CQS New City High Yield Fund Ltd (NCYF) ; what's the catch ?

Altior

I've done a fair amount of digging on this relatively high yielding IT/dividend hero. I'm yet to find what exactly is the trip wire  

Plenty of history, strong total returns, transparent. Yes you're always going to need to identify good opportunities when there are bond maturities, but it appears to have a long track record of achieving that.

I have even viewed a presentation broadcast about 18 months ago, from the FM himself Ian ‘Franco’ Francis, as part of my digging. Less than 700 views!

Aside from the standard risks of investing and pooled bonds, what might I be missing? I suppose this Franco will be packing it all in at some point, so succession planning is a threat. 

I have dipped my toe in, and now my whole foot

NCYF | 51.60 -0.72p -1.38%

CQS New City High Yield Fund Limited (NCYF) - 22 Nov 2023

Thoughts welcome.

(yes, the fees are punchy)

Hoenir

Trades at a significant premium to NAV.  Solid level of income is offset to a degree by a guaranteed capital loss. 

PhoneBook

Go to the Citywire Moneyforums website, you may need to register (free) and search for NCYF in the Investment Trusts board. You'll see commentary on NCYF alongside similar funds like BIPS, CVCG, TFIF and others. (I'm not able to post a direct link here, I'm afraid).

Altior

Hoenir said:

Trades at a significant premium to NAV.  Solid level of income is offset to a degree by a guaranteed capital loss. 

Thanks. Indeed there is a premium, but that is priced in over an extensive period of time. I try and dip my purchases when the price is a bit lower, like today. Overall it will be reasonably negligible. My plan is just to buy and hold for the income for as long as possible.

masonic

It can trade at a substantial discount when under stress. I last bought it in the pits of the Covid crash. Not one for the faint hearted when the next crisis comes around.

phlebas192

I have 5% of our IT income portfolio in NCYF - this portfolio is funding our retirement. To date it has performed reasonably well and has met its purpose which is to produce income 'now'. I always recognised that its income was, in part, going to come from converting capital into income and that although it is a "dividend hero" it is likely to only increase its dividend by the bare minimum (for the past 5 years it has only increased the dividend by 0.2% and it hasn't exceeded a 1% increase in the last decade). Over time, its income will be eclipsed by other ITs that have a lower yield but increase their dividends by more.
The other reason I would consider holding it was if I had capital over the IHT allowance and wanted to generate excess income which could then be gifted free of IHT - in such a case even if it underperformed it would be unlikely to do so to the extent that it exceeded the 40% IHT charge.
FWIW, I wouldn't even consider it if I were in the accumulating phase as it is likely to underperform other investments over a longer timeframe.

Altior

JamesRobinson48 said:

If you've read the company's most recent Annual Report, you will know that the company is mostly invested in bonds that are either rated BB or lower, or (mostly) are unrated. Hence the very high running yield.

There are also some equity investments, in entities that are claimed to be listed on a stock exchange. But I've never even heard of the respective stock exchange. If you've done some real digging, you'll have discovered what activities those investee companies are engaged in; what characteristics they mostly seem to have in common; and how hard it is to obtain good information about them. 

For the above types of financial instrument, trading liquidity may be thin and bid/offer spreads may be very wide. That could be acceptable for a closed end fund, where instruments are intended to be held until maturity. But how much comfort can one take from the asset valuations used? Also, the company does seem to be exposed to risk of some of its investments defaulting. 

It's too far along the risk spectrum for me. 

Yes it's not an all in type of holding. It's reasonably diverse across the bonds it holds. For me, the reserves provide a bit of cover is something goes toxic. So differing from a regular bond fund. It would be beaten up by another huge credit crunch (along with everything else!)

JamesRobinson48

Altior said:

JamesRobinson48 said:

If you've read the company's most recent Annual Report, you will know that the company is mostly invested in bonds that are either rated BB or lower, or (mostly) are unrated. Hence the very high running yield.

There are also some equity investments, in entities that are claimed to be listed on a stock exchange. But I've never even heard of the respective stock exchange. If you've done some real digging, you'll have discovered what activities those investee companies are engaged in; what characteristics they mostly seem to have in common; and how hard it is to obtain good information about them. 

For the above types of financial instrument, trading liquidity may be thin and bid/offer spreads may be very wide. That could be acceptable for a closed end fund, where instruments are intended to be held until maturity. But how much comfort can one take from the asset valuations used? Also, the company does seem to be exposed to risk of some of its investments defaulting. 

It's too far along the risk spectrum for me. 

Yes it's not an all in type of holding. It's reasonably diverse across the bonds it holds. For me, the reserves provide a bit of cover is something goes toxic. So differing from a regular bond fund. It would be beaten up by another huge credit crunch (along with everything else!)

Don't the company's borrowings make it more exposed to risk than a regular bond fund?

Altior

masonic said:

It can trade at a substantial discount when under stress. I last bought it in the pits of the Covid crash. Not one for the faint hearted when the next crisis comes around.

Indeed, the way I look at my purchases are that I am buying the income and effectively writing off the capital. When I started buying it was yielding close to 10%. Sure, there is a theoretical risk of a total loss. I have plenty of capital waiting for a buying opportunity scenario in the long awaited next big long term downturn. I did get involved during the height of the tariffs scare, and realised the profits today to buy more NCYF as it happens!

dunstonh

This is a high risk trust.  It is comparable to high yield bonds such as Aegon HYB on the UT/OEIC side.

So, it is a diversifier but its not a risk reducer.

Altior

JamesRobinson48 said:

Altior said:

JamesRobinson48 said:

If you've read the company's most recent Annual Report, you will know that the company is mostly invested in bonds that are either rated BB or lower, or (mostly) are unrated. Hence the very high running yield.

There are also some equity investments, in entities that are claimed to be listed on a stock exchange. But I've never even heard of the respective stock exchange. If you've done some real digging, you'll have discovered what activities those investee companies are engaged in; what characteristics they mostly seem to have in common; and how hard it is to obtain good information about them. 

For the above types of financial instrument, trading liquidity may be thin and bid/offer spreads may be very wide. That could be acceptable for a closed end fund, where instruments are intended to be held until maturity. But how much comfort can one take from the asset valuations used? Also, the company does seem to be exposed to risk of some of its investments defaulting. 

It's too far along the risk spectrum for me. 

Yes it's not an all in type of holding. It's reasonably diverse across the bonds it holds. For me, the reserves provide a bit of cover is something goes toxic. So differing from a regular bond fund. It would be beaten up by another huge credit crunch (along with everything else!)

Don't the company's borrowings make it more exposed to risk than a regular bond fund?

Perhaps but in theory, compensated by the returns being smoothed out. There remains a strong likelihood of a realisable capital value (as opposed to an annuity for example). The leverage should help to enhance the income over the long haul (again, theoretically).