Cqs New City High Yield Share Discussion Threads

[redhill9] 23/6/2022 14:09

Thanks again cc2014 for your prompt response and for those two suggestions.

A quick look indicates they are the sort of fund I’m interested in – I’ve been overweight in property funds until recently and having reduced several, plus having some income accumulating to be invested, am keen to diversify into new stocks and these two funds both look good options.

[cc2014] 23/6/2022 12:20

Thank you for your detailed response Redhill and well done on your purchases at very low prices on NCYF.

I can understand how this creates an attachment to a share as it's always a good feeling to be getting a great yield but be sitting on the capital gain as well. The question though as you state is whether the capital is put to better use elsewhere, although I completely get the over-attachment and not wanting to over-trade as it's something I find myself doing too often.

On the upside for NCYF with interest rates probably going to around 2.5% in the UK, NCYF will be able to start replacing some of it's maturing assets with better yields, which will improve my 6.5% number. Indeed the market has already anticipated this move and yields on new high yield debt are much higher. However, the market is still moving down the prices of existing assets to match those for new isses. It's to be expected so this is going to keep the NAV under pressure for some time longer and worsens the 6.5% number.

On the downside NCYF has about 20% equites in it's portfolio, mostly things like property REITs and I think these assets will fall in value as we head into recesssion. This is back to the permament capital loss thing.


You ask about other funds and I would offer two that interest me at the moment. Both are debt funds and hold no equity (noting that I'm counting pref shares as debt for this)

The first two hold mostly floating rate assets so as interest rates move up so does their income. I like this because it's removes the interest rate risk element and means the value of the underlying assets won't fall as interest rates rise. Also, they don't pay out the same dividend every year but adjust it as the underlying yield on the portfolio moves around (i.e. as interest rates change). Both are trading on a decent discount. They have very different risk profiles to NCYF and far less bank regulatory capital exposure.

1. CVCG (used to be CCPG). 83% floating rates assets and the current yield on the underlying assets is 9.4% with a yield to maturity of 10.6%. The last NAV is a little out of date from 1st June but then it was 103.35p so let's call it 101p now. Today I bought some at 91.8 and 92.0 so that's a 9% discount to NAV for a fund which after the management charges will yield around 8.4%.
The dividend is only 5p but I bet will rise on the next one. So, some returns from the dividend and some from the capital gain.

2. NBMI. 67% floating rate assets. and the current yield on the underlying assets is 7.8% with a yield to maturity of 8.2%. NAV is 85.2p and I bought some yesterday just below 80p (although my much larger holding was purchased lower down) so around a 5% discount.
The dividend is about 5.5p (there's an extra one at year end) so again some dividends and some capital gain

[redhill9] 23/6/2022 10:53

CC2014, thank you for your response.

I agree with most (not quite all!) of what you say.

First, absolutely right about Raven being, most probably, a write-off and I’d certainly suggest NCYF should have sold out at the first hint of a Russia invasion but, trying to be fair, very few people thought the invasion would actually happen and was mere posturing and also we don’t know if selling once it happened was achievable (although I’d guess they probably could have sold at some price). Hindsight, of course. However, the point perhaps to be recognised is that NCYF is a High Yield fund and as such there will be risk – anyone who expects high yield without commensurate risk is in the camp of “both wanting cake and eating it”.

More important is your point about the effect of dividends being paid from capital, which I understand and referred to it in my post, but the question is how much this is likely to continue/accelerate in the future.

You mention that the share price has reduced from 100p to around half but, for perspective, my own situation is I hadn’t heard of NCYF until March 2020 when, on the advice of a friend, I had a look and started buying at 38p and then bought several more tranches in the following months. My average book price is just under 49p so the current annual dividend of 4.47p means a book yield of over 9%. That fact alone may influence my perspective on continuing to hold NCYF. Also, it may be relevant to add that, currently, all dividends received within my income portfolio are reinvested into other income stocks so when NCYF repays capital as an element of dividend this becomes reinvested somewhere else. I’m comfortable with this, so long as I remain aware that the yield contains an element of capital.

