M&G Credit Income 26 March 2021
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) aims to generate a high yield with low volatility and low credit risk from fixed income investments. To achieve this MGCI invests extensively in the private debt markets, traditionally the preserve of institutional investors. M&G has been investing in private assets since 1997 and has c. £65.5bn in AUM in that space. It employs 287 fixed interest professionals including 130 analysts, providing coverage of the private and public debt markets, which allows MGCI’s manager, Adam English, to cherry pick the best ideas on a risk/reward basis.
MGCI aims for its portfolio to have an investment grade credit rating on average while generating an income of LIBOR plus 4%. This income is close to that achieved in high yield, but the extra return comes from illiquidity and complexity premia rather than through taking unnecessary levels of credit subordination. Last year the income target was met, although with a partial contribution from capital gains, as discussed in the dividend section. The board has targeted three quarterly payments of LIBOR plus 3% for FY 2021, with the intention of a higher variable fourth payment to get the dividend to LIBOR plus 4%.
MGCI is managed by Adam English, a fund manager on the life and insurance team at M&G. Adam selects ideas from the work of the different specialist teams, and looks to switch between public and private debt and between sectors within both categories as relative value allows. Most of the portfolio is floating rate, and any duration is hedged down to c. 1 year.
The shares currently trade on a discount of c. 10%, having traded on a premium prior to the emergence of the pandemic.
MGCI offers investors a way to generate a high yield in what we consider a relatively low risk way. The credit risk is lower than would be required to generate the same yield in conventional fixed income, while the duration is also low. The diversification in terms of asset class, sub-sector and individual investment is higher than the typical alternatives investment trust. Meanwhile the trust has no structural gearing and is committed to using debt in a limited fashion. All these features should be attractive for the income-seeking investor.
However, the main risks that are taken to achieve this income are related to illiquidity and complexity. We believe M&G’s extensive experience and huge resources in the private debt markets puts it in a strong position to handle these risks, to originate and underwrite deals, and monitor and analyse risks. Certainly, the steady performance of the portfolio through the 2020 crisis is evidence the process works to reduce the impact of these risks (see performance).
The question for investors is likely to be whether LIBOR plus 4% is enough. Yield is hard to come by at the moment (although at the time of writing bond markets have been selling off, increasing the opportunity). Nevertheless, higher yields are available on some renewables, infrastructure and direct lending investment trusts. This comes at the expense of extra credit risk and/or high gearing, higher industry risk, or higher stock specific risk. Individual appetites for income and for risk will vary, but in our view MGCI is an excellent long-term holding for income-seekers who can get comfortable with the relatively complex portfolio.
|Offers a high yield from a portfolio with relatively low credit risk
|Higher-yielding alternatives available
|Approach has proven resilience in a crisis (spring 2020)
|Complexity will make it harder for investors to know what they are invested in
|Offers access to traditionally institutional markets via a leading investor in the space
|Limited capital gain potential