Trust manager increases debt to buy UK shares

Trust manager increases debt to buy UK shares

The valuations to which UK shares have fallen in recent months has led Job Curtis, who runs the £1.5bn City of London investment trust, to borrow more cash to invest.

Mr Curtis said he has increased the level of gearing, as debt in an investment trust is known, from 7.7 per cent to about 12 per cent in the past six months, even as the UK market has fallen.

He said market fears about the path of higher UK interest rates had spooked markets and sent global equity valuations much lower while the valuations at which UK shares presently trade already reflected a range of negative issues facing investors.

The manager, who has managed the trust for over thirty years, said he had used the extra capital to invest in companies both focused on the UK domestic economy and those more focused on the international economy.

For instance, he described the shares of Lloyds Banking Group as "very cheap", and has an investment in those.

Mr Curtis said: "I run quite a conservative portfolio and so that suits itself to gearing.

"The FTSE currently yields 4.4 per cent and at a valuation of 12 times earnings, based on history those valuations are a good time to invest, taking the longer term view, rather than trying to predict the short-term."

Investment trusts, as listed vehicles, can borrow money to invest. The idea is that if the fund manager invests the money wisely, the end investor receives a higher return because they earn a return from both the money they invest and the money borrowed on their behalf.

But if performance is poor the losses are amplified because the diminishing returns must also fund debt repayment costs.  

The City of London investment trust has a yield of 4.6 per cent, and trades at a premium to its net assets of 1.9 per cent.

It has increased its annual dividend for each of the past 51 years.

Other managers have shied away from UK shares in the pre-Brexit environment.

But Dan Kemp, chief investment officer for EMEA at Morningstar, said: "Brexit is difficult to analyse because of the indirect and tenuous connections it has on investment fundamentals.

"We believe that when investors depart from long-term, fundamentally sound investment analysis, they can drift dangerously into speculation.

"The first thing to acknowledge about the fundamentals is that the UK economy is not the UK equity market. We do not need to predict the UK economy to know what might happen to UK stocks. The UK is unloved, reasonably cheap, and fundamentally healthy."

Peter Blackburn, of Loughtons, an independent financial advice firm in Devon, said: "Although the UK stock market has remained preoccupied by the ebbs and flows of the Brexit debate, the UK economy has continued to produce strong data.

"Towards the end of 2018, we have seen further positive numbers on wage growth and employment, backed up by more good news on inflation.