For my own position, I see two key questions. The first question is: having bought the shares with the intention of a long term hold, how will the yield be affected over the foreseeable future? The second question is: would I be better to sell at the current share price of 53.6p, and giving up a current market yield of 8.3%, and invest elsewhere? Your answer for the first question is to suggest the long term return is more like 6% if the capital reduction is on average 2.5% per year. That may be correct but may I ask what timescale are you using for that calculation? For the second question, my own view is that, barring some significant change in known circumstances, I’m happy to continue holding NCYF within my income portfolio unless I can find a similar fund that offers a better yield allowing for normal considerations of risk/reward plus the impact of capital reduction. Do you know of any? A fairly extreme example may be Marble Point (MPLS) which is an investment company paying a yield of over 12% and I hold a small % in my portfolio, far less than NCYF, but MPLS is (I consider) much higher risk than NCYF.

Regarding your point about Aviva Prefs drifting down to 100p and then being redeemed at par, I think I’m right in saying that after the debacle several years ago when they slipped into their financial report (apparently without the non-execs appreciating the implications) a comment that they were considering doing just that and the subsequent furore across the investment industry, resulting in the Aviva CEO and CFO each losing their jobs, Aviva announced that any future redemption of irredeemable prefs would only be by tender (as NWBD did recently at a premium to sp, a tender that wasn’t fully taken-up by a long way). Also, with that in mind, if Aviva Prefs drift down to 100p wouldn’t that, all other things being equal, likely be a reflection of the overall market rather than just prefs themselves?

We may not wholly agree on NCYF and that may be partly due to different perspectives, but I do appreciate you're post above as it is always good to have someone challenge a point of view.

[cc2014] 21/6/2022 10:38

"If holding a fixed interest stock long term the share price may go down, which reduces the NAV of a fund such as NCYF, but the income continues."

Well, yes, no, sort of but not really. I understand what you are saying and I see your point but:

1. Recently the value of RAVP went to zero. RAVP has been delisted and there may be some debate about future dividends but right now it's zero. The total capital of around 3% of the fund has been wiped out, or very nearly wiped out depending on your view of Russia. There is no longer an income stream and this is part of the risk with investing in high risk/high yield funds like NCYF.
2. The prefs you mention do not have maturity dates so they will drift up and down depending on interest rates and the health of the underlying company. Whilst the Aviva prefs give a yield of around 7% at 120p it's no good if they drift down to 100p and then Aviva redeem them as they won't be regulatory capital in 2024. Again the capital would be reduced and the income doesn't continue.


I could run the argument another way though. Please allow me some breath over the exact details here but let me run with the broad outline.

Over the last 20 years since the fund was started the share price has halved from 100p to 50p because the fund manager has made a few bad investments but more validly every year he is paying out more dividends than the value generated within the fund.
If in another 20 years time the share price has halved again to 25p will the fund still be paying 4.5p dividends?


Of course if interest rates rise to 2.5% the fund manager has a far better chance of making enough to pay the dividends. That looks far more feasable going forward.


Look, I'll try and given you my overall view. The fund has a dividend of around 8.5% but it loses around 2.5% a year in capital on average. If you own it in the knowledge it's making around 6.0% in the long term that's fine. I've owned NCYF in the past myself when I've been farily sure interest rates were in my favour.

Since I take the view the return is about 6% a year, then there are lots of other investments yielding similar that don't seem to carry the same risk. The market is entitled to price NCYF at whatever it likes but my guess is that the price is being held up by investors who are focussed on the yield but haven't fully considered the likely capital losses.

The overall problem though is that it loses alot when the economy is under stress through bad investments. I'm anxious we are heading that way right now as the consumer is under pressure through inflation. A little bit of inflation is good for bank debt as the banks improve their NIM. A lot of inflation is very bad indeed as consumers start struggling to pay their debts.

[redhill9] 21/6/2022 09:58

Not sure about your logic there.

