LONDON (Alliance News) - City Merchants High Yield Trust Ltd Tuesday said its net asset value rose in the first-quarter, as high yield bonds produced positive returns and performed well relative to the wider bond market.
Net asset value on a total return basis grew by 2.2% in the first three months of 2014, while the share price gave 4.1%. In 2013, the trust's total net asset value return was 13.3%.
The trust, which targets both high income and capital growth predominantly in high-yielding fixed-interest securities, said the high yield bonds performed as they did against a backdrop of strong demand for income and in an environment of modest inflationary pressure and gradually improving economic growth.
Citing data from Merrill Lynch, the trust noted that European high yield bonds had a total return in the quarter of 2.6% (in sterling terms). Euro investment grade corporate bonds returned 1.7% and sterling investment grade returned 2.5%. Gilts returned 2.3%. The aggregate yield of the European high yield market fell 9 basis points to 4.58%, a low level by historical standards.
However, issurance has been relatively slow year-to-date despite a pick-up in the rate of supply in March, it said.
"In our view, ongoing structural reform and the implementation of new, more conservative banking sector regulations should be supportive of legacy subordinated bank debt for many years. We also see areas of value in hybrid debt securities. We feel the excess yield available in return for the subordination risk on these securities can be attractive," portfolio managers Paul Read and Paul Causer said in a statement.
"Our investments are focused on issuers with strong balance sheets, mainly in utilities, telecoms and insurance names. Our outlook is relatively defensive. We see limited potential for further capital gain in high yield bonds. Our inclination is to take opportunities to reduce risk in these market conditions."
"We have reduced risk in the portfolio modestly, increasing our allocation to cash and trimming some positions in high yield bonds. Over the quarter we have also traded out of some of our positions in bank capital where we felt the balance of reward to risk had become less attractive. We continue to manage the portfolio without any borrowing," the portfolio managers added.
City Merchants High Yield Trust shares Tuesday closed flat at 188.5 pence.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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