M&G Credit Income 05 March 2019

M&G Credit Income Investment Trust launched in November 2018 and targets a dividend yield of LIBOR plus 4% per annum once fully invested. The trust offers investors access to illiquid and private debt markets, usually only the preserve of institutional investors, which offer attractive yields for taking extra liquidity and complexity risk.

At all times, the managers have committed to ensure that at least 70% of the investments will be investment grade. Their aim is that the trust will offer the yield of a high yield fund, but with the credit risk of an investment grade fund. With the economy in a late cycle phase, the lower level of credit risk could prove attractive as time goes on. At the same time, most of the investments are expected to be floating rate, offering protection from rising interest rates, and the duration will be low (currently around two years).

Since launch the trust has made good progress on getting invested. In line with the stated strategy, it has so far invested largely in liquid public securities which will serve as liquidity to invest in private, less liquid opportunities as they come up. The dividend level in the first accounting period is planned to be LIBOR plus 2.5%, payable in two instalments, with the trust moving to quarterly dividends and a LIBOR plus 4% payout from 2020 onwards.

The trust is managed by Jeremy Richards, for 25 years manager of the fixed income allocation of the Prudential’s Life Fund, who is able to draw on the expertise and analysis of a vast team of analysts at M&G working in highly specialised sectors of the fixed income universe. He works with his deputy Adam English and also Will Nicoll, co-head of alternative credit at M&G.

M&G’s resources and scale are such that they are often the originators of innovative structures, a trend in which it is anticipated that the trust will be able to participate, benefitting from the extra yield that typically comes with an immature asset class.

Since launch, the trust has traded strongly and currently stands on a 4.9% premium. The board has the authority to buy back shares to protect the discount, while there will also be a liquidity window held every five years allowing investors to redeem their investment at NAV. Having raised £100m in the IPO (the lower end of its target), the trust recently came back to the market with a fully subscribed placing raising an additional £25m in January, largely from original investors who wanted to increase their holdings.

This is a unique opportunity to get access to a highly diversified pool of investments, which retail investors are usually unable to invest in, in a structure which is well suited to the illiquid nature of the asset class. The depth of resources and M&G’s reach in the private lending markets is a key selling point: we believe it offers the ability for Jeremy and his colleagues to have an unparalleled view of the entire fixed income universe as well as the opportunity to invest in innovative ways. This should allow him to take advantage of valuation opportunities when they arise, as well as have extensive and specialist due diligence at his fingertips.

We think the dividend of a high yield fund with the credit risk of an investment grade fund should be a highly attractive proposition, especially in the late phase of the cycle we are in, which could see credit sell off and defaults eventually rise. The fact that the payout is largely from floating rate assets should also prove attractive once interest rates begin to rise once again (after the Brexit convulsions have passed). The long-term nature of investing in this sector means this could also be an interesting one for total return investors to lock away in an ISA, as we discuss in our strategy piece published this week.