Fund fundamentals: Eye on yield

New City Investment Managers Ltd5th Floor, 33 Chester StreetLondonSW1X 7HYTel: +44 (0)20 7201 6900Fax: +44 (0)20 7201 1165Web: www.ncim.co.ukNew City Investment Managers Ltd (NCIM) was founded by Richard Lockwood in 2004 to provide specialist fund-management services for investors. Joining Mr Lockwood at the inception of NCIM was Andrew Ferguson. The two men spoke with Mining Journal recently about the company and its investment strategy.NCIM became a wholly-owned subsidiary of asset-management group CQS in September 2007. As founder of NCIM (which, at that time, was managing assets of some US$600 million), Mr Lockwood said that he was impressed by the “capabilities and depth of the CQS group”. He added that “providing the best for our clients is of paramount importance”At the time of CQS's purchase of NCIM, the group had some US$9 billion under management, an amount which has subsequently declined to under US$7 billion. The acquisition also gave London-based CQS a significant stake for the first time in the long-only investment trust business. CQS's founder and CEO, Michael Hintze, said at the time that the acquisition was part of the group's strategy to “expand product and geographic reach”In September last year, NCIM was appointed the new investment manager to Golden Prospect Precious Metals Ltd. At end-January, Golden Prospect had some US$8 million under management, with the largest holdings being Gold Bullion Securities Ltd (11.1% of the gross assets), Goldcorp Inc (10.7%), Newcrest Mining Ltd (7.3%), Yamana Gold Inc (5.8%) and Barrick Gold Corp (4.5%).Golden Prospect brought to five the number of investment companies advised/managed by NCIM, with over US$300 million under management. The others are New City Energy Ltd (NCE), Geiger Counter Ltd, New City High Yield Fund Ltd (NCHY) and City Natural Resources High Yield Trust (CNRHY).Extensive experienceMr Lockwood began his investment career in 1959 with Hoare Govett. In 1988, he joined Invesco, where he was responsible three years later for establishing City Merchants High Yield Trust (CMHY). During the 12 years that he was its sole investment manager, CMHY achieved a compound return of over 13%.In 2003, Mr Lockwood joined Midas Capital, and became investment manager of CNRHY. He was also appointed manager of Aberdeen Convertible Trust (subsequently renamed NCHY). Both trusts are now managed by NCIM.The investment objective of CNRHY (which currently has over US$150 million under management) is to provide shareholders with “capital growth and income from a portfolio of mining and resource equities, resources and industrial fixed-interest securities”. The trust is unusual for a resource investment in that it pays a quarterly dividend (currently an estimated annualised 3.5%). With capital appreciation being so hard at the moment, Mr Lockwood said, CNRHY is looking to increase the dividend yield by buying bonds and convertibles.Mr Lockwood emphasised the flexible basis of the fund, with the holding in base metals moving from an initial 50% to under 10%, with around 35% now being held in gold, 15-20% in oil and 12-15% in uranium. Mr Lockwood believes a boom in base-metals prices is likely at the first sign that the international economic recession is lifting, and CNRHY will increase its weighting in base metals at that time.NCIM has generally reduced the risk element in its funds (but will still take ‘risks' where in circumstances of high conviction). As a result, CNRHY has reduced its exposure to exploration companies and increased the weighting of small, emerging, producers. At the end of January the trust had 196 holdings, the largest of which were Goldcorp (representing 6.1% of the trust's gross assets), Extract Resources Ltd (5.3%), REA Holdings (ordinary and preference shares, 3.1%), Kalahari Minerals plc (3.0%) and Randgold Resources (2.5%).The objective of the NCHY trust is to provide investors with a “high dividend yield and the potential for capital growth by mainly investing in high-yielding fixed-interest securities”. At the end of January, 74% of the trust was in fixed-income securities, and the balance in convertibles. There were 108 holdings, the top ten of which represented almost 35% of the US$100 million in assets under management (one of the most significant resource holding being an Athabasca Mining Services' bond yielding 13%, due 2011). NCHY has an estimated overall yield of 8.7%.NCIM was appointed investment adviser to Geiger Counter, a uranium and nuclear-power fund, in July 2006. At end-January, Geiger Counter had 60 shareholdings, with some US$30 million under management (48% of this being in producers, 27% in developers, 6% in explorers, 5% in services, 8% in commodities and 6% in cash). The largest individual holdings were Kalahari Minerals and Kiwara plc (10.7% each), Neutron Energy Inc (10.3%) and Nufcor Uranium Ltd (7.9%).The closed-end, listed NCE fund was launched in February 2008. As Mr Lockwood admits, the timing could have been better; assets were US$40 million at launch but only US$22 million at the end of January. The initial focus was on oil and gas, but the fund has since expanded to incorporate all sources of energy, including ‘alternative' supplies. The trust has 56 holdings, which encompass shares, convertibles, fixed-income securities and warrants.Clear expectationsMr Ferguson, who manages these trusts with Mr Lockwood, is a mining engineer who started his career in Western Australia for Western Mining Corp.Messrs Lockwood and Ferguson both believe in the importance of providing investors with clear expectations and regular updates. Indeed, Mr Lockwood underlines NCIM's commitment to provide regular commentary on investment tactics and strategy. This philosophy is clear from the start of the interview, with Mr Ferguson commenting that fund managers are “custodians of other people's money”Mr Ferguson moved to Hong Kong last year to understand better the market conditions in China, and be closer to the merger and acquisition activity. He noted, for example, the increased ‘colonisation' of Africa, and the burgeoning importance in China of nuclear power. There are, Mr Ferguson calculates, 24 nuclear reactors under construction in China but none has yet secured long-term uranium supplies.Unlike the mooted supply contracts for iron ore, ‘hybrid' U3O8 contracts (utilising aspects of both spot and contract markets) are not possible because the metal can not be held physically, and uranium is also too ‘political'. With a looming supply deficit, NCIM's managers anticipate significant activity in the uranium sector, with a “carve-up” of assets in the year ahead likely.Neither Lockwood nor Ferguson is unduly panicked by the current economic conditions, and they note that NCIM itself was “born in adversity” six years ago. The original investments were focused on base metals, but assets under management are now much more diverse, with gold presently being the major asset category.Mr Ferguson comments that there has been a “flight by investors to the US dollar”, and he describes some other currencies as “damaged”. However, he believes gold offers a “new alternative”, and that, because of this, there has been a “major change in what gold represents”. Mr Ferguson concedes that there is little or no yield in gold but notes that historically gold has provided a store of value.Referring to a “huge sense of unease in the market”, Ferguson and Lockwood observe that private investors were ahead of most professional investors in the precious-metals market. “Very prudent, and risk-averse, decisions” by the general public resulted in a boom in demand for gold coins. The surprise, they say, has been the slow reaction of mints around the world to satisfy this market.For NCIM, no investments are ruled ‘in' or ‘out'. As it happens, NCIM is still not a significant buyer of the majors, remaining sceptical of their relative value despite the across-the-board market hammering. For example, Rio Tinto still has a “high associated risk”, according to Mr Lockwood.Mr Lockwood stressed that NCIM is a long-term manager, not a trader. The company has three main drivers: gold, uranium and income. Looking five years ahead, NCIM expects to have an increased weight in base metals, and to participate in an anticipated shortage in gas-storage facilities.There are six people on NCIM's natural-resources investment team, with Merfyn Roberts helping to manage NCE and CNRHY; Ian Francis NCHY; John Wong CNRHY; with Will Smith supporting the portfolio-management teams. Adam Cooke and Nigel Carter complement the team in investor relations. 138415.City-Natural-

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