M&G Credit Income: Income performance excels

M&G Credit Income (MGCI) is one of the successes of the investment trust sector of the past five years. The compelling attractions of its very high yield, achieved without gearing and with low NAV volatility, have seen it consistently trade on a premium and issue new shares into the market. The trust’s shares yield 8.5% at the time of writing on a historical basis, while taking minimal interest rate risk (duration) and most importantly having a solid investment-grade credit profile, which sets it apart from many other funds offering similar yields (see Dividend). The portfolio is of average investment-grade quality, while MGCI is also completely ungeared.

Manager Adam English can achieve all this thanks to the uniquely diverse set of options he has; he can invest across the public and private-debt markets, wherever the huge M&G fixed interest teams operate. Over the past year, Adam has been finding plenty of attractive opportunities in the private-debt markets, able to lend to projects backed by Magnificent seven revenues (see Portfolio) or high-quality securitisations which offer exceptional yields, all within the context of public-debt markets, which are expensive and hence vulnerable to any credit shocks.

However, he has also been allocating heavily to high-quality, liquid, and lower-yielding ABS and Loan funds. With credit markets looking expensive and private deals taking a long time to finalise, Adam is happy to let liquid assets build up and wait for better opportunities. This cautious approach is in stark contrast to the private-debt funds, which have recently run into trouble in the US, and have a very different and much riskier model than MGCI.

It remains to be seen whether the war in the Middle East will last, but if it does, we think it is likely to see equity and credit markets sell off. Higher energy costs could wreak havoc on economies struggling to keep growth positive, and the conflict may be the black swan that sees complacent, expensive markets suffer a significant correction. For income investors who want to boost the yield they achieve without taking on excessive risk, this is exactly the sort of event that could throw plans into disarray, and MGCI’s utilisation of the private-debt space as well as the cautious, defensive approach taken by the manager means that it has reduced exposure to a sell-off in credit markets compared to the typical fund with its yield level, with plenty of cash on hand to take advantage if spreads do widen.

Some investors may worry about the issues in US private-debt markets, but we think they are contained to specific sectors and ultimately to lending practices within them — funds that are lending to riskier borrowers, using leverage themselves and without doing sensible and cautious analysis of potential outcomes are having difficulties. This is the polar opposite of the approach taken by Adam English on MGCI. In every respect, stock and sector selection is directed by the objective to deliver low NAV volatility as well as a high yield to shareholders. MGCI’s portfolio is yielding c. 6.8% at the time of writing while being in a highly defensive posture, which means there is the potential for returns to be even higher in future once opportunities open up.