MGCI’s yield should rise if interest rates are hiked.

Overview

M&G Credit Income (MGCI) owns a highly diversified portfolio of fixed income assets and offers a very high yield (7.7% at the time of writing) without taking the risks that would typically be required to achieve it, and without the use of structural gearing. The trust invests across all segments of the public and private debt markets, taking advantage of M&G’s deep resources to exploit the extra yield that can be earned in complex and illiquid securities, all within a closed-ended wrapper which facilitates this while providing the end investor daily liquidity.

Many of the specialist areas it invests in offer floating rate coupons, meaning that as interest rates rise, the income the trust receives rises too. With central banks currently under pressure to raise rates, and 78% of the portfolio offering as floating rate coupon, this could be a particularly attractive feature. And as the trust’s dividend policy is to pay 4% of NAV plus SONIA (an interbank rate which tracks the base rate) each year, the dividends paid by the trust will rise if rates are indeed hiked.

One of the key objectives of the trust is to deliver this high yield along with low NAV volatility. To that end, the manager Adam English takes a defensive approach to sector and stock selection and a relative value approach when it comes to making investments. Over the past two years the portfolio has been very defensively positioned, with Adam unimpressed by the spreads being offered for credit risk. Nonetheless, the trust paid its high dividends, aided by the flexibility of the mandate. Over 2026, however, Adam has made significant investments in new private debt assets, which has seen the proportion held privately rise. This should hopefully feed through into higher portfolio income, although MGCI has also continued to see strong inflows which are initially parked in higher quality, liquid assets. The trust has been on a premium for most of the past two years, and this stood at 2% at the time of writing.

The board has consequently announced a placing and retail offer of new shares to be issued at a 1.5% premium, with the fundraising to close on 20/10/2026.

Analyst’s View

We think M&G’s combination of high yield and defensive positioning should appeal to lots of income-seeking investors, which explains the premium rating for most of the past two years. In particular, the ability to avoid taking duration risk is attractive with the prospect of rate hikes on the horizon, and some analysts expecting structurally higher rates in the current cycle. Perhaps more importantly, investing in assets of high credit quality is particularly appealing given how expensive public corporate bond and high yield markets are. Given these markets are cyclical, tight spreads imply the potential for significant losses at some point, even if it is not clear what will see this multi-year environment end. An economic slowdown or recession accompanied by higher interest rates could be one way, if it leads to default rates ticking up and credit selling off, and MGCI should appeal to cautious investors concerned about this possibility. We note that MGCI delivered steady NAV performance through the volatility seen in Q1 when the war in the Gulf broke out.

Of course, the primary appeal is the potential to receive a higher income if rates do rise, along with this defensive portfolio performance. MGCI’s yield is paid quarterly, without the use of structural gearing. The spread of 400bps over SONIA should be attractive in relative terms even if rates fall. We note the recent investments in private debt have helped the portfolio income rise, and Adam is confident that, with spreads at historic tights, there will be opportunities in the coming years to invest at much wider yields and for portfolio income to exceed the dividend target in a later stage of the cycle.

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
  • Portfolio yield below dividend target

Kepler