Richard Troue: Have the bottle to back firms, not economic prospects

The Analyst

Investor sentiment has improved markedly in recent months, but it is easy to get carried away when stock markets rise. There is little to suggest a return to rapid economic growth is on the horizon. Western governments remain overly indebted and emerging economies still rely to a degree on exports to the West.

It remains important to divorce company prospects from the economic outlook. Some companies will thrive through thick and thin. I continue to believe that there is a place in most portfolios for strong, stable businesses which can offer great brands or franchises. Once people know and trust a product they buy it again and again, through necessity, loyalty or habit. Recurring revenues foster robust balance sheets, strong cash flow and rising profits. In turn this can lead to high and rising dividends.

For investors able to accept fluctuating capital values, equity yields currently look attractive. Longer term, the pricing power enjoyed by these companies means they should be able to pass on increases in their costs through higher prices, so maintain and even increase profits and dividends. Other things being equal investors should be willing to pay more for each share, giving the potential for capital growth as well.

UK companies paid £80.4bn in dividends during 2012; an all-time record. Corporate balance sheets remain in rude health and cash flows strong. While dividends are expected to grow this year, the underlying rate of growth is expected to slow.

This highlights a benefit of the investment trust structure. Investment trusts can hold back up to 15 per cent of their income each year to build up a reserve. It can be used to smooth dividend payments during years when growth is harder to come by, or if dividends fall.

The City of London Investment Trust plc, managed by Henderson's Job Curtis, currently has healthy reserves. The flexibility to use these reserves has helped the trust increase dividends in each of the past 46 years, even after the financial crisis.

Mr Curtis has been at the helm since July 1991, aiming to provide growth in capital and income from investments predominantly in larger, UK-listed companies. He considers himself a naturally cautious investor, and while he doesn't ignore the wider economic environment, his main focus is the prospects of individual companies.

He begins by looking for those with above-average yields and dividend growth prospects. He prefers highly cash-generative businesses backed by assets.

The portfolio is well diversified, containing more than 100 holdings. Presently, Mr Curtis is maintaining a "defensive core" in companies with international earnings and consistent dividend growth.

Companies supplying staple goods to consumers and those with strong brands that cannot be replicated easily fit the bill.

Diageo is a top holding. Its portfolio of brands, which includes Guinness, Smirnoff vodka and Johnnie Walker whisky, has a loyal following and it is benefiting from increasing demand in emerging markets.

Similarly, while he has generally avoided UK banks, Mr Curtis has been adding to a holding in HSBC which he believes offers an attractive dividend yield and a global footprint.

Banks performed well during 2012 and the portfolio missed out on some gains, though exposure to insurance companies, which were not affected to the same extent by the financial crisis, helped make up for this.

While the core of the portfolio is invested in less economically sensitive companies, Mr Curtis also has exposure to those more reliant on stronger economic growth. Quality is paramount. He seeks those with strong balance sheets, good intellectual property or technology and manageable debt. For instance, TUI Travel was added to the portfolio during 2012 as he felt it was capable of capitalising on weakness among competitors.

Investment Trusts have the ability to borrow money and the portfolio is approximately 11 per cent geared at present, offering an attractive yield of 4.2 per cent.

Ongoing charges for the last financial year were low at 0.45 per cent, although there is a performance fee. At the time of writing, the trust trades at a premium to net asset value of 2.1 per cent.

Mr Curtis has built a good, long-term record on this trust using a consistent approach with a focus on good-quality businesses. It could appeal to income-seeking investors with a long-term horizon who are comfortable with the investment trust structure and are seeking a core holding for their portfolio.

