Most of the trusts paying out that much are invested in unconventional asset classes that have their own risks and limited potential for capital growth, but this is not the case for New City.Its focus on conventional, high yield debt and good management means it can offer exceptional risk-adjusted returns, Tepes says.
“Generally, a high yield comes with drawbacks, we believe. It may mean that higher risk is being taken on or that total returns are capped or lower than they could have been otherwise,” she said.
“New City High Yield is a notable exception. With one of the highest yields among all trusts, over the longer term it has delivered equity market-beating returns while preserving capital far better in times of market stress.”
“The fund’s rating has also been consistently strong, its shares trading on a premium over 90 per cent of the time since inception in 2004.”
Looking back to the 2008 market crash, the trust has returned 88.08 per cent in total return terms over seven years. During that period, the average trust in the UK Equity & Bond sector has returned 42.77 per cent and equities 41.62 per cent.
Performance of trust vs sector and index over 7yrs
Source: FE Analytics
According to data supplied by Cantor, the trust has returned 10 per cent a year since 2004 with a lower volatility than all of the other high-yielding trusts.
Over the past year the fund has been steady rather than spectacular, returning 5.91 per cent while its peers in the IT Equity & Bond sector have rocketed ahead.
Performance of trust vs sector and equities over 1yr
Source: FE Analytics
The unique attractions of this trust are that it offers a strong risk/return profile without buying asset classes that are limited in their capital returns, Tepes explains.
“Over 6 per cent is a very high yield, especially from conventional bonds,” she said.
“Of those with yields over 6 per cent, 90 per cent will come from property, infrastructure, loans or some asset class where the returns are capped. Most of the total return will come from the yield.”
“With this one they offer the chance of decent capital growth. This one has achieved 9 or 10 per cent total returns per annum.”
“Some people are still put off buying bonds at the moment, but the good thing about this one is it’s unconstrained. It can move between conventionals, floating rates and so on.”
It is the premium that represents the biggest risk to investors at this point in time, Tepes says. It is currently at 6.1 per cent.
The analyst attributes some of this to strong demand before the trust is adopted into the FTSE All Share index next week.
“I think it’s a great fund, I really like it but the problem at the moment is the premium of 6 per cent or so,” she said.
“A lot of that is explained by it going into the FTSE on 24 March, so I wouldn’t be rushing to buy it at the moment.”
“I would wait until it has gone onto the index. I expect there will be index buyers that will have to buy the stock and there will be upside pressure on the price. The price has been reacting to that expectation, I think.”
Data from FE Analytics shows that the fund has been on a consistently high premium over the past 12 months. This is with the exception of the period in May last year when bonds and equities fell following talk of the US Federal Reserve backing out of quantitative easing.
The share price fell 11 per cent while the NAV was down just 6.14 per cent.
Price and NAV of trust over 1yr
Source: FE Analytics
Despite this “taper tantrum”, New City High Yield’s focus on high yield means that it is low duration – meaning it is less sensitive to interest rate rises.
Exposure to floating rate notes will help it should inflation occur, too.
Tepes says that while the flexibility of the fund’s mandate is a boon, its concentration on the high yield area does mean that it can be more correlated to equities than an investment grade bond fund.
The trust buys bonds, preference shares, convertibles and floating rate notes, never allocating more than 20 per cent to each at a time. It can also hold up to 20 per cent in equities.
It is highly liquid, in part thanks to its small size, and the managers estimate they could sell 90 per cent of the portfolio in less than 48 hours if they had to.
The fund currently has 68.9 per cent in bonds, 10.3 per cent in preference shares, 8.5 per cent in floaters and 5.7 per cent in convertibles, with just 6.3 per cent in equities.
In terms of currency exposure, it has 61.7 per cent in sterling-denominated assets, which has been a tailwind in recent months, and 19.7 per cent in the US dollar, along with 6.9 per cent in the euro and 5 per cent the Aussie dollar.
The fund manager is Ian Francis of New City Investment Managers, who joined in 2007. He also co-manages the New City Natural Resources High Yield Trust.
