UK equities produced a negative total return of 1.9% in January as measured by the FTSE All Share Index. UK GDP growth was reported at a slightly higher than expected 0.5% for the fourth quarter of 2017. Sterling strength was a notable feature with a rise of 5.1% against the US Dollar and 1.3% against the Euro.
Within the FTSE 100 Index, the biggest riser was GKN which received a takeover bid from Melrose and is held in City of London’s portfolio. Next was another strong performer in the portfolio after better than expected Christmas trading but profits were taken in the holding after it reached our estimation of fair value. Utilities, where the Trust is overweight, continued to underperform on regulatory and political concerns despite offering dividend yields significantly above the market average. A new holding was bought in global communications services group, WPP, where its share price valuation appeared to under value its long- term prospects.
We believe after a period of exceptionally low volatility, some turbulence in world equity markets is not unexpected. But the main regions of the world continue to enjoy robust economic growth. The dividend yield from UK equities remains attractive to us relative to the main alternatives.
Total return - the financial benefit, including income and appreciation of capital, that somebody gets from an investment.
Fair value - A sale price agreed to by a willing buyer and seller, assuming both parties enter the transaction freely. Many investments have a fair value determined by a market where the security is traded.
Volatility - The rate and extent at which the price of a portfolio, security or index moves up and down. It is used to measure the riskiness of an investment.