While markets experienced periods of volatility, particularly following the conflict between the US and Iran, investor confidence was supported by resilient corporate earnings, lower interest rates and ongoing takeover activity across the UK market.
City of London delivered an NAV total return of 21.9%, matching the FTSE All-Share Index and outperforming both the AIC UK Equity Income and IA UK Equity Income peer group averages over the year.
The annual dividend increased by 4.0%, marking the trust’s 60th consecutive year of dividend growth, the longest of any UK investment trust.
Dividend growth was ahead of UK inflation and was fully covered by earnings, with earnings per share rising by 4.4% during the year.
Takeover activity was a significant positive contributor. Holdings including Schroders, Beazley, Tate & Lyle and Segro benefited from bid activity as international buyers continued to tap into the attractive valuations available in the UK market.
IG Group was another strong contributor, supported by favourable market conditions and strong customer growth.
We also benefited from not owning some companies whose valuations came under pressure as investors started questioning the longer-term impact of AI.
The largest detractor was not owning Rolls-Royce. The company’s shares rallied strongly over the period as a recovery in civil aerospace continued. The company remains a relatively low dividend payer and therefore sits outside our investment approach.
Underweight positions in HSBC and AstraZeneca also held back relative performance as both companies performed strongly during the period.
RELX and Anglo American were additional detractors. RELX faced concerns about the potential impact of AI on its business model, while Anglo American was affected by operational and strategic challenges before being sold from the portfolio.
We introduced four new holdings during the year: Big Yellow, the UK’s leading self-storage operator; ICG, a specialist alternative asset manager; ITV, where value could be unlocked through portfolio restructuring; and Rightmove, whose market position we believe remains resilient despite concerns about AI disruption.
We added to several existing holdings where we saw attractive opportunities. These included BP, where improving fundamentals and higher energy prices helped strengthen the investment case; RELX, where we believe concerns about AI are overstated; and GSK, which offers attractive valuation and growth potential.
We sold holdings where the dividend outlook or investment case had deteriorated, including XP Power, Hays, Mondi and Harbour Energy, while Anglo American was also exited from the portfolio.
Artificial intelligence continues to reshape markets. While AI has the potential to deliver significant productivity gains, the scale of current investment raises questions about whether future returns will justify today’s expectations. We expect both winners and losers to emerge as adoption accelerates.
Inflation and interest rates remain key watchpoints. Ongoing geopolitical tensions, particularly in energy markets, continue to create inflationary pressures, making further interest rate cuts less certain than investors had hoped.
The UK market remains attractively valued relative to overseas markets. This valuation gap continues to support takeover activity and creates opportunities for long-term investors focused on fundamentally strong businesses.
Financials remain a supportive backdrop for income growth. Banks and insurers, which represent a significant part of the UK market and the portfolio, continue to benefit from higher interest rates, strong balance sheets and continuing favourable regulatory conditions.
We believe the portfolio is well positioned to continue delivering both income and capital growth. Its diversified exposure across sectors and geographies, combined with a focus on companies with attractive valuations and dividend growth potential, provides a strong foundation for the years ahead.