City Natural Resources Investment Trust Review

City Natural Resources High Yield Trust (CYN) is one of just three UK investment trusts to focus exclusively on natural resources. Economic growth concerns led the sector to underperform the broader market in recent months, particularly between March and May. Some mining project cost issues also became prominent. CYN has experienced a rare period of weakness against its benchmark. Favoured companies were added to and the manager believes this, an improved emphasis on shareholder returns by mining companies and QE expansion will support performance. Since New City became manager in 2003 CYN has returned 497.5% (NAV total return) and 414.0% (share price total return) vs total returns of 251.9% and 98.0% from its composite benchmark and FTSE World indices. Total dividends for the last financial year grew 14.5% and CYN has over a year of revenue reserves. The board expects continued dividend growth.

Investment Strategy: Diversified Natural Resources Exposure
CYN is a global fund that invests in equity and debt securities of mostly quoted companies in the mining and natural resources sectors and supporting industries. It is managed using a mixture of top-down and bottom-up strategies and maintains an extensively diversified portfolio of about 200 securities. Gearing is employed with a view to enhancing returns over the longer term with existing debt fixed at 3.5%.

Sector Outlook: Long-Term Positive For Natural Resources
Despite a global slowdown and difficulties in the US and Europe, global GDP is still expected to continue to grow. In June, The World Bank estimated GDP growth for 2012 at 2.5% and forecast GDP growth for 2013 and 2014 at 3.0% and 3.3% respectively. The engine of growth is the developing economies. The manager is focused on what should be positive long-term fundamentals of continued demand growth, and limited supply, with a bias towards the more immediate and certain cash flows of producing assets over those in exploration and development. These investments are better position to support shareholder returns through dividends.

Valuation: Discount In Line With Longer-Term Averages
The discount, at 15.6%, is in line with its three- and five-year averages of 15.0% and 15.6% respectively. It currently trades at a small discount to the sector average, despite a very strong long-term performance record. As such, we believe the trust may offer value to investors looking for a diversified global natural resources exposure, with the potential for dividend growth.

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