2025 was a better year for UK equities than many expected. How did that backdrop shape the trust’s performance?

It was indeed a strong year. The UK market delivered around a 20% total return and even outpaced the US – something we haven’t seen for a while. That reflected the attractive value in UK shares, which have been overlooked for years.

Against this backdrop, City of London Investment Trust (CTY) also outperformed and delivered its 59th consecutive dividend increase, fully covered by earnings. Our largest sector exposure, banks, was a key driver of returns, alongside successful stock-specific decisions.

Income remains a priority for many UK investors. Where did you find the most compelling income opportunities?

Alongside banks, we increased exposure to real estate investment trusts (REITs). Despite a tough period for property markets, we see attractive long-term dynamics in London offices: hybrid work patterns have settled, new supply is limited, and demand is picking up. We added to names such as British Land and Land Securities, where we see improving fundamentals.

We also initiated a position in Big Yellow Group, the UK’s leading self-storage provider. The UK is far less supplied with storage facilities than the US, so it’s a growth market. The company’s strong balance sheet and attractive valuation makes it a compelling income opportunity.

Which holdings helped most and were there any that held back performance?

NatWest, M&G, and BAE Systems were some of the main contributors. BAE, in particular, benefited from increased global defence spending and has well-established positions in the US, Europe and Asia.

On the negative side, not holding Rolls-Royce, which rose sharply but offers a low dividend yield, detracted from relative performance. Some pharmaceuticals holdings had more mixed results, not holding the overseas bank, Standard Chartered, also held back returns.

You’ve gradually reduced overseas exposure. How is the portfolio positioned today and what role do non-UK holdings play?

Today, the trust is mostly invested in big, well-established UK companies. In fact, about 83% of our investments are in companies that are part of the FTSE 100, which is an index of the 100 largest firms listed on the London Stock Exchange (think of names like HSBC or Unilever). We also invest around 10% in UK mid-cap companies, which are medium-sized businesses with strong growth potential. The remaining 7% of the portfolio is in overseas-listed companies.

A few years ago, we had more invested overseas – about 17%. But as market conditions have shifted, we’ve seen much more value in UK companies. In areas like oil and consumer staples UK companies are currently trading at lower prices compared to similar firms in the US and Europe. This gives UK stocks an edge in terms of value for investors right now, so we’ve deliberately increased our UK exposure to take advantage of these opportunities.

That said, our overseas investments still play an important role. They help diversify the portfolio, especially in areas where the UK market isn’t as strong. For instance, TotalEnergies complements our UK energy holdings, while Merck, Johnson & Johnson, and Novartis add global expertise in pharmaceuticals. Munich Re boosts our exposure to the reinsurance sector, and Swire Pacific in Hong Kong gives us access to high-quality assets in Asia.

These international positions work alongside our core holdings in UK companies, helping create a balanced and resilient portfolio.

Investors are still navigating inflation, interest rates and political uncertainty. What’s your outlook for the UK market?

The UK market remains attractively valued – particularly when you consider income. The market dividend yield is around 3.3%, and share buybacks add roughly another 2%, giving investors a total distribution yield of over 5%. This is higher than in the US and in my view means that you’re being “paid to wait.”

UK companies also earn a large proportion of their revenues overseas, so domestic uncertainty shouldn’t be overstated. Meanwhile, we expect ongoing takeovers and share buybacks to help support valuations.

What are your priorities for the year ahead?

Our focus remains unchanged: grow the trust’s net asset value and continue delivering rising income, while keeping risk controlled. That means holding high-quality companies at sensible valuations, avoiding structurally challenged areas, and acting decisively when market conditions change. City of London has built a strong long-term record and maintaining that is central to how we manage the portfolio.

Discrete performance

All performance, cumulative growth and annual growth data is sourced from Morningstar.

Source: at 30/09/25. © 2025 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance does not predict future returns.

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