City Merchants High Yield says that, in the six months to 30 June 2016, its net asset value total return was +2.2% which compares with an average total return of +3.6% from the funds in the Investment Association Sterling Strategic Bond sector. The Board believe that the action the portfolio managers took which successfully protected the NAV against the volatility in markets immediately following the UK’s vote to reject membership of the European Union made a big difference to performance.
In the lead up to the referendum, they increased exposure to the US dollar, raising the allocation to cash and
initiating a position in US Treasuries. They are pleased to report these measures proved effective and the fund has subsequently delivered strong returns.
Dividends in line with target
The first and second interim dividends for this year of 2.5p each, remain in line with their target of matching last year’s total dividends.
The portfolio holds a core of high yield corporate bonds, focused on seasoned issuers that they consider default-remote. In addition, they have significant exposure to areas of the market, which they believe offer relatively attractive yield. Approximately 25% of the portfolio is invested in bank capital, predominantly in the subordinated debt of large European banks. They took the opportunity of weakness in this sector earlier in the year to add some exposure to bonds they thought were attractively priced. In our view, the sector continues to pay a reasonable level of income for the risk. They also have around a 10% allocation to subordinated insurance bonds. Elsewhere they also have holdings in hybrid capital instruments, across sectors including telecoms and utilities. They believe the subordination risk of these more junior debt instruments is attractive in the context of the companies’ relatively strong balance sheets.
CMHY : City Merchants High Yield positioned itself for Brexit