CQS NATURAL RESOURCES GROWTH AND INCOME: Golden opportunities in sight

It is a new dawn for asset manager CQS Investment Management, founded 25 years ago by Michael Hintze. It was recently acquired by Canadian financial giant Manulife.

For now, the CQS brand remains, although Lord Hintze has left the show, taking with him the flagship hedge fund he has long managed. So it’s pretty much business as usual for CQS, an investment firm known for its credit management (CQS stands for convertible and quantitative strategies).

Yet CQS also has another string to its bow. It has a natural resources investment team that manages three investment funds.

Together the team – consisting of Ian Francis, Robert Crayfourd and Keith Watson – manage investment trusts Geiger counter (mainly investing in uranium stocks), the small one Golden prospect Precious metals fund (capitalisation £29m) and CQS Natural Resources Growth and Income.

The three funds remain somewhat in the shadows – a result of the dominance of rival commodity funds such as the £1.1bn BlackRock World Mining, which is attracting the attention of powerful asset managers looking to invest client money.

It partly explains why shares in all three trusts are at a double-digit discount to the value of their underlying assets.

For investors, this potentially offers the opportunity to make additional profits if these discounts narrow – although there is no guarantee this will happen. Over the past five years, shares in the three trusts have traded at a discount more often than not.

The Natural Resources Growth and Income fund is the most established of the three. Listed in Britain, the £127 million trust was launched in June 2003 and invests in a broad range of international companies with business interests in mining or extracting a wide range of natural resources.

The investment record is excellent. Over the past five years, it has delivered a shareholder return of 187 percent. Last year it achieved a return of 18 percent. By comparison, BlackRock World Mining’s respective returns are 142 percent and 2.8 percent.

What makes the trust different from the competition is its focus on medium-sized and smaller companies. So it’s not interested in traditional energy-related stocks like BP and Shell, which investors think they can easily buy and hold as standalone investments in their portfolios.

The result is a fund littered with stocks unknown to most UK investors – listed in the US, Canada and Australia. Shale oil companies are a strong investment theme. “We like the US shale oil producers,” Crayfourd says. ‘Their activities are on land and therefore in terms of expansion area. Yes, the world is becoming electric, but oil is still needed.’ The fund’s top ten investments include American shale oil producer Diamondback Energy.

Aside from oil and gas stocks, which represent a quarter of the trust’s assets, the other major sector is precious metals.

“We love gold as an asset,” says Keith Watson. ‘The gold price is supported by strong purchases by central banks in countries such as China. If Western investors get an appetite for gold, the price should continue to rise.” Australian listed gold miner West African Resources is among the top ten.

The trust pays dividends quarterly. For the first three quarters of the current financial year it has been set at 1.26 per year share. This corresponds to an annual income of approximately 2.9 percent.

The ongoing annual costs are high at 1.8 percent (source: Association of Investment Companies).