The debt and equity of undervalued companies offer investors juicy yields

The Manulife CQS New City High Yield Fund's fund manager, Ian and Franco Francis, tells the BFIA where he would invest his money

Manulife CQS New City High Yield Fund (LSE: NCYF) invests primarily in cheap, high-yielding fixed-interest securities in an effort to give investors a high gross dividend yield (currently 8.8 percent) and the possibility of capital growth. About 13 percent of the portfolio is made up of stocks, with the remaining 87 percent consisting of fixed-interest securities (the maximum amount of equity exposure is 20 percent). In terms of currencies, the portfolio is composed of 13 percent euros, 18 percent US dollars, and 69 percent sterling.

Because NCYF is a smaller fixed-income fund, it is able to participate in very appealing small corporate bond issues that are frequently unavailable to larger funds due to their minimum-size requirements. Since the fund's establishment in 2007, there have only been three defaults due to the managers' careful attention to risk management, which has also allowed NCYF to raise the dividend annually for the past 18 years.

Three underappreciated businesses to examine.

Shawbrook Group, which owns 12.103 percent of Perpetual, is the biggest holding. A competitor bank, Shawbrook provides savings and lending services to both retail (mortgage and consumer finance) and commercial (real estate and smaller businesses) clients. Acquisitions in sectors like auto finance and lending to smaller businesses have accelerated its organic growth, which is extremely profitable. A measure of a bank's core capital adequacy, the Common Equity Tier 1 ratio, is at a comfortable 13 percent, with 3 percent being the minimum.

Over the past five years, the balance sheet and loan book have more than doubled to 20 billion and 17 billion, respectively. Like the majority of challenger or specialty lenders, Shawbrook frequently uses manual underwriting, which is evident in its strong 400 basis point net-interest margins and reasonable 40 basis point cost of risk.

The funding side is primarily driven by retail savings, primarily term and fixed-rate deposits, of which 90 percent are small enough to be covered by the Financial Services Compensation Scheme. The banks are frequently disregarded due to their infrequent smaller bond transactions and lack of coverage by equity analysts.

Take Stonegate 10.75 percent 2029 into consideration as well. The business runs a chain of bars, clubs, and pubs. With a 10 percent market share, it is a major player in a fragmented market; its most recent 250 million equity injection shows that it is a supportive sponsor; its 3point 2 billion worth of real estate shows that it has good asset coverage; and its financial profile has improved. The company is moving forward with its plans to maximize its assets through the conversion of pubs, disposals, and the reduction of late-night venues, despite the fact that Stonegate still faces challenges and the environment is still unstable.

Enhancing its customer appeal, cost control, and price increases with little volume elasticity are also priorities. An improved free cash flow profile should result from all of these factors. The group has sufficient liquidity and no short-term maturities. We believe that at 10.75 percent the bonds remain attractive.

Frontline (NYSE: FRO), the largest equity holding, is a global shipping group that uses a fleet of energy-efficient, modern tankers to transport refined products and crude oil. Sanctions against Russia benefit Frontline, and refiners in India are moving some of their imports into the market that complies with them.

Any exports of Russian crude, if the conflict in Ukraine ends, would require compliant, insurable vessels instead of the current uninsured dark fleet. Additionally, exports from West Africa to Asia, a very lucrative market for shippers, are rising significantly. Income investors find this stock appealing due to its high payout ratio.