(CTY) City of London IT share chat

INTERIM MANAGEMENT REPORT


CHAIRMAN'S STATEMENT


Net asset value total return

The UK equity market fell slightly over the first four months of the period under review, with the outlook uncertain for many companies due to the Covid-19 virus. A strong rally took place in the final two months of the period after newly developed vaccines were revealed to be effective against the virus. The FTSE All-Share Index recovered all of its losses from the first four months to produce a total return of 9.3% for the six months to 31 December 2020.

City of London's net asset value total return of 6.9% lagged the FTSE All-Share Index over the six month period. While gearing contributed positively by 0.7%, stock selection was negative by 3.0%. The biggest detracting sector was not holding equity investment instruments, especially Scottish Mortgage, followed by being underweight in travel & leisure, including not holding Flutter Entertainment. The third biggest detracting sector was our above average exposure to gas, water & multi-utilities. In general, some of the portfolio's more defensive holdings were underperformers, such as Nestlé (food manufacturer), Verizon Communications (US telecommunications operator) and RELX (information provider).

On a more positive note, the underweight positions in pharmaceuticals and oil & gas were the two biggest sector contributors followed by our holdings in real estate investment trusts, which recovered well in the last two months of the year. It was also pleasing to note strong stock contributions from M&G (life insurer and asset manager), Croda (chemicals) and La Française des Jeux (French National Lottery operator).

UK medium-sized and small companies, which are in general more domestic and cyclical, significantly outperformed UK large companies over the six months to 31 December 2020. The FTSE 250 Index of medium-sized companies produced a total return of 21.0% and the FTSE Small Cap Index 25.7%, while the FTSE 100 Index was 6.4%. This outperformance occurred despite dividend cuts being even more severe among medium-sized and small companies compared with FTSE 100 companies. City of London's relatively high FTSE 100 weighting and the defensive bias of its portfolio led to a total return underperformance over the six months compared with the averages of other UK equity income investment trusts and OEICs.


Earnings and dividends

Against the background of a significantly lower dividend base across the UK market compared with the same period last year, City of London's revenue earnings per share fell by 15.6%. Compared to our experience during the first half of 2020, when our earnings fell by 38.2% compared with the same period the previous year, there was a significant improvement with a number of investee companies returning to the dividend list, such as BAE Systems (aerospace and defence), Persimmon (housebuilder) and Direct Line Insurance. So far this financial year, City of London has declared two interim dividends of 4.75p each. City of London's diverse portfolio, strong cash flow and revenue reserve give the Board confidence that it will be able to increase the dividend for the fifty-fifth consecutive year. The quarterly rate will be reviewed by the Board before the third interim dividend is declared in March 2021.


Expenses

Expenses remain under tight control. The ongoing charge ratio is expected to remain around 0.36% for the year to 30 June 2021. There will, however, be a drop in interest costs following the redemption of our last debenture of £30 million, with a fixed interest rate of 8.5%, on 31 January 2021.


Material events and transactions during the period

During September 2020, 1,175,000 shares were bought back into treasury, at a discount to net asset value, for a total cost of £3,736,000. These were then reissued, at a premium to net asset value, for total proceeds of £3,860,000. A further 5,445,000 ordinary shares were issued at a premium to net asset value for total proceeds of £19,622,000.

The proceeds were predominantly invested in existing holdings in the portfolio considered to offer a realistic share price valuation relative to prospects and above average dividend yields. Areas of notable additions were: aerospace & defence (BAE Systems), financials (Direct Line Insurance, Legal & General, M&G and IG Group), tobacco (British American Tobacco and Imperial Brands) and utilities (SSE). One new holding was purchased, which was Cisco, the leading maker of network equipment for the internet.

Complete sales were made of Halma (health and safety equipment), Renishaw (precision measuring instruments) and Spirax-Sarco Engineering. All three stocks have performed exceptionally well over the period they have been in the portfolio, but their prospects were considered to be more than fully reflected in their share price valuations. Complete sales were also made of Greggs and National Express (bus and coach operator) given what was considered to be slow recovery prospects due to the pandemic. A complete sale was also made of TP ICAP (wholesale financial intermediary) following its change in corporate strategy. Overall, the number of holdings in the portfolio fell from 90 (at 30 June 2020) to 85 (at 31 December 2020).


The Board

Philip Remnant retired as Chairman at the conclusion of the Annual General Meeting on 27 October 2020 after nine years on the Board. It was unfortunate that the lockdown rules prevented shareholders from attending the Annual General Meeting in person, as I am sure that they would have wished to join the Board in thanking Philip for his outstanding leadership of the Company.

Martin Morgan will be retiring as a Director at the Annual General Meeting later this year, having served for nine years, and the Board will be starting a process to appoint a new Director shortly.


Outlook for the six months to 30 June 2021

The roll-out of three vaccines against the Covid-19 virus is very encouraging and provides "light at the end of the tunnel". It is unlikely, however, that there will be a smooth path to herd immunity for the UK or globally given current limitations to the supply of the vaccines and the apparent scope for the virus to mutate.

Governments and central banks have responded to the enforced lockdowns of economies as a result of Covid-19 with unprecedented fiscal and monetary easing. It is likely that, after a contraction in the first quarter of 2021, the UK and global economy will recover sharply over the rest of the year, with consumer demand bolstered by running down the high savings ratios accumulated while economic activity was restricted. The scale of the lockdowns could still leave deep scarring in some sectors, such as travel and hospitality, with the resumption of dividends some way off. City of London's portfolio remains biased towards large companies with defensive and cash generative qualities.

The UK's trade deal with the EU at the end of 2020 removed an uncertainty and may improve sentiment towards UK equities from global investors. While interest rates remain at a rock bottom level, UK equities offer a much more attractive yield and have scope to build on recent capital appreciation if expectations for profits and dividends are met.


Sir Laurie Magnus

Chairman

18 February 2021



PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties associated with the Company's business can be divided into the following main areas:


· Global pandemic

· Portfolio and market price

· Dividend income

· Investment activity, gearing and performance

· Tax and regulatory

· Operational


Information on these risks and how they are managed are given in the Annual Report for the year ended 30 June 2020. In the view of the Board, the principal risks and uncertainties at the year end remain and are as applicable to the remaining six months of the financial year as they were to the six months under review.


DIRECTORS' RESPONSIBILITY STATEMENT

The Directors confirm that, to the best of their knowledge:

• the condensed set of financial statements has been prepared in accordance with FRS 104 "Interim Financial Reporting";

• the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year); and

• the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).



On behalf of the Board

Sir Laurie Magnus

Chairman

18 February 2021

City of London IT - Half-year Report #CTY @SGC_65 https://www.voxmarkets.co.uk/rns/announcement/c2593006-05e2-4b1e-ab26-4a98427ba7fa #voxmarkets