City of London (CTY ) is trading at a rare premium after manager Job Curtis held his nerve with contrarian plays, including the decision to overweight banks for the first time in two decades.

Janus Henderson’s Curtis, who last month was awarded an AAA Citywire investment trust manager rating, has run the £2.4bn UK equity portfolio since 1991, witnessing his fair share of market peaks and troughs.

His UK equity income trust is the Association of Investment Companies’ (AIC) leading ‘dividend hero’, having grown its dividend each year since 1966.

Curtis tends to takes a cautious and defensive stance, but that doesn’t mean he is averse to going against the grain.

Over the past year, the trust is the second-best performer in Deutsche Numis’s UK Equity Income sector, with net asset value (NAV) growth of 13%, second only to Temple Bar (TMPL ) with 14.3%.

Over the same period, City of London’s shares are up 16.7%, which compares to 11.7% by the average trust in the AIC’s UK equity income sector. It currently trades at a 1.1% premium to NAV and offers a 4.4% yield.

Curtis said a move into unpopular sectors helped him to stay ahead of the pack, particularly a push into domestically-focused banks around 18 months ago.

‘We moved overweight to banks about 18 months ago for the first time in 20 years,’ he said.  

‘We were underweight since before the global financial crisis [of 2007/08].’

He added NatWest (NWG) to the portfolio and topped up his holdings in Barclays (BARC) and HSBC (HSBA). Lloyds (LLOY) is the tenth largest position in the trust at 2.9%, while NatWest is eighth and accounts for 3.4% of the portfolio.

The reason for Curtis’s optimism towards banking was based on the work of a ‘very good’ banking analyst on the team who looked at the hedging that banks employ against the aggregate size of their current and deposit accounts, which helps to manage interest rate and currency risks.

‘The analyst said the market was underestimating the effect [of the hedging] on banks’ profits,’ said Curtis.

‘NatWest, in particular, where assumptions were very conservative.’

The move into NatWest paid off, having bought in at 200p. Today, it is 519p.

‘NatWest has very good dividend growth. The dividend is up 27% but it still only has a payout ratio of 40%, and has said that will go up to 50%. It could go higher,’ said Curtis.  

Lighting up returns

Another sector that Job ‘stuck with’ was tobacco, which he described as ‘the most unpopular sector in an unpopular market’.

‘We stuck with it because of the good cash generation,’ he said, referring to his stake in Imperial Brands (IMB), which was the seventh largest holding at 3.5% of the portfolio.

Curtis noted that a new management team at the tobacco giant is ‘committed to shareholder value and began a huge share buyback 18 months ago, which has been highly successful’. This helped to drive share price performance.

‘Three years ago, the shares were around £16.00 and now they are £28.00,’ he said.

Rival tobacco stock British American Tobacco (BATS) is also in the trust’s top 10 but Curtis admitted it is a ‘more complex story’, given its exposure to next-generation products such as vapes, where it is facing tough competition from China.

It also ‘took on a lot of debt’ with the acquisition of Reynolds American, the owner of Strike and Camel cigarettes. However, this debt pile is reducing under new management and Curtis said BATS remains ‘very defensive and highly cash generative’.

‘We have stuck with our contrarian plays but you do have to go over the cash again and again when sentiment is against you,’ he said.

This was particularly the case when Curits invested in BAE Systems (BAES) five years ago when he said ‘ESG mania’ was at its peak, and investors were focused on the environmental, social and governance (ESG) credentials of companies.

While he said it was understandable that tobacco companies didn’t tick ESG boxes for some investors, he said defence companies like BAE serve a real purpose and are ‘necessary to supporting democracy’.

While defence stocks had been out of favour, the war in Ukraine and subsequent conflicts in the Middle East have contributed to BAE’s extraordinary 271% share price gain over the past five years. The fund manager has responded by taking some profits on BAE. 

However, Curtis does not expect the momentum behind defence stocks to slow down, noting that ‘countries are rearming and not just in Europe’. Here, he highlights Japan, which is ‘more worried about the Chinese than the Russians’. 

Contrarian UK

The UK can be viewed as the ultimate contrarian play, as the home market is still very unloved.

He points out that on a like-for-like basis when Shell (SHEL) is compared to Exxon there is a massive 40% discount.

The UK’s general unpopularity has triggered huge scale buybacks that the manager believes ‘are working’.

‘People said the UK is cheap but they are still not marginal buyers. What’s really interesting is that companies have stepped in to become the marginal buyer,’ he said.

‘Company after company is buying back. It is working and having a positive effect.’

After billions of pounds spent in buybacks, Curtis said ‘investors are cottoning on’, but allocations to the UK still remain low.

‘People have more in Nvidia than they do in the UK,’ he added.

Following the uncertainty created by US president Donald Trump’s tariff announcements, Curtis believes the UK’s defensive nature should play in its favour.

Finally he points out that despite confidence being low, company fundamentals are strong, falling interest rates are broadly positive for markets and should improve profits, while ‘the consumer is still in good shape’.