Results analysis: NB Global Monthly Income Fund

• NB Global Monthly Income Fund (NBMI) reported results for the year ending 31 December on Tuesday 20/04/2021. During the year the strategy and name of the investment trust changed. Prior to 8th September, it was known as NB Global Floating Rate Loan Fund, and invested predominantly in floating rate loans. The new strategy is much broader, allowing the manager to invest across traditional and alternative credit, including in privately arranged debt.
• The annual results reported reflect almost three quarters under the old strategy. From the change of strategy to the end of the year, NAV total returns were 4.91%, considerably better than the - 1.83% reported for the sterling share class for the 31/12/2020 – 08/09/2021 period.
• The dividends paid under the new strategy also rose in the later period. Annualised, they represented a yield of 5.39% on the 31 December 2020 share price. In the period prior to the change, the dividends amounted to a yield of  4.84% on the 30 September 2020 share price. Dividends are now paid monthly rather than quarterly as before
• As at 31 December 2020, NBMI’s portfolio had 48% invested in global floating rate loans, 26% in global high yield, 12% in private debt, 7% in CLO Debt tranches and 6% in special situations.
• The share price total return for the 2020 financial year was 6.97%. The discount has narrowed since 31/12/2020, from c. 13.1% to 9.9% as of the close of business on 20/04/2021
• The rally in risk-on assets helped the improvement in performance in the final quarter of 2020, particularly given the higher credit risk of the new strategy. Looking forward, chairman of the board Rupert Dorey says: “The combination of strong fiscal and monetary support combined with the high personal saving rates and the unleashing of pent-up demand will continue to deliver improved economic growth in 2021. In this environment, non-investment grade credit is likely to continue to see favourable demand given the search for yield in a very low interest environment. Despite the progress against the virus from vaccinations, short-term volatility could be the result of new COVID-19 variants and delays in vaccine deliveries. However, we believe that our fundamental credit research, focus on relative valuations and aim to avoid defaults position us well to take advantage of any market volatility.”

Kepler View

NBMI’s latest results show promising returns from the new strategy. This has been aided by the market environment, with positive results from vaccine trials kicking off a rally in credit markets in the final quarter of 2020 and the first quarter of 2021. However, the flexibility of the new mandate meant that the managers have been able to invest in bonds with higher credit risk to take advantage of the rally, and has also allowed the portfolio to make good returns from investing in special situations where an improving economic environment can help a company.

The flexibility of the new mandate is a key attraction, in our view. Neuberger Berman has deep resources as an institutional investor across credit markets, and the new incarnation of NBMI offers access across traditional credit as well as to alternative credit sectors which are not widely accessible to retail investors. The monthly dividend and fee cut are other potentially advantageous changes to the mandate which could increase the attractiveness of the shares.

NBMI’s previous incarnation had fallen out of favour with investors and onto a persistent discount. One of its key selling points was the protection it offered in a rising interest rate environment. While NBMI has some of the same features  which would help it in such a scenario – low duration, high exposure to floating rate instruments – the broader mandate should allow it to generate higher returns in a broader range of environments. On the other hand, the higher credit risk does mean it is more exposed to a sell-off in credit.

The discount has been persistent since the change of mandate, although shareholders were offered the chance to redeem part of their investment via a tender offer. However, the new deal for investors offers potential protection on that account. From June 2022, a tender offer will be held every six months, while the board has stated it will consider winding up the trust if net assets fall below £150m.

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