as well as corporate profits and dividends, although inflationary pressures will be a headwind for some companies. The UK equity market’s dividend yield remains attractive relative to the main alternatives.
Source: Bloomberg, FTSE All Share Index as at 29th October 2021.
The rate at which the prices of goods and services are rising in an economy. The CPI and RPI are two common measures.
Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.
The policies of a central bank aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money. Monetary stimulus refers to a central bank increasing the supply of money and lowering borrowing costs. Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.
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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