CQS New City High Yield (NCYF)

CQS New City High Yield Fund (NCYF) delivers an exceptionally high yield, 8.9% at the time of writing, having grown its dividend for 19 consecutive years. One more year will qualify it for AIC Dividend Hero status.

Managers Darren Toner and Ian ‘Franco’ Francis invest in the smaller, more complex and less liquid issues in the high yield bond market to generate this income. NCYF uses the closed-ended structure to the full, taking advantage of its ability to handle illiquidity, gearing up the portfolio and managing a revenue reserve which supports payments in times of volatility. The appeal to income investors is obvious, and the trust has mostly traded on a premium for a number of years, regularly issuing shares to grow.

Current expectations are for interest rates to rise in the coming quarters in the key jurisdictions of the UK, US and EU, and this would play into the managers’ hands. Higher rates are likely to feed through into higher absolute yields on offer, and make it easier for the managers to reinvest maturing bonds into those paying higher coupons. The portfolio has a low duration, having a high yield and short average time to maturity, and so the impact on portfolio values should be small.

Darren and Franco continue to find plenty of opportunities in the market. They note any stress from volatility in energy markets, from higher rates and from the impact of AI should lead to differentiation in company performance and outlook and therefore opportunities for active investors.

Franco is set to retire next May, but has worked with Darren, head of the global high yield and financials teams at CQS, for 16 years and the specialist team of analysts remains in place, so there will be no change to the approach.