Over the last decade or so, fluxes in the world’s markets have been driven by a select group of themes. These themes describe the changes taking place in societies and economies, from ageing populations through to the adoption of new technologies. Most focus has been placed on the developers of AI, to the direct benefit of the US market. However, disruptors and innovators can be found in other markets too.
The UK market is famous for its dividend payments. Often sourced from legacy industries, such as oil & gas and banks, this can give the market a reputation as having a foot firmly in the past. Yet, the mere survival of the FTSE – and the attraction of some of its members for overseas buyers – betrays another side.
Investing for income through innovation
The City of London Investment Trust personifies this reputation for income. It has raised its dividends for 58 years – longer than any other investment trust. Yet, maintaining dividend growth requires the companies the trust invests in to keep growing too. As such, the trust’s investments include some of the trailblazers available in the UK.
One of the challenges facing the world in the 21st century is a rapidly ageing population. This has widespread consequences, not least for healthcare. One of the stalwarts of the UK stock market is GSK, a leading biopharma business and part of the CTY portfolio. Its vaccines are used to treat common respiratory conditions, which are risky for older populations.
Demand for insurance services has also seen a sustained rise over the last few years as an older population seeks comfort in later life. CTY investment Aviva is addressing this trend, modifying products like health insurance for the needs of these customers.
Technology means more than Chat GPT
When we discuss technology, our minds tend to head straight to Silicon Valley. However, innovation is not limited to tech pioneers. A clear innovator in the UK is BAE Systems. Its defence products are in high demand, due in part to their integration of new technologies – and this demand seems unlikely to diminish as three decades of relative peace sadly fade away.
A less well-known, but transformed, FTSE member is RELX. What was once a relatively staid publisher now provides a wide range of services to businesses. Notably, some of these use AI to real advantage. As such, it has been one of CTY’s highest growth investments over the last three years.
What innovation means for investors
CTY’s stated investment objective is to provide its investors with long-term growth in income and capital. While its dividend track record is commendable, its commitment to capital growth is less well-known. By uncovering future growth opportunities in the UK market, the trust’s manager, Job Curtis, aims to ensure he is capturing future dividend potential alongside current high yielders.
With this in mind, stock selection added 2.64% to the trust’s return relative to its benchmark in the trust’s full year to 30 June 2024. More impressive is the trust’s long-term track record of outperforming inflation. Over the five years to 30 June 2024, the trust achieved an NAV return of 43.42%, while inflation over that period was c. 25%. As such, investors over this period saw a real return drawn principally from UK stocks.
To find out more about The City of London Investment Trust click here.
Source: Morningstar as at 31/08/2024
Past performance does not predict future returns.
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Benchmark
A standard (usually an index) that an investment portfolio’s performance can be measured against. For example, the performance of a UK equity fund may be benchmarked against the FTSE 100 Index, which represents the 100 largest companies listed on the London Stock Exchange.
Dividend
A variable discretionary payment made by a company to its shareholders.
Inflation
The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
Investment trust
An investment trust is a form of investment fund, specifically a publicly traded collective investment scheme that invests its shareholders’ money in the shares of other companies.
Portfolio
A grouping of financial assets such as equities, bonds, commodities, properties or cash. Also often called a ‘fund’.
Net asset value (NAV) total return (investment trusts)
The theoretical total return on shareholders’ funds per share reflecting the change in Net Asset Value (NAV) assuming that dividends paid to shareholders were reinvested at NAV at the time the shares were quoted ex-dividend. A way of measuring investment management performance of investment trusts which is not affected by movements in discounts/premiums.
Real return/nominal return
‘Real return’ is the return on an investment after taxes and inflation. ‘Nominal return’ is the return before factoring in taxes and inflation.
Yield
The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Before investing in an investment trust referred to in this article, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- Losses could be incurred if a counterparty became unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- Some of the administrative expenses are taken from capital. This allows more income to be paid but it may also restrict capital growth or even reduce the capital over time.
- Derivatives may be used with the aim of reducing risk or managing the portfolio more efficiently. However, this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk (as well as the potential for greater reward) than a portfolio that is diversified across more countries.
- This investment should be held as part of a broader diversified portfolio. Balancing it with investments that have different risk profiles can help reduce the impact of any single investment underperforming.
- The Company may borrow to invest, which could magnify gains or losses.
- As the Company may borrow to invest, changes in interest rates could increase or decrease the cost of any borrowings.
- The Company invests in the shares of other companies. These shares may become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Your return on investment is directly related to the market price of the Company's shares, which may be higher (trading at a premium) or lower (trading at a discount) than the value of its underlying net asset value assets. This means your returns may differ from the performance of those assets.
- While active management techniques are typically positive for performance, this approach may also result in periods of underperformance relative to the benchmark and comparable passive and index-tracking funds, particularly during unexpected market shifts.
- Shares can gain and lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may rise and fall in line with the underlying equity markets.
- If the companies in which the portfolio is invested persistently reduce their dividend payments, the Company will find it more difficult to maintain or grow its own dividend payments each year.
- The Company maintains a portfolio with a bias towards income-generating companies. This may result in the Company significantly underperforming or outperforming the wider market.