NB Global Monthly Income Fund 07 February 2022
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by NB Global Monthly Income Fund. 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.
This trust has recently announced a proposed managed wind-down of the company and return of capital to shareholders. Please find the full announcement here.
NB Global Monthly Income Fund (LON:NBMI) is essentially a highly sophisticated strategic bond fund that uses the flexibility afforded by the closed-ended structure to invest in various non-conventional fixed income sectors usually restricted to institutions. This helps the portfolio to generate an ungeared yield of over 6%.
NBMI is managed by a team of senior managers at Neuberger Berman who have oversight of the various public and private debt markets via a team of over 50 professionals in the below investment grade space. These resources and Neuberger Berman’s huge footprint in the institutional debt markets allow them to flexibly allocate across the publicly listed bonds and loans market (conventional credit) and into the private debt markets, the CLO market and in distressed debt and special situations (unconventional credit).
The Dividend is set at the start of each year by the board, based on the managers’ view of the opportunities and outlook in their markets. This January the monthly payout has been raised to 0.415p a share, equivalent to a prospective yield of 5.25% on NAV and 5.6% on the share price at the time of writing.
Partly thanks to the high exposure to floating rate instruments, the duration is extremely low at 1.2 years, which could prove an attractive characteristic if the expected hiking cycle is seen this year. The portfolio does have high credit risk though. As we discuss in the Portfolio section, the managers are bullish on the outlook for spreads and report borrowers look in good health from the bottom-up. They view any weakness as a buying opportunity. While the main economic exposure is to the US, the trust also invests in Europe but hedges back into sterling.
NBMI has some clear advantages over a conventional strategic bond fund. The ability to invest in private debt and other non-conventional markets offers higher yields and greater diversification. As investments in the private markets can offer a higher yield for the same credit rating, there is also the diversification sources of return into illiquidity and complexity as well as simply credit. Considering this alongside the payment of a monthly dividend we believe NBMI has a lot to offer income-seeking investors.
Turning to the short term, NBMI looks like a highly attractive option at this point in the rates cycle, when some of its key advantages look likely to pay off. The extremely low duration should limit the impact of rate hikes over 2022. If the managers are right that the outlook for the US economy remains strong, then the portfolio should also benefit from narrowing credit spreads. Meanwhile, the access to private debt markets should allow the team to continue to fund higher-yielding stock-specific opportunities as spreads on public markets tighten. However, it has to be considered that if the US economy does go through a troubled period, then the credit exposure could see NAV losses.
There are some comprehensive Discount control mechanisms which mean we think the current 6.5% is well protected and could represent a good entry point. The first semi-annual tender offer will be held in June 2022, offering investors a partial exit at NAV less costs, while the board has also committed to consider wind up if these tenders take the trust below £150m in net assets.
bull | bear |
Highly attractive yield, particularly given low interest rate environment |
To generate high yield needs to take credit risk which brings economic sensitivity |
Very low duration and high allocation to floating rate investments appealing in rate hiking cycle |
Some investments are complex and hard for retail investors to understand |
Deep resources in the NB teams allow access to specialised markets offering higher returns |
Hedging back into sterling can have a net cost to the fund |