CITY MERCHANTS HIGH YIELD TRUST LIMITED: Interim Management Statement
CITY MERCHANTS HIGH YIELD TRUST LIMITED: Interim Management Statement City Merchants High Yield Trust Limited
Interim Management Statement
for the Three Months ended 31 March 2013
Objective of the Company
The investment objective of City Merchants High Yield Trust Limited (the `Company') is to seek to obtain both high income and capital growth from investment, predominantly in high-yielding fixed-interest securities.
The Company seeks to provide a high level of dividend income relative to prevailing interest rates through investment in fixed-interest securities, various equity-like securities within fixed-income markets and equity-linked securities such as convertible bonds and in direct equities that have a high income yield. It seeks also to enhance total returns through capital appreciation generated by investments which have equity-related characteristics.
No material events, specifically in relation to the Company, occurred during the period.
As set out in the recently published annual financial report, the Company paid a third interim dividend of 2.5 pence per ordinary share on 28 February 2013 in respect of the period ended 31 December 2012. The Company has declared a first interim dividend, in respect of the year ended 31 December 2013, of 2.5 pence per ordinary share which will be paid on 24 May 2013, to shareholders on the register on 26 April 2013. The Board continues to target total dividends of 10 pence for the current year.
Following a strong performance in 2012, the NAV of the investment trust continued to rise in the first quarter of 2013. Income was an important factor in total return and the relatively high coupons of high yield bonds made them one of the strongest areas of the bond market. Subordinated bank capital was also strong.
According to data from Merrill Lynch, European high yield bonds had a total return in the quarter of 5.5% (in sterling terms), the aggregate yield for the sector falling 8 basis points to 5.70%. Returns were boosted by the weakness of sterling. In local currency terms European high yield bonds returned 1.8%. This compares to 1.7% for sterling investment grade corporate bonds and 0.6% for Gilts. Within investment grade, financials outperformed, returning 2.1% compared to 1.5% for non-financials. Sterling Tier 1 subordinated bank debt was the best-performing part of the market with a return of 3.0%. Investor appetite for credit risk remained strong throughout the period, driven by the relatively high levels of yield available in a generally low yield and low interest rate environment. Macroeconomic data continues to point to only modest levels of GDP growth in the major developed economies, especially in Europe. This is keeping interest rate expectations low, supporting low yields. Meanwhile, the success of the actions of the European authorities over the past year to address systemic fears relating to the single currency has been reflected in the muted market reaction to ongoing political uncertainty in Italy and the Cypriot bank bail-out. In these supportive market conditions, bond issuance has been strong. Barclays estimate that there was a total of £21bn of new high yield bond supply across European currencies in the first quarter, 18% up on the same period in 2012. According to Moody's, the European 12 month trailing high yield default rate moved lower in the first quarter, ending March at 1.8% compared to 2.0% in Q4 2012 and 3.3% a year ago.
Portfolio strategy & outlook
The high yield bond market has achieved strong returns in recent quarters and the asset class is now considerably more fully valued. Yields and credit spreads have fallen and many newly issued bonds are coming to market with very low coupons by historical standards. The overall theme of our portfolio has not changed greatly. The core of our portfolio is made up of a selection of high yield bonds from seasoned issuers that we believe have relatively low default risk. We continue to favour financials, most notably subordinated bank capital. Rising capital levels, ongoing structural reform and implementation of new, more conservative banking sector regulations should be supportive of this area of the market for many years. In our opinion, aggregate yields on this type of debt offer value. We believe that our portfolio can continue to provide an attractive level of income. On the other hand, from current price levels we see limited potential for capital appreciation and we are also seeing some evidence of weaker earnings and a poorer outlook for growth. Given this, we are not employing any leverage in the fund and we have an allocation of just over 5% to cash.
Trading in the portfolio over this quarter included trimming and selling some positions where we had seen strong capital appreciation, adding some new positions and participating in new issues, including refinancing operations by issuers we already held. For example, we trimmed our holding in Novae Group 6.5% (insurance) and our position in Intergen 9.5% (utility). We added a position in Telekom Austria 5.625% floating rate (telecom) and participated in the DFS 7.625% (retail) new issue.
Paul Read, Paul Causer
Performance - Total Return
3 Months 1 Year 3 Years 5 Years
Share Price 2.0% 7.4% 25.7% 62.9%
Net Asset Value 4.5% 16.4% 28.0% 74.6%
FTSE All-Share Index 10.3% 16.8% 28.7% 38.5%
FTSE Government Securities - 0.7% 5.3% 26.7% 40.9%
All Stocks Index
Source: Thomson Reuters Datastream
Share Price and Discount
As at For the Three Months Ended 31 March 31 March 2013 2013 High Low Average
Ordinary Shares mid-market 165.50 179.00 164.00 171.00
Source: Thomson Reuters Datastream
Assets and Gearing
31 March 2013
Total Gross Assets (£m) 128.4
of which cash (£m) 6.1
Borrowings (£m) -
Cum Income Net Asset Value 176.4
Gross Gearing 0.0%
Net Cash 4.8%
`Gross Gearing' reflects the amount of gross borrowings in use by the Company and takes no account of any cash balances. It is based on gross borrowings as a percentage of shareholders' funds. `Net Cash' reflects the net exposure to cash and cash equivalents expressed as a percentage of shareholders' funds after any offset against its gearing.
31 March 2013
NR (including equity) 25.0%
Top Ten Holdings
Ranking Top Ten Holdings % of
1 LBG Capital 7.975% Sep 2024 & 6.439% May 6.1%
2020 & 6.385% May 2020 & 9% Dec 2019 & 16.125% Dec 2024
2 Aviva 6.125% Perpetual & 8.875% 4.2%
3 Société Genérale 8.875% FRN Perpetual 3.5%
4 Premier Farnell 89.2p Convertible Preference 3.3%
5 General Motors Wts Jul 2019 & Wts Jul 2016 3.3%
6 Vedanta Resources 8.25% Jun 2021 & 4% Cnv Mar 2.6%
7 Intesa Sanpaolo 8.375% FRN Perpetual 2.3%
8 Abengoa 8.5% Mar 2016 & 4.5% Cnv Feb 2.3%
2017 & 6.875% Cnv Jul 2014 & 6.25% Cnv Jan 2019
9 Credit Agricole 7.589% FRN Perpetual & 8.125% 2.2%
10 Balfour Beatty 10.75p Convertible Preference 2.0%
Changes to Share Capital
Ordinary Shares of no par value Issued Treasury
As at 31 Dec 2012 72,786,327 0
Ordinary shares bought back 0 0
Ordinary shares issued 0 0
As at 31 March 2013 72,786,327 0
The Company has authority to buy back shares and to issue new shares (disapplying pre-emption rights), in each case within specified limits. The Company expects to renew these authorities each year.
Price and Performance
The Company's Ordinary shares are listed on the London Stock Exchange and the price is published in the Financial Times under `Investment Companies' and in the Daily Telegraph under `Investment Trusts'.
The Company's net asset value is calculated daily and can be viewed on the London Stock Exchange website at www.londonstockexchange.com.
Further information can be obtained from Invesco Perpetual as follows:
Free Investor Helpline: 0800 085 8677 (available Monday to Friday from 8.30am to 6.00pm)
Internet address: www.invescoperpetual.co.uk/investmenttrusts
The information provided in this statement should not be considered as a financial promotion or recommendation.
Issued for and on behalf of City Merchants High Yield Trust Limited
R&H Fund Services (Jersey) Limited
Telephone: 01534 825323
16 April 2013
-0- Apr/16/2013 13:27 GMT