Walls, who takes a valuation-focused contrarian approach to the market, told FE Trustnet earlier this year that he had been re-establishing a position in emerging markets for the first time since February 2010 due to poor sentiment and low valuations and was also considering buying back into commodities for similar reasons. The manager has now taken the plunge and bought into City Natural Resources High Yield, having last owned it way back in May 2011.
“When we last spoke, I was tentatively picking up shares in emerging market funds and at that time umm-ing and ahh-ing about the correlation between commodities and emerging markets,” Walls explained.
“I have in fact bought City Natural Resources High Yield, which is something I haven’t been in for a number of years.”
“The discount had pushed out above 20 per cent, but performance has been pretty dire and sentiment has been pretty poor.”
“However, with Blackrock World Mining IT trading at NAV, I think there is a good opportunity here.”
Due to slowing growth in developing world economies such as China and the end of the often cited “commodity super-cycle”, natural resources portfolios have performed poorly for a number of years.
The City Natural Resources High Yield Trust, which is managed by Ian Francis and Will Smith, has been particularly hard-hit by the increasingly negative sentiment.
According to FE Analytics, for example, the closed-ended fund has lost 55 per cent over a cumulative five year period, meaning it has slightly underperformed against the IT Commodities and Natural Resources sector over that time.
As a point of comparison, the FTSE World Basic Material index and the MSCI AC World Metals & Mining index have lost 16.36 per cent and 36.39 per cent respectively, over three years.
Performance of trust vs sector and indices over 3yrs
Source: FE Analytics
City Natural Resources has also lost more than 15 per cent over 12 months, though that is actually better than the sector average.
However, Walls says that now is a good chance to the trust due to its wide discount and because attitudes towards the asset class, as a whole, have become too bearish.
“Generally, you are seeing a greater pick up in interest towards some of the large mining companies as managers like their decent and predictable yields,” Walls said.
“However, this is also a bit of a typical contrarian call because everyone seems to be worried about slowing growth in China and the other emerging markets; I just think everyone is becoming over-pessimistic.”
“I do think it has been over-done a bit. Also, GDP growth – while it isn’t necessarily always a good indicator of what stock markets will do – is ticking away quite nicely on a global basis so I don’t think the demand side will be as bad as many people think.”
Walls bought the trust on a 20 per cent discount, though it has already come in to 17.7 per cent.
Nevertheless, he says that still represents fundamentally good value for new investors as the sector, on a whole, is trading between a 3 and 4 per cent discount.
Walls also points out that the trust has, on average, been on a 16 per cent discount over the last 12 months with its discount to NAV reaching lows of 6 per cent at points over the last year.
City Natural Resources High Yield has a yield of 4.2 per cent.
Francis and Smith have a slightly different portfolio to most of their peers. For instance, they don’t hold any of the multinational mining giants such as BHP and Rio Tinto, but instead they hold companies that focus on alternative energies like REA Holdings, which cultivates crude palm oil, and Fission Uranium.
The performance of the trust has also picked up recently with our data showing that the New City Natural Resources High Yield having returned close to 10 per cent in 2014, while the sector has lost money.
Performance of trust vs sector in 2014
Source: FE Analytics
Ongoing charges are 1.47 per cent and it is geared at 22 per cent.
Walls has managed his five crown rated Unicorn Mastertrust fund since its launch in December 2001.
According to FE Analytics, his £16m fund has been the best performing portfolio in the IMA Flexible Investment sector over that time with returns of 207.24 per cent, beating the sector by more than 125 percentage points in the process.
Performance of fund vs sector since December 2001
Source: FE Analytics
It also boasts top decile returns over rolling one, three, five, seven and 10 year periods having only underperformed the sector in three of the last 10 discrete calendar years; which were the falling markets of 2007, 2008 and 2011.
Its clean share class ongoing charges figure is 1.16 per cent.
