Coronavirus Update

CQS New City High Yield Fund - Interim Report

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New City High Yield Fund

Interim Results 

Highlights* 

  • Net asset value total return of 4.62%.
  • Ordinary share price total return of 3.18%.
  • Dividend yield of 7.52 %, based on dividends at an annualised rate of 4.45 pence and a bid share price of 59.20 pence at 31 December 2019.
  • Ordinary share price at a premium of 7.21% at 31 December 2019.
  • £2.5m of equity raised during the six months to 31 December 2019.

Investment and Share Price Performance

The period in focus for this review continued to see political dramas culminating in a General Election in the UK in December. Despite this backdrop, the environment for investors was quite good. Responding to growth concerns, global monetary policy overall was loosened and price pressures remained low, supporting stock markets and fixed interest securities alike. Your Company is mainly invested in the high yield sector of the fixed income market and this environment was positive for such assets. Ian Francis, your investment manager, provides more detail in the Investment Manager's Review. 

The six months ended 31 December 2019 have seen good performance for your Company with a net asset value total return of 4.62% and a share price total return for the same period of 3.18%. The calendar year 2019 proved rewarding with the net asset value and share price rising by 2.70% and 5.34% respectively.

The Company's shares have continued to trade at a premium to their net asset value and at 31 December 2019 this stood at 7.21% with an average premium over the six months to 31 December 2019 of 7.20%.

Earnings and Dividends

The Company's revenue earnings per share were 2.24 pence for the six months ended 31 December 2019, 7.05% lower than the 2.41 pence earned in the same period last year and covering the dividends paid.

The Company declared two dividends of 1.0 pence in the period, the same as those declared in the same period last year. Dividend payments are at the core of your Company's policy and therefore a major focus for the Board. The yield is at a very attractive level and since its launch in 2007, dividends paid by the Company have increased every year. Looking ahead, it may be that this trend is not sustainable but as things stand, the Board expects this year's dividend will be at least the same as the total annualised rate of 4.45 pence that was declared last year.

Gearing

The Company has in place a £35m facility with Scotiabank at a current all-in rate of 1.88975%. The Board believes that the use of gearing at an appropriate level is a key benefit for the Company. As at 31 December 2019, £31m was drawn down from this facility and the Company had an effective gearing rate of 10.03%.

Share Issuance

Taking advantage of the premium rating that the market continues to attach to your Company's shares, £2.5m was raised from new and existing shareholders during the period, with 4.2m ordinary shares issued from the block listing facility. As at the date of this report, a further £3.2m has been raised since 31 December 2019. Gradual share issuance when suitable investment opportunities are available should benefit existing shareholders by lower ongoing charges and greater liquidity in the Company's shares, all other things being equal.

Administration Changes

As described in the Annual Report, BNP Paribas Securities Services S.C.A. Jersey Branch took over as the Company's new Company Secretary, Administrator, Depositary and Custodian during the period under review. The Board is pleased with how the new team is settling in and believe having everything under one roof will assist communication and operational efficiency.

Outlook

At the time of writing, the World Health Organisation has declared the Covid-19 virus a pandemic, many countries have imposed restrictions on the movement of people and global stock markets have fallen very significantly. Whatever the future holds in respect of the virus, there will undoubtedly be a material negative economic shock, particularly in certain sectors, but we cannot know just how severe or prolonged this will be.

The negative impact on global growth from the virus is likely to keep downward pressure on interest rates and we have seen rate cuts from several central banks including the Bank of England, as well as other measures from governments to mitigate the economic impact. Whilst this is welcome, high yielding fixed income securities have nevertheless been hit by the likelihood of credit impairment in a slower growth or even recessionary environment, depressing the Net Asset Value of the Company since the calendar year end. Furthermore, the impact of Covid-19 has caused a dislocation in underlying markets, liquidity has reduced and volatility is exceptionally high. This dismal combination has meant your Company's shares have slipped to a discount, something not seen for some years.

The Board is very focused on the situation and expects that after a difficult period, the virus will abate, allowing normal life to resume and financial markets to stabilise.