Shares in CQS Natural Resources Growth & Income (CYN) cheapened 2.7% to 184p on Friday, despite the resources focused investment trust reporting a first half net asset value total return of 15.2%, materially ahead of the composite benchmark’s 0.2% increase.

The share price reverse appears to reflect profit-taking following a recent share price spike against a backdrop of surging raw materials inflation, with commodity prices strong even before Russia’s unprovoked invasion of Ukraine.

The trust has also been a beneficiary of higher interest rate expectations, which have supported a rotation into value stocks including many currently free cash flow generative mining and energy names.

DIGGING FOR RETURNS

During the half to December 2021, the New City Investment Managers-steered fund benefited from its overweight positions in copper, shipping and lithium.

In terms of individual stocks, it enjoyed excellent returns from the likes of nickel, copper and cobalt miner Talon Metals and also Sigma Lithium Resources, which produces lithium for the electric vehicle-bus industry serving clients in Canada and Brazil.

Other portfolio drivers included Foran Mining, which targets being the first carbon neutral copper miner and uranium play NexGen Energy, which has a portfolio of projects spanning the Athabasca Basin in Saskatchewan, Canada.

In their managers’ review, Ian Francis, Keith Watson and Rob Crayfourd said the fund’s current exposure to copper, oil and gas production and precious metals each stand at around 20% of assets.

Energy storage minerals such as rare earth metals, lithium and nickel represent ‘nearer 15% of assets’, they explained, while exposure to shipping, which is biased towards energy transportation, stands at around 8% of assets.

‘Elsewhere, by virtue of strong performance, the fund’s exposure to nuclear power has become a more meaningful position as investors recognise the value inherent in existing clean, baseload generating capacity which has recaptured credence as many countries reassess their energy policies,’ added the trio.

GAZPROM PAIN

CQS Natural Resources Growth & Income began increasing exposure directly into traditional fossil-based energy last summer as the perceived risks to energy supply increased, adding names such as Precision Drilling in anticipation of a pick-up in North American oil and gas production, as well as EOG, Diamond Back and Vermilion Energy.

‘Cognisant of the risks, in late summer 2021 the fund took a small position in Gazprom, a pressure point for the supply of gas into Europe’, explained the managers.

However, following Gazprom’s suspension from the London Stock Exchange (LSEG), the investment has been ‘written down to zero’.

Though net asset value growth proved strong in the half, the trust’s share price return was more disappointing with a negative total return of 0.6%.

And the discount to net asset value widened from 3.5% at the end of June 2021 to 20.3% as at 31 December 2021, though it has since narrowed to 15.3%.

Richard Prickett, chairman, said the persistent discount is ‘a major concern for the board and we have been working with our advisors to better promote the excellent returns we have seen over the last 18 months.’

Prickett continued: ‘Inflationary pressures are now rising along with these commodity price increases, and the fund is also protected with a significant exposure to gold and other precious metals.

‘The closed end structure of the fund has enabled it to take positions in less obvious and liquid stocks and we expect these to provide very positive returns.’

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Issue Date: 11 Mar 2022