M&G Credit Income 04 May 2023
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 (LON:MGCI) offers a high income linked to interest rates from a diverse fixed-income portfolio. By investing in private debt markets as well as in specialist public debt sectors, a high income can be generated without taking on high-yield level credit risk. Additionally, duration is kept low, with the majority of the portfolio being floating rate, which means the value of the portfolio shouldn’t fall as much when rates rise as a traditional fixed income fund’s does (see Performance).
MGCI is managed by Adam English at M&G. M&G is a fixed-income specialist, with many decades of experience investing in public and private debt for institutional clients (mainly pension funds and insurers). M&G has over a hundred analysts spread across public and private debt markets, and Adam can allocate across the broad universe they cover, offering shareholders access to markets typically only available to professional investors.
Currently, 76% of the portfolio is investment-grade quality, and on a sector basis, it is defensively positioned. Despite this, a high Dividend yield is on offer. The dividend target is SONIA plus 4% over the course of a year. With SONIA averaging 3.73% over the first quarter of the year, and the possibility of further rate hikes to come, a highly attractive income is on offer, albeit with some variability. This income rose substantially over 2022 as interest rates were hiked and SONIA rose.
We think MGCI is a highly attractive way to generate a high income in the current environment. The yield is substantial from a portfolio with low duration and low credit risk, the two key risks taken in traditional fixed income. In our view, equity and bond markets have priced in a relatively “soft landing”, in which inflation falls quickly and interest rates are cut. While MGCI is not actively positioned for one macro outcome or another, we think it offers valuable protection against a harder landing scenario. Additionally, whatever ‘landing’ occurs, the trust pays a high income in the interim which we think is attractive given the risks to capital in volatile markets. Thanks to the structure of the product, Adam has been able to take a defensive position while still generating a high dividend yield.
It is true that a softer landing would not be the best environment for MGCI. If rates are cut, MGCI will not experience capital returns as good as traditional fixed income, and the yields earned on the portfolio will fall. However, yields available would also fall on traditional fixed income, and in a lower rate environment, SONIA plus 4% would still reflect an attractive return over cash. Additionally, we note Adam has a highly flexible mandate which allows him to take advantage of pricing opportunities in multiple sectors to help boost the income and also offers some capital gains potential, even if this is not an investment objective.
- 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
- High-yield bond funds may yield more at times