Richard Troue, investment analyst. www.hl.co.uk

Compare with the Independent: See how much you could save by switching credit cards. Compare now

Sport
Raheem Sterling and Luis Suarez celebrate during Liverpool's game with Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
Sport
Luis Suarez celebrates after scoring in Liverpool's 3-2 win over Norwich
Football Vine shows Suarez writhing in pain before launching counter attack
Arts & Entertainment
The original design with Charles' face clearly visible, which is on display around the capital
arts + ents The ad shows Prince Charles attired for his coronation in a crown and fur mantle with his mouth covered by a criss-cross of white duct tape
Sport
Steven Gerrard had to be talked into adopting a deeper role by his manager, Brendan Rodgers
sport LIVEFollow the latest news and scores from today's Premier League as Liverpool make a blistering start against Norwich
VIDEO
News
People White House officials refuse to make comment on 275,000 signatures that want Justin Bieber's US visa revoked
News
Sir Cliff Richard is to release his hundredth album at age 72
PEOPLESir Cliff Richard has used a candid appearance on an Australian talk show to address long-running speculation about his sexuality

Sport
Lukas Podolski celebrates one of his two goals in Arsenal's win over Hull

Arsenal strengthened their grip on a top-four finish with a straightforward 3-0 win over Hull City.

Arts & Entertainment
Quentin Tarantino, director
arts + ents Samuel L Jackson and Michael Madsen have taken part in a reading of Quentin Tarantino’s axed follow-up to Django Unchained.
News
The speeding train nearly hit this US politican during a lecture on rail safety
news As the saying goes, you have to practice what you preach
Sport
Mercedes Formula One driver Lewis Hamilton of Britain (front) drives ahead of Red Bull Formula One driver Daniel Ricciardo of Australia during the Chinese F1 Grand Prix at the Shanghai International circuit
sport Hamilton captured his third straight Formula One race with ease on Sunday, leading from start to finish to win the Chinese Grand Prix

Arts & Entertainment
Billie Jean King, who won the women’s Wimbledon title in 1967, when the first colour pictures were broadcast
tv
News
Snow has no plans to step back or reduce his workload
mediaIt's 25 years since Jon Snow first presented Channel 4 News, and his drive shows no sign of diminishing
Life & Style
food + drinkWhat’s not to like?
Voices
Clock off: France has had a 35‑hour working week since 1999
voicesThere's no truth to a law banning work emails after 6pm, but that didn’t stop media hysteria
Arts & Entertainment
Maisie Williams of Game of Thrones now
tvMajor roles that grow with their child actors are helping them to steal the show on TV
Arts & Entertainment
Kingdom Tower
architecture
Life & Style
Lana Del Rey, Alexa Chung and Cara Delevingne each carry their signature bag
fashionMulberry's decision to go for the super-rich backfired dramatically
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    1st Line Helpdesk Engineer Apprentice

    £150.00 per week: QA Apprenticeships: This company has been providing on site ...

    Telesales & Sales Support Apprentice

    £221.25 per week: QA Apprenticeships: This company is a well established Inter...

    Client Relationship Manager - SQL, Python

    £40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

    **Financial Services Tax**

    £35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

    Day In a Page

    How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

    How I brokered a peace deal with Robert Mugabe

    Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
    Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

    British Muslims's Happy video attacked as 'sinful'

    The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
    Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

    Michael Williams: Do as I do, not as I pray

    Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
    A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

    A History of the First World War in 100 moments

    A visit to the Front Line by the Prime Minister's wife
    Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

    Jenny Collier: 'Sexism on stand-up circuit should be extinct'

    The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
    Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

    Cannes Film Festival

    Ken Loach and Mike Leigh to fight it out for the Palme d'Or
    The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

    The concept album makes surprise top ten return

    Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
    Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

    Lichen is surprise new ingredient on fine-dining menus

    Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
    10 best baking books

    10 best baking books

    Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
    Jury still out on Manchester City boss Manuel Pellegrini

    Jury still out on Pellegrini

    Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
    Ben Stokes: 'Punching lockers isn't way forward'

    Ben Stokes: 'Punching lockers isn't way forward'

    The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
    Mark Johnston: First £1 million jackpot spurs him on

    Mark Johnston: First £1 million jackpot spurs him on

    The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
    Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

    Ricky Gervais: 'People are waiting for me to fail'

    As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
    Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

    Mad Men returns for a final fling

    The suits are still sharp, but Don Draper has lost his edge
    Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

    Google finds a lift into space will never get off the ground

    Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit