M&G Credit Income 19 September 2024

M&G Credit Income (MGCI) is a highly flexible fixed income fund, able to invest across public and private debt markets in pursuit of a high yield. Unlike many funds that offer such a high yield, it does so without taking on a lot of credit risk or gearing up. Nevertheless, it currently offers a 9.1% dividend yield from a portfolio of investment-grade quality.

The portfolio has delivered strong returns over the past year, c. 11% on a NAV total return basis (see Performance). This has been mainly due to the high income generated, while there have also been capital gains on some investments as spreads in public debt markets have tightened. Demand has generally remained high for the shares, with the trust frequently trading on a small premium in recent months and the board issuing into the market.

Manager Adam English reports that he has been seeing an increasingly attractive pipeline of private debt opportunities, and he has been reinvesting profits into them. These should allow him to boost the income being generated by the portfolio while spreads are less attractive in public markets – the key advantage of the flexible structure.

Private debt is mostly floating rate, and MGCI tends to run with 70–80% in floating-rate debt. This means that income rises or falls as UK interest rates do, with a lag. The Dividend is therefore likely to fall slightly over the coming months, as the target is 400bps over SONIA (an interbank rate that closely tracks the base rate). However, Adam expects the yield to remain high, with rates set to fall slowly and risks to the upside still around.

We think MGCI’s high yield and low NAV volatility should be appealing to many income-seeking investors. The spread of 400bps over what is effectively a cash rate should remain, even if we see the absolute yield fall gradually as interest rates do. This should be highly attractive versus the yields available on other income-paying investments such as high yield bonds, which carry greater credit risk and duration, and many alternative assets in the investment trust space, which use high levels of gearing to generate their yield.

MGCI seems to be well suited to the current economic environment, and we think absolute returns should remain high for some time to come. While economic growth remains weak in the UK and its key trading partners, serious recession looks unlikely. Inflation has proven relatively resilient, thanks in part to economies performing better than feared. As a result, it looks likely that rate cuts in the UK and US will be gradual and well-ordered, which would keep the income paid out by the trust high. Meanwhile companies’ ability to service their debts should remain resilient, which would create a strong outlook for credit risk. We note that Adam reports a steady flow of attractive deals in the private debt space, which speaks of a healthy market and healthy corporate sector and should mean the manager has plenty of opportunities to maintain the yield and quality of the portfolio.