M&G CREDIT INCOME INVESTMENT TRUST PLC

 

(the “Company”)

 

LEI: 549300E9W63X1E5A3N24

 

Quarterly Review

 

The Company announces that its quarterly review as at 31 March 2024 is now available, a summary of which is provided below. The full quarterly review is available on the Company’s website at:

 

https://www.mandg.com/dam/investments/common/gb/en/documents/funds-literature/credit-income-investment-trust/mandg_credit-income-investment-trust_quarterly-review_gb_eng.pdf

 

Market Review

The first quarter of the year saw further declines in inflation across most major economies, however with progress slower than expected, market sentiment turned to concern that the inflation fight would prove increasingly difficult for central banks over the final stretch. Robust economic growth in the US showed little signs of abating and investors were forced to reconsider assumptions on the path of global interest rates which resulted in a dramatic repricing in rate cut expectations. At the start of the year financial markets had anticipated six rate cuts from the US Federal Reserve (Fed), whilst the quarter closed with only two cuts fully priced in. Government bond yields rose in January and February before recovering somewhat in March when the Fed confirmed that it expected to cut rates three times this year. Comments from ECB President Lagarde and Bank of England Governor Baily also brought rate cuts firmly into view in Europe, which provided a supportive backdrop for risk appetite.

 

Manager Commentary

Pleasingly the Company delivered another quarter of strongly positive performance. The Company’s NAV total return in Q1 was +2.42% which outperformed the benchmark for the third consecutive quarter. The NAV total return also outperformed comparative investment grade fixed income indices such as the ICE BofA Sterling Corporate and Collateralised Index (+0.16%), the ICE BofA 1-3 Year BBB Sterling Corporate Index (+1.31%), and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+1.78%). Performance was driven by a combination of income accrued over the quarter and capital gains as the portfolio benefited from the rally in credit spreads, whilst we also realised notable gains from asset sales.

 

Credit markets appeared to shrug off the interest rate repricing as spreads continued to tighten over the quarter, supported by a strong demand for the asset class. Despite a historically large supply of investment grade corporate bonds, investors were able to easily absorb the excessive supply, pushing spreads lower, with most deals heavily oversubscribed and with little concession to secondary curves. Into the market strength we sold down a number of bonds where credit spreads had tightened significantly from where they were purchased to levels where, in our opinion, they looked expensive. These included some of our remaining European REIT exposure (NE Property, CTP, Balder), dollar denominated blue chips (Warner Brothers, General Motors) and European energy hybrids (SSE, Iberdrola). In selling these bonds we were able to crystalise healthy capital gains which contributed to the Company’s outperformance versus the benchmark.

 

Whilst we still view investment grade credit as robust, in our opinion spreads now look expensive. Considering the challenging business conditions that corporate issuers face, including but not limited to higher borrowing costs and political uncertainty; we don’t believe that at current spread levels investors are being adequately compensated for taking on risk. In addition, historical observation suggests that the potential for further aggressive spread tightening from current levels in Investment Grade is limited. On a relative value basis we favour the risk-return characteristics available in alternative asset classes such as ABS and CLOs where we have been able to invest in debt of a higher credit quality whilst achieving a greater return. Recent activity has seen us selling BBB corporate risk at +180bps and buying A-rated ABS tranches at +280bps. During the quarter we took an additional £8m of exposure to ABS or CLOs, including a further £2m investment into M&G Lion Credit Opportunity IV and an additional £1.8m in ICSL 2 B, a quasi-private securitisation of UK student loans sponsored by the Secretary of State for Education. £3.5m of this exposure was taken via further investment in the M&G Senior Asset Backed Credit Fund which we use as a short-term cash park vehicle but which actually offers a comparable yield to parts of the BBB-rated euro and sterling credit markets.

 

Outlook

Concerns about the pace of disinflation and the implication for the timing and depth of interest rate cuts from the Fed have been intensified by the release of three consecutive stronger than expected US CPI reports this year. In light of less upside inflation risk and more muted economic growth in Europe, a key question for markets is whether the ECB and Bank of England will be able to move ahead of the Fed if the latter is forced to delay the timing of its first rate cut. Until recently, this had done little to dampen investor enthusiasm for risk, however the US-led repricing of both short and long term interest rates has contributed to a softening in equity and credit markets early in the second quarter. That said, the technical backdrop in fixed income remains strong, with all-in bond yields still screening favourably to other asset classes and the supply/demand imbalance in corporate bond markets keeping credit spreads well contained. There is also a lot of capital currently invested in money market funds which looks likely to make its way into corporate bond funds once overnight interest rates reduce, providing an additional tailwind which should see credit spreads remain anchored. It is in such market conditions, when bond spreads are looking expensive, that our flexibility in being able to invest across a diverse range of alternative asset classes and private credit has the potential to offer a particularly attractive return premium to public markets.

 

In a year full of electoral events across the globe, both domestic and foreign politics are poised to play a central role in financial markets in 2024. In the UK, a general election is expected in the second half of the year and recent events have shown how sensitive market participants can be to surprises in fiscal policy. In the US, the outcome of November’s election has the potential to cause ripples on a global scale regarding issues such as trade, climate, and defence policy. Geopolitical tensions are as heightened as they have been for decades and the ongoing conflict between Israel and Hamas has recently drawn Iran into direct confrontation with Israel, resulting in attacks from both sides. An escalation into a wider conflict in the Middle East would have far-reaching human and economic consequences, with notable impacts already seen in commercial shipping and oil prices. The Russia-Ukraine war also moves into its third year, with the current “stalemate” precariously balanced amidst uncertainty about U.S. aid.

 

In terms of portfolio strategy, at current spread levels we continue to favour moving up in credit quality when investing in public markets. In addition, where opportunities permit we will look to sell existing public bond holdings, realising capital gains and reinvesting proceeds into new private investments. This rotation into higher yielding private assets with stronger structural protections would further improve the credit quality of the portfolio. Pricing in private credit markets remains competitive and we are happy to remain disciplined in adding assets into the portfolio only where we feel we are compensated appropriately for the level of risk taken. In such a well bid market, M&G’s track record and scale is a competitive advantage that allows us to negotiate attractive terms and security packages with borrowers. We also have the experience and expertise to provide bespoke solutions in response to borrower requirements, with the added complexity of such deals allowing us to attract a higher return premium. We have entered the year with the portfolio cautiously positioned, with access to a £25m credit facility and a further £10m invested in a AAA-rated, daily dealing ABS fund, ready to be reallocated should market volatility present us with attractive opportunities.

 

Link Company Matters Limited