New funds can, for example, currently be invested in Prefs (which are a key constituent of the portfolio) at good yields. For example, AV.A, SANB and STAB can be bought for a yield of around 7% - throw in a bit of the additional gearing then available and the yield increases to well over 7.5% (less cost of debt). Your suggestion that all the cash raised is used to pay dividends seems a little off?

If holding a fixed interest stock long term the share price may go down, which reduces the NAV of a fund such as NCYF, but the income continues. This is why the NCYF share price remains steady while the NAV has reduced. If holding fixed interest stocks in a long term portfolio for retirement income - as I do - it's the income on those stocks that matters not the share price at any point in time. Certainly the dividend currently payable by NCYF is going to come under some pressure over future years but I'd suggest there's enough leeway in the current high yield for that not to be a major concern as it will still remain attractive for some time yet.

It's certainly not the disaster you seem to want to suggest (and the market seems to agree with me, hence the premium to NAV).

[my retirement fund] 21/6/2022 08:55

Well another yet more issued, another million issued so that gives them an additional 40K profit to prop it up, so long as they can keep issuing buckets full of additional equity the music can keep playing out aloud I guess, no ?

[metaltrack] 20/6/2022 16:30

Capital losses have just about been covered by dividends over the past few years.It was nice to have a regular payment and unfortunately with shares being issued to cover payouts I'm sad to see this go.NCYF was part of my portfolio for a long time.I wish you all the best if you decide to hold.

[cc2014] 20/6/2022 08:28

Sure, the yield is great but is it sustainable long term given the long term reduction in NAV?

[redhill9] 19/6/2022 18:39

You two must be relieved not to be invested in a share paying around 8.3% yield that the market appears to still like despite your comments.

[cc2014] 17/6/2022 18:53

And there we go. Another 1.5m shares issued at 53.6p

[cc2014] 17/6/2022 14:07

NAV smashed yesterday and breaches 50p. Now 49.63p

Still NCYF trundles along at a 8% premium to NAV despite the capital losses to investors.

[rahosi] 03/5/2022 08:24

REA. Assuming you mean the preference shares RE.B, the 22/4 Annual Report stated:-

The payment of dividends on the company's 9 per cent cumulative preference shares was resumed in June 2021. In addition to the payment in December 2021 of the current preference share dividend of 4.5p per share, a further 1p per share was paid in respect of the cumulative arrears then outstanding of 18p per share. It is the directors' intention that, in addition to paying the preference dividends accruing in respect of 2022, the company will also pay not less than 10p per share of the remaining 17p arrears of dividend during 2022

The Prefs 52 week price has gone from ~80 to 114.5 currently

---
The regular shares RE., currently 170 went from a 52 week low of 50 to a high 0f 208 with the prospect of those dividends being restarted once the above has occurred.

[guitarsolo] 28/4/2022 12:51

Marktime/Retirement:
Just to add a little of what I know, the last published figures were poor with EPS of 4.18p (down from 4.59 the year before) and indeed it left the 4.47pps dividend uncovered. This required them to dip into the reserves which stood at 4.15pps at the end of the same period.
Just looking at these numbers would cause justified concern. But there was a bit of narrative that was relevant. The covering info stated that the 4.18pps EPS was low because two particular coupons had been missed (for Rea Holdings and Matalan). I can't tell you exactly how much they were or how much of the gap up to the dividend would have been covered had they been paid on time. But more importantly, I have it on good authority from a reliable investor who holds the Rea coupon elsewhere that it WAS paid, albeit after the accounting period. I'd imagine the Matalan coupon is similar. Therefore, the picture may not be as bleak as first thought.
I've held NCYF for ages and am down on capital but the dividends take me into profit. Ian Francis has very deliberately (in my view) increased the dividend every year (by 0.01p recently) just so that (in my view!) he can claim to have a record of always increasing dividends! Of course, taking inflation into account and it's a real term drop.
But reading IF's narratives over the years, the ultra-low interest rate environment has been a horror to navigate. Bonds have matured or been called and replaced with lower and lower rates meaning that it's been nigh on impossible to keep the EPS growing (and in fact it's fallen). He has tried to trade his way a bit, and issued more equity at a premium with some degree of leverage, all to try and keep the plates spinning.
My view (and why I continue to hold) is that I think IF thinks an era of higher interest rates is coming and this will turn the tide back (slowly) in the other direction and corporate borrowing rates will be more "normal". Well, we will see.
But back to my opening remarks about Rea/ Matalan, I await the next report which should show these late coupon payments and in effect boost the next set of results. If they do, we can relax a little. If they don't, then be worried! Meanwhile, the reserve is there for a reason.
Guitarsolo

