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

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea