CYN: A focused natural resources investor

Saba highlighted that if the new directors it has proposed are appointed, it would seek to change CYN’s investment manager (to Saba Capital) and refocus the company’s investment policy to acquiring other investment companies trading at a discount to NAV. If implemented in full, shareholders would no longer have access to a distinct natural resources portfolio managed by successful sector experts. Contrary to Saba’s claims, we view CYN’s performance as attractive relative to the broad natural resources sector, as it has outperformed broad sector indices and most of its direct peers over the long term.

We also consider Saba’s proposal to offer significant liquidity at NAV unappealing given that CYN is subject to a continuation vote at each AGM. Therefore, shareholders can, if they wish, vote for a wind down of the company, which would be managed by a team with extensive sector experience (which Saba’s team lacks).

Saba Capital campaign: Your vote matters

The cutoff time for proxy voting is 11am on 31 January, and you can view CYN’s guide to voting here. As described in Edison’s recent report, Saba Capital campaign – Your vote matters, we believe that Saba will likely favour a plain opportunistic arbitrage strategy to exploit the discounts to NAV among UK-listed investment trusts (by replicating the strategy of Saba Closed-End Funds ETF, ticker: CEFS), coupled with growing its own assets under management (AUM) and fee income, over providing shareholders with a truly differentiated value proposition tailored to each of these trusts. We believe that this opinion is shared by shareholders of Herald Investment Trust, which recently held its general meeting where 99.8% of the votes (excluding Saba) rejected all of Saba’s proposals.

CYN: A nimble and well-performing natural resources specialist

CYN offers investors access to under-researched mid- and smaller-cap companies in the natural resources sector. It has an active and dynamic allocation to commodity exposure, shifting as it changes its view on commodity price drivers while maintaining a healthy level of geographic and company-level diversification, holding over 100 positions. CYN’s relatively small size allows it to be nimble in its investments and quickly adjust to market trends by repositioning the portfolio. In fact, CYN has had consistently higher turnover than its peers (see Exhibit 1).

CYN’s current portfolio has a relatively high exposure to precious metals (39.2%) and oil and gas (19.1%), according to its latest fact sheet (December 2024); see Exhibit 2. Gold prices have risen significantly over the past three years (up 56%) due to a combination of monetary factors, central bank buying and geopolitical risk. In our view, equities are yet to fully reflect this commodity price strength and the case for gold equities appears particularly compelling at this point in the cycle (see our recent industry report on gold). During bull markets, miners have the capacity to typically outperform physical gold by 2–5x during bull markets, a pattern already evident with gold equities having rallied 81% since October 2022 versus gold's 64% rise. With average all-in sustaining costs at US$1,400/oz against a gold price of US$2,600/oz, margins are robust and cost inflation has slowed. The sector offers attractive valuations, with EV/EBITDA ratios below the broader market, dividend yields surpassing the S&P 500, and true portfolio diversification with a low 0.24 correlation to the S&P 500 over 10 years.

Several catalysts support continued strength for gold. Monetary policy is becoming supportive with both the US and China cutting rates. CYN also views the industry as having capacity for further dividend growth and M&A, both of which tend to be catalysts for resolving valuation anomalies. The fund’s weighting towards energy has also been maintained (although trimmed slightly from post COVID levels), with exposure to a broad range of energy plays, including equipment and service providers. The fund also retains exposure to uranium, which is important for the global energy transition.

The fund is actively managed with the manager shifting allocation to underlying commodities dependent on where they see the most attractive risk reward, looking to maximise returns and reduce volatility for investors through the cycle. Relative to the broader metals and mining industry, CYN is less exposed to base metals (5%), copper (4.5%) and bulk materials such as iron ore (no reported exposure). Demand for iron ore is driven primarily by Chinese urbanisation and the domestic property cycle, which is increasingly mature. The iron ore market is a natural oligopoly, with large global producers dominating the bottom end of the cost curve. The fund’s lack exposure to this large part of the broader sector has been a key differentiator.

The fund is managed by experts in the mining and natural resources sectors

CYN’s investment manager is CQS (UK), which was acquired by Manulife Investment Management in April 2024 and now trades as Manulife | CQS Investment Management. CQS is a global diversified asset manager with AUM of US$14.6bn across multiple global strategies, focusing predominantly on credit. In 2007 CQS acquired natural resources specialist New City Investment Managers (NCIM).

The day-to-day management of CYN’s portfolio is undertaken by Keith Watson and Rob Crayfourd (equities) and Ian ‘Franco’ Francis (fixed income). Keith is a fund manager with over 30 years of business experience and holds a BSc in applied physics. Robert, who is a CFA charterholder and holds a BSc in geological sciences, joined CQS in 2011 and has 20 years of experience in resource investing. They both also manage Geiger Counter (focused predominantly on uranium) and Golden Prospect Precious Metals (which invests primarily in precious metals). Franco, who has more than 25 years’ experience in trading and portfolio management, joined CQS in 2007 following its acquisition by NCIM; he also manages the CQS New City High Yield Fund.

Performance: Ahead of peer average over five and 10 years

In Exhibit 4, we compare CYN’s NAV total return (TR) against other members of the AIC Commodities & Natural Resources group. CYN’s performance is broadly in line with the peer average over one and three years, while being ahead over five and 10 years, which we consider a testament to its investment mandate. This has been against the backdrop of an unfavourable market environment in recent years triggered by a sharp increase in interest rates, which weighed on long-duration assets, such as equities of junior miners. While we have likely seen a cyclical peak in interest rates in 2024, the current market expectations are that US rate cuts in 2025 will be less pronounced than previously anticipated, given more sticky inflation and expectations that Donald Trump’s agenda may be inflationary.

The manager’s niche strategy focused on earlier-stage businesses (which tend to be more volatile but offer a higher return potential) and its stock-picking expertise have proved successful (and justify the somewhat higher ongoing charge). CYN has outperformed the MSCI World Metals and Mining Index as well as the BlackRock World Mining Trust (the largest within the peer group and whose performance has been close to that of the index) and the VanEck S&P Global Mining ETF over the last one, three and five years.

We also need to address Saba’s claims of CYN’s underperformance based on cherry-picked numbers, as it compared the three-year performance of CYN to the MSCI World Energy Index. Firstly, CYN’s exposure to oil & gas stood at 19% as at end-December 2024, and in our view the MSCI World Metals and Mining Index acts as a better comparator of CYN against its investable universe. Secondly, we note that CYN outperformed the energy index based on five-year data.

Three reasons why generalists struggle with natural resources investments

Upon successful change of board members, Saba would seek to appoint itself as CYN’s new investment manager and change the company’s investment mandate to focus on buying/merging with other UK investment trusts trading at a discount to NAV. However, Saba has not presented a detailed plan with respect to the transition of the portfolio, and we note that natural resource investing has increasingly become a specialised skill, undertaken by investors with dedicated experience in the sector. This is for a number of reasons, including:

1. The sector’s relevance to the broader market. In large markets the natural resources sector is no longer a significant part of broader indices. Materials is the smallest sector in the US S&P 500, and mining is a sub-sector within this, so professional generalist investors in many large equity markets are happy to overlook the sector as they do not have the experience or time to focus on the factors that lead to stock performance.
2. Understanding the risks for stage of development. Many natural resource projects have future cash flows that depend on a range of technical risks (development, funding) etc, and understanding how value accrues to shareholders as companies navigate through this is critical to the timing of stock investments. This often requires a combination of specific technical skills, experience and detailed stock-specific research.
3. Understanding commodity cycle themes. Commodity markets are volatile and driven by a number of influences beyond just macroeconomic themes, including the supply cycle, specific political risks and cost pressures. Timing commodity cycle investments and selecting commodities for exposure within portfolios requires dedicated research.

The upside to this requirement for specialism is that patient pools of capital for funding natural resource investments are not often in the public domain, leaving outsized returns for those investors who are able to make well-timed and carefully selected investments.

Saba’s liquidity proposal is redundant

Saba promises shareholders liquidity events including tender offers and share buybacks, so that all shareholders immediately have the opportunity to receive substantial liquidity near NAV. However, CYN is already committed to an annual continuation vote, and shareholders may elect to wind down the fund and receive their cash back, which they have not done so far, likely in appreciation of CYN’s distinct strategy and outlook. Even if shareholders decide to vote in favour of a wind down at some stage, we believe that CYN’s current manager has the required skills to carry this out in an orderly manner and with a more valuation-aware mindset. Furthermore, CYN’s board recently commenced a review process to address the prevailing discount to NAV and aims to announce its outcome by the end of the current fiscal year (June 2025). Areas of consideration include:

• the current investment policy and management agreements;
• the provision of liquidity options to shareholders via buybacks, tenders or similar actions;
• the introduction of an increased dividend, paid partly out of capital;
• further discount management mechanisms;
• the provision of a full cash exit at NAV to shareholders; and
• a potential merger with another investment trust or open-ended fund.

In the context of Saba’s claims with respect to CYN’s wide discount to NAV, we note that its historical average discount does not differ materially from those of its peers. Furthermore, we note that above-average discounts have been an industry-wide phenomenon, partly attributable to factors beyond the direct control of the boards of UK-listed closed-end investment companies (which we discussed in our thematic piece). We also note several attractions already offered to CYN’s shareholders, including the aforementioned continuation vote, the quarterly dividend (current yield of 2.7% annualised) and share buybacks. In FY24 (ending June 2024), CYN bought back 1.1% of its outstanding shares (£1.4m), as it remains conscious of the relatively small size of the company and that large-scale buybacks could hinder its ability to capture opportunities in the current stage of the market cycle.

The board’s message to shareholders

Christopher Casey, CYN’s chairman, addressed shareholders as follows:

‘Saba’s proposals are without merit, introduce new and significant risk to your investment and are not in the best interests of ALL Shareholders. Their claims of CYN’s underperformance are misleading, their proposals demonstrate a self-interested, short-term focus, their track record is questionable and, if the resolutions are passed, you may no longer be invested in a highly specialised natural resources investment trust with good governance and a clear strategy. The Board urges all shareholders to vote and vote against all the requisitioned resolutions to protect your investment.’