[my retirement fund] 28/4/2022 11:25

No you've not missed anything, and its the later, they have managed in the past always managed to keep the party going with leverage and issuing and selling new shares above NAV.

Risk has been growing, sooner or later as you point out the music will stop. The market here is stupid and clearly asleep at the wheel. It will get a nasty shock sooner or later imo.

[marktime1231] 28/4/2022 11:20

Checking back having sold up last July, got out because I was expecting NCYF cannot sustain an 8% yield. I guessed they would be looking to merge with another high yield trust and reset lower. And yet it is still going strong, trading at a healthy premium.

In February the interim report to 31 Dec 2021 came with the dire news that revenue in H1 was just 2.09p versus 2p paid in dividends. Despite which it said it continues to aim to increase total dividends paid, which last year were 4.47p (full year revenue to June 2021 was just 4.18p). How on earth can you do this, a shortfall from gross portfolio revenue, and ongoing charges are 1.25%?

We will "draw modestly on reserves" over the next couple of years they say.

Actually issuing new shares £10-20M pa and increasing gearing. Are new investment opportunities coming along at 10%+ interest rates to justify raising funds? Or are they trading and borrowing to plug the gap in underlying revenues?

This has all the hallmarks of a scandal, increasing pay outs to attract new investors at a premium but increasingly unable to cover the coupon from income. Like a ponzi scheme, covering commitments to existing shareholders with fresh subscriptions.

Or have I missed something? The market is not stupid and is still buying in at 7% premium to NAV.

[cc2014] 10/3/2022 11:26

It's amazing how many shares the MM will absorb when they are in the mood and how few when they aren't.

[lab305] 10/3/2022 10:38

Sold 820k of these today. The transactions are showing up late and as buys instead of sells. Reason for sale asset value dropping below 50p.

[my retirement fund] 09/3/2022 16:24

115% gross gearing and a particularly high risk portfolio yet a 6% premium to NAV. Please describe the justification, your thoughts ?

[redhill9] 08/3/2022 14:45

myretirementfund, I've always thought the NCYF premium was justified by the gearing being at a much lower rate than the income yield - isn't that right?

cc2014, not sure "stabilised" is quite the right term for RAVP! Being Prefs I doubt they would be a complete write-off anyway but being valued at zero for a while at least must be prudent until the company can be seen to be trading as usual.

[my retirement fund] 08/3/2022 14:14

Insane its at a premium

[cc2014] 08/3/2022 14:10

NAV down to 50.08p. RAVP has stablised now.

[wllmherk] 03/3/2022 12:07

I sold out of RAVP last week as could see the writing on the wall, took a significant loss at 89p, but, looking a good move at current price. In these for income so as long as they can hold the dividend I'm not too worried.

wllm :)

[cc2014] 03/3/2022 10:48

They publish daily NAV's so they do the work for you. I would expect them to hold Raven at market price. Yesterday it fell again and they will have had to write off the dividend yesterday as well so the NAV is likey to fall again when published today. In time I agree Raven will go to zero although there seem to be plenty of punters with no conscience prepared to invest in Russia who don't agree, looking at Raven's share price. I'm a bit shocked it hasn't been suspended.

From memory RAVP was 3.4% of their holdings. And much as I like this fund that's the challenge with high yield investments. It's fine until it isn't.

I'm not invested currently due to the excessive premia to NAV. I would want a 5% discount to NAV and the chances of that are slim.

[my retirement fund] 03/3/2022 10:00

Not looked at this for a while. Clearly the Raven holding needs to be written to zero and its dividend removed from the yeild. Has anyone managed to do the calculations yet?