InvestmentsOct 20 2014

Fund Review: City Natural Resources High Yield Trust

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This £145.3m investment trust launched in August 2003 and has been co-managed by Will Smith and Ian Francis since November 2009, while Rob Crayfourd joined them in February 2012.

New City Investment Managers is adviser to the trust and a range of other resource funds, and is the trading name for CQS Asset Management, which is a global, multi-strategy asset management firm. Mr Smith outlines the trust’s objective: “The aim is to provide capital growth through a portfolio of mining and resource equities, and also income through resource equities and broader fixed interest securities.”

He continues: “The investment process generates commodity allocation from a macroeconomic overview and then stock selection through bottom-up company research. The focus of the fund is on global mid- and small-cap companies.”

According to the manager, the mix of equities and bonds has always been a feature of the trust. He suggests that the resource space is constantly changing and that managers have to adapt to that, citing the shale boom as an example. He is adamant that macroeconomic factors have a part to play in the running of the trust. “Supply and demand for commodities are driven by macroeconomic forces and it is a benefit to the managers to be able to form their macroeconomic outlook with input from the wider CQS group,” he says.

Among recent changes to the portfolio, Mr Smith points out that it has been adjusted for “a slower China” following a period of slower growth in the region. “We have been underweight the bulk commodities as our analysis has suggested they are in oversupply and demand is weakening,” he says. “The weighting has increased in the dividend-paying oil and gas companies that are benefiting from technology to increase productivity and margins.”

The ongoing charges are currently 1.7 per cent, while Mr Smith notes that the trust’s share price has risen 6.9 per cent so far this year, reflecting the diversification of the portfolio away from mining and into oil and gas, and agriculture.

The trust has racked up a top-quartile performance in the AIC IT Commodities & Natural Resources sector, in spite of several years of poor performance during what has been a challenging time for the sector. FE Analytics shows the trust delivered a return of 114.17 per cent to investors in the 10 years to October 8 2014, against the sector average of 65.69 per cent. But in the three years to the same date, the trust recorded a loss of 44.42 per cent, compared with an average loss from the sector of 46.37 per cent.

Mr Smith acknowledges that some holdings have detracted from performance. He says: “We have always had exploration companies within the portfolio and the likes of Ausgold and Foran Mining have been punished. The gold sector has also been particularly weak.”

While it has been a difficult time for mining and metals, the manager singles out Sirius Resources, which is building a nickel mine in Western Australia, as having performed well.

He continues: “We have long had a large weighting in the palm oil sector, which has recently seen an outbreak of corporate activity, with our two largest holdings – New Britain Palm Oil and Asian Plantations – both being bid for.

“Within the agriculture sector, Plant Impact, a UK-listed company developing the next generation of yield enhancement products for soya beans and other crops, has doubled this year.”

Turning his attention to the outlook for the resources sector, Mr Smith again observes the adjustment to a slower China, although he believes that commodity demand, driven by urbanisation, is still growing. “A strong dollar is a headwind for commodity prices and resource stocks, but we believe that the major companies have to acquire in order to grow, and quality projects should always attract a premium,” he says.

“Technology is transforming the onshore oil and gas sector, and we believe the outlook for base metals such as zinc and copper remains tight. The resource sell-off offers the opportunity to acquire first-class assets at knockdown prices.”

EXPERT VIEW

Rob Morgan, investment and pensions analyst, Charles Stanley Direct

Will Smith’s investment trust is highly diversified, which helps to mitigate the risks inherent in this sector. The trust has a good record of growing dividends since inception, and it has been assisted in this through high-yielding loan and preference share holdings, as well as gearing on the trust – currently 20 per cent. The combination of a healthy 4 per cent yield and an underlying portfolio of primarily smaller and medium-sized commodities firms makes this an unusual, possibly unique, investment. The current 15 per cent discount to net asset value confirms the sector is out of favour – and it should be on the radar of contrarian income seekers.