M&G Credit Income

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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.

MGCI’s high yield and strong returns have led to a premium rating…

Overview

M&G Credit Income (MGCI) is a highly flexible fixed-income fund which delivers a very high yield without taking the credit risk, duration risk, or gearing that is usually used to achieve this. The historic yield is 8.2% at the time of writing, achieved from a portfolio of investment-grade quality on average, a duration below one, and no Gearing.

Manager Adam English invests across public and private debt markets, aiming to deliver an attractive yield with low NAV volatility. In recent months he has been reducing credit risk in the portfolio, taking the view that it is not being fairly compensated. He is parking funds in liquid ABS funds of high credit quality and looking for opportunities to reinvest in attractively priced assets.

Currently, the private assets pipeline looks particularly promising, and it may be that is where Adam looks to boost the yield and take on more risk as the year progresses . Private assets are usually only accessible to institutional investors and offer high yields for those able to do the research required to invest. MGCI brings these opportunities to the retail market, facilitated by the expansive credit teams at M&G.

MGCI has delivered strong returns in the last two years and met its  Dividend target of SONIA plus 400bps. This has contributed to a premium rating and the board has struggled to issue enough shares to keep a lid on it. A recently completed placing and retail offer saw demand for an additional 6.5m shares which listed this week, or around 4% of the share capital before the raise.

Analyst’s View

We think MGCI is an attractive long-term holding for an income-seeking investor. A yield around full four percentage points higher than the base rate and therefore the typical cash rate is likely to be very good whatever that base rate is. Whilst spreads can vary over time, this is on average likely to be the sort of yield available from high yield, whilst it is achieved with a portfolio of much higher credit quality which should keep losses to default and credit events to a minimum. Meanwhile, the volatility of the NAV should be lower thanks to the low credit risk and very low duration. Investors do forego the potential for sharp capital returns in higher-yielding bonds or those with higher duration when the relevant conditions apply, but we think this is an easy sacrifice for the income investor who will most likely be more worried about limiting the potential for capital losses.

Currently, the picture for fixed income is mixed. We are expecting modest rate cuts in the UK and EU over the year which should boost prices and be good for the affordability of corporates with debt. However, these cuts are expected due to a weakening of the economy which means inflation is slowly falling and rate cuts may be needed to stimulate activity. These factors are all bad for credit. Adam’s relatively cautious stance makes sense in this environment, in our view, and it is notable that he can go defensive whilst still yielding just under 8% on his portfolio.

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
  • Rate cuts will reduce portfolio income, absent offsetting investment decisions