Even the global financial crisis couldn't tarnish this trust's premium

Telegraph

27-03-2025

Questor is The Telegraph's stockpicking column, helping you decode the markets and offering insights on where to invest.
Debt is huge across investment companies right now – in a good way. Trusts offering access to this sector come with the obvious attraction of rising dividends, which have been buoyed thanks to higher interest rates. Better still, the dividend yields on these trusts are well ahead of those that an investor would receive from a government bond, but achieving this requires taking on additional risk in some form.
While many managers rely on leverage to achieve the desired result, CQS New City High Yield Fund looks for debt issues that would normally be considered too small for most debt investors and those that have not been assessed by a credit rating agency. These relatively overlooked issues tend to trade on higher yields, but require the manager to run its own credit assessments to ensure the yields on offer are not too good to be true.
The trust pays a quarterly dividend and can boast a track record of increasing dividends every year since its inception more than two decades ago. The trust's financial year runs to June 30, and at the interim stage the board said that it thought this year's dividend would be covered by earnings.
In addition to providing a high yield, preservation of capital is an important part of the investment objective and to that end the manager's approach is conservative.
The team is headed up by Ian Francis, who brings more than three decades of experience and can draw on the substantial resources of Manulife CQS Investment Management's credit analysis team. The portfolio is fairly diversified, with exposures to more than 100 different issuers, but thanks to the detailed research of his team Mr Francis is comfortable with a high concentration of roughly 40pc of assets in the 10 largest positions.
Some of the names in that list will be familiar: Co-op Bank, Virgin Money and Barclays. Some of the more unusual ones are subsidiaries of more well-known brands. For example, other top 10 positions are TVL Finance, which issues debt on behalf of Travelodge, and Galaxy Bidco, a financing arm for Domestic & General Insurance and a longstanding position in the portfolio.
The overall bias is to sterling-denominated issues, which comprise more than 70pc of the portfolio. Some readers may be comforted that just 16pc of the portfolio was exposed to US dollars at the end of December 2024, given President Trump's ambition to weaken the currency.
The portfolio also includes some exposure to preference shares, convertibles and high-yielding equities (about 13pc of the trust at end January 2025). At the end of 2024, there was a position in NextEnergy Solar Fund, which is trading on a yield of 12.4pc, for example.
CQS New City High Yield has peers with higher returns, but these tend to come with higher Nav volatility. It has built up a loyal fanbase and, if you are already a shareholder in the trust, you are probably happy to hang on. However, new investors will have to stomach the premium that the shares trade on.
CQS New City High Yield Fund's shares have traded at a premium to net asset value for almost all of the trust's life, even during 2008's financial crisis, reflecting the impressive work of the manager. Notable exceptions were the Covid panic five years ago, when the discount briefly breached 18pc but returned to a premium a few days later, and the early part of 2021. It is worth remembering that five-year performance figures are currently misleading, thanks to the Covid anniversary.
The 2021 event was significant because this was the point when some investors began to suspect that we were headed for higher inflation, which began to show up in the figures in April of that year – higher inflation meant higher interest rates were on the way. In the long run, that would be good for trusts like CQS New City High Yield as it fed through into the revenue account, but in the short term it meant higher yields and lower prices for the debt in the portfolio.
To mitigate against the risk of this the manager keeps the duration of the portfolio (a measure of time-weighted cashflows) relatively low. Issues with long maturities tend to be more volatile.
Mr Francis feels there is a risk that the UK economy enters a period of stagflation this year, and believes further UK rate cuts are possible. However, with the increasing likelihood that interest rates will stay higher for longer (or, perhaps more accurately, a return to conditions that prevailed over the decade before the financial crisis), Questor feels that CQS New City High Yield Fund will continue to offer attractive long-term returns.