M&G Credit Income 13 April 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by M&G Credit Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
M&G Credit Income (MGCI) offers investors an income linked to interest rates, aiming to generate a yield of at least 4% over the interbank rate. The trust invests across the fixed income universe, in private debt as well as public, offering exposure to sectors more commonly available to institutional investors. One of the key benefits of the strategy is it offers the income of a high yield bond fund from assets with an investment grade rating on average – this is made possible by investing in private markets where higher yields are on offer for those who can take the complexity and liquidity risks.
MGCI is managed by Adam English, who draws on the research of over 295 investment professionals across M&G’s fixed income teams. Adam can invest across the public debt markets, but MGCI’s key differentiating factor is his ability to invest across private markets. This includes well-established structures, such as various types of asset-backed security (ABS), as well as bespoke financing deals that M&G is able to originate in cooperation with the borrower. As we discuss under Portfolio, there are a number of features of MGCI which contribute to low NAV volatility and lower risk than high yield credit funds: high levels of diversification, predominantly investment-grade assets and high levels of asset-backing.
Much of the portfolio is floating rate, which means the income available to pay the Dividend should rise as central banks raise rates. This also contributes to the low duration, which is just over one year, protecting the portfolio from capital losses as rates rise, in contrast to conventional bond funds (as demonstrated in Performance).
The board has a policy of using buybacks or issuance to keep the shares trading close to NAV. At the time of writing, the Discount was 1.3%.
MGCI looks like an attractive way for income-seekers to diversify their Portfolio and, at the current juncture, looks to have some key advantages over conventional bonds. The low duration and linkage of the income account to interest rates should prove helpful if central banks continue the hiking cycles they have started. While the trust is exposed to widening credit spreads, Adam has reduced the credit risk in the portfolio over the past two quarters in expectation of spread widening and stands ready to add risk back when valuations are sufficiently attractive. In the meantime, the trust’s high credit rating means it is less exposed to a worsening credit market than a conventional bond fund with a similar yield.
MGCI pays four Dividends a year, with the final one expected to be substantially larger. This year’s dividends could be substantially higher than last year, particularly if we see rate hikes in the major economies. The yield achieved for buying on a small discount could therefore be higher than 4.1%. There are higher historic yields available on renewables and infrastructure trusts, but one of the key advantages MGCI has is diversification: well over 100 individual investments are diversified by geography, sector and issuer and spread across various segments of the fixed income markets. Furthermore, the average investment grade quality credit, liquidity in the portfolio and ability of the manager to de-risk or gear up as market conditions change provide advantages.
- High yield linked to interest rates with average investment grade quality credit
- Offers access to private debt markets, providing attractive risk/return characteristics and diversification
- NAV should prove resilient due to many defensive characteristics
- Complexity makes it harder for investors to understand exposures
- Limited capital gain potential
- Higher yielding options available