UK equities produced a negative total return of 0.4% in September as measured by the FTSE All Share Index. With the Bank of England indicating that it is likely to increase interest rates, Sterling rallied against the US Dollar and the Euro. Given the negative effect on overseas profits of Sterling’s rise, the FTSE 100 Index, which is predominantly made up with international companies, produced a negative return of 0.7%, underperforming the more domestically focussed FTSE Mid 250 Index of medium-sized companies, which produced a positive return of 0.6%.
The oil sector was a notable outperformer with the oil price responding positively to demand and supply factors. Additions were made to City of London’s holdings in Royal Dutch Shell and BP where significant cost cutting has made the dividends more secure. General retailers also outperformed with the Trust’s holdings in Next and Marks & Spencer both producing double digit returns. Mining was a notable underperformer, hurt by weaker metal prices. City of London has below average market exposure to mining but holds BHP Billiton, Rio Tinto and Anglo American for their dividend potential.
In September, City of London raised £50 million of fixed rate 32 year private placement notes at an annualised coupon of 2.94%. In our opinion, this locks in long-term borrowing at an attractive rate and should enhance long-term performance. In the short term, the dividend yield from UK equities remains attractive relative to the main alternatives.
Dividend yield: a dividend expressed as a percentage of current share price.
Private placement: a sale of stocks, bonds or securities directly to a private investor, rather than as part of a public offering.