City Natural Resources High Yield Trust has released its annual results for the year ended 30 June 2015. These show that, during the period, the trust provided an NAV total return of -20.9% thereby underperforming its benchmark (a composite of the Credit Suisse High Yield and HSBC Mining indices), which returned -14.9%. Arguably reflecting market sentiment towards commodities, the discount widened during the period (from 16.8% to 22.1%) so that, share price total return was -24.6%.
However, income during the year improved so that, whilst the dividend level remaining unchanged at 5.6p, this year’s dividend was covered by earnings of 6.15p (last years dividends were not fully covered). Prior to this, the trust had provided nine consecutive years of dividend growth. However, the Board decided that a degree of caution was required (they say that there are a number of factors that influence the trusts income which are currently hard to predict) and also note that the yield on the Company’s shares is 6.4%, which also played a part in the decision.
The period since the year end has seen NAV continue to decline. The managers say that, in the short term, uncertainty continues and that bond markets continue to look exposed. They note however that “fear in the bond markets could see asset allocations to equities being increased, and the lagging effect of commodity price falls in general, and oil in particular, may see growth expectations surprise on the upside”. Looking at the supply demand balance, the managers say that, whilst they acknowledge that the bulk commodities are well supplied, base metals appear to be closer to equilibrium and that they believe the capital starvation that the sector has endured will exacerbate the effect of any positive shift in the supply and demand dynamic. They say that the number of active exploration companies has dwindled and the number of projects being developed into mines has also shrunk as capital has deserted the sector. Commodities are cyclical but they believe that demand for most metals, agricultural products and energy, is still rising in real terms and these products cannot be substituted. In their view, we are five years into a downturn and despite the current gloom in the sector, they remain certain of the cyclical nature of the resources sector and expect that when a recovery comes the movement will be strong.
A difficult year for city natural resources : CYN