M&G Credit Income 28 March 2024
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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 an exceptionally high yield without taking on the credit risk that most bond funds would have to do in order to achieve this – and without the use of gearing. Manager Adam English is able to do this thanks to the exceptionally flexible remit, which allows him to invest across the more complex and illiquid areas of the credit markets, including private debt, bringing the full weight of M&G’s institutional expertise and resources to bear in a rare mass-market vehicle. The portfolio is highly diversified across loans, asset-backed securities and private placements, not to mention the more well-travelled fixed-income sectors.
MGCI is currently delivering a handsome yield of 9.3%. The portfolio is c. 75% invested in floating-rate debt, and with the interbank rate SONIA at 5.2%, this is a major contributor. Roughly half the portfolio is in private debt, and Adam is looking for opportunities to add in this segment, with spreads on public debt looking unattractively narrow. However, he is being selective, and this, along with a recent acceleration in repayments of private debt in the portfolio, means the weighting has been slow to rise. In the meantime, higher-quality tranches of asset-backed securities (ABS) and collateralised loan obligations (CLOs) are offering attractive yields versus corporate bonds of worse credit quality.
Adam has a Gearing facility on hand, which allows him greater flexibility to take advantage of opportunities as they come up, but it is currently undrawn and the yield on offer is from an ungeared portfolio, unlike many of the other high yields in the investment trust space.
Arguably, the current economic situation of high rates and positive economic growth is the sweet spot for MGCI’s strategy. High rates boost the yield achieved on the portfolio and positive growth means companies are able to fund their debt comfortably. Adam is able to generate an exceptionally high yield without taking too much risk: in credit, in complexity or in duration. A slow decline in rates would see a slow decline in income earned on floating-rate debt, but Adam is likely to have the ability to increase risk to earn extra spread, assuming this is an orderly and slow decline. On the other hand, a sharp cutting cycle in the major developed economies following a rapid deterioration of economic data would be negative for the portfolio, although this would largely be felt in relative rather than absolute performance due to the low duration, given the high credit quality of the portfolio. However, this seems like an unlikely scenario, given the current state of the US and UK economies, and in our view MGCI looks set to deliver high returns from a relatively low-risk portfolio for some time to come.
We think MGCI is a highly attractive option for those seeking to earn a high income at the current juncture. The exceptionally high yield is generated from a portfolio of investment-grade quality. Moreover, Adam has a number of levers to pull to boost the income further should market conditions see yields in higher-quality debt fall.
Bull
- 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
Bear
- Complexity makes it harder for investors to understand exposures
- Limited capital gain potential, including from duration
- Rate cuts will reduce portfolio income, absent offsetting investment decisions