City Merchants High Yield generated a 5% return in net assets and an 8.5% return to shareholders over 2014. The dividend was maintained at 10p. The shares moved from trading at a 0.1% discount to a 3.2% premium.
The portfolio has a weighting in subordinated debt issued by European banks. This fell in value over 2014 but the managers still prefer holding this to conventional corporate bonds. They also have holdings in hybrid capital instruments and convertible bonds. Their hybrids are across sectors including insurance, telecoms and utilities. They think the subordination risk of these more junior debt instruments is attractive as these companies have relatively strong balance sheets.
The managers are cautious about the future – this comment will end up in our usual monthly economic roundup but we thought it was worth reproducing here: –
“Our outlook remains cautious. We think that the high yield bond market is relatively highly valued and has limited potential for further capital appreciation.
We think that, although the demand for income will remain an important factor in total returns across bond markets, duration is once again likely to be the dominant factor. In this context the economic backdrop remains relatively supportive: inflation is low while economic growth is generally weak and this should allow central banks to remain accommodative for some time to come. However, with a large part of the investment universe already reflecting this benign outlook the opportunity for disappointment is, in our view, not insignificant.”
CMHY : City Merchants cautious