City Natural Resources High Yield offers cheap entry for mining bulls

Performance has been hindered by a difficult couple of years for commodity markets, and the trust's underperformance of its benchmark is largely attributable to its exposure to smaller mining and resource stocks, some of which are not in these indices. While in other sectors small caps have tended to outperform this has not been the case for smaller, less liquid resource stocks.

As a result City Natural Resources High Yield Trust is on a discount of 14 per cent.

But City Natural Resources High Yield's managers say: "These are dramatic falls which we believe are overdone in the short term, and which offer compelling opportunities to invest in quality companies at attractive valuations."

They also expect a supply constraint as companies and investors rein back capital spending programmes which should be supportive of commodities when combined with increases in demand.

All commodity focused investment trusts have been hit by the set back but City Natural Resources High Yield has been one of the better performers beating its sector average over one, three and five years.

This trust has also continued to strengthen its dividend with the 5.5p payout for the year a 13.9 per cent rise on its previous financial year. The dividend is fully covered by earnings which grew 8.6 per cent to 6.34p during its last financial year and this is the eighth consecutive annual dividend increase, a 175 per cent rise since August 2003.

The trust's managers expect management changes in the mining industry will lead to a change of culture and more increases in returns. They have has also increased exposure to oil and gas shares with a proven record of paying dividends, which should also benefit from the strength of oil and gas.

"For those looking at the trust for the first time the 3.9 per cent yield now justifies its name," says Tom Tuite Dalton, analyst at Oriel Securities. "One for contrarian mining bulls."

"Revenue reserves at latest financials appeared sufficient and the fund's exposure to high yielding fixed interest securities and preference shares, where much of the heavy lifting on the revenue account is being done, are also each highly supportive of a sustained level of distribution," adds Paul Locke, analyst at Westhouse Securities. "Therefore, if the market shows some signs of disappointment at the lack of dividend growth (by recent standards), this could be regarded as an opportunity to accumulate stock in the fund."

The trust has issued convertible bonds which have been a drag on performance and it says maintaining the historic pace of dividend growth could be difficult, though it will maintain a progressive policy.

However, if you have a high risk appetite and a long-term investment horizon, and believe there will eventually be a turn in mining shares, this could be a cheap opportunity to get into a trust that historically has performed strongly, and provides exposure to cheap shares. To tap into a potential rerating of both the trust and its holdings, BUY.

Source: Morningstar, *New City Investment Managers.

Morningstar as at 21 October 2013

TOP TEN HOLDINGS as at 30 September 2013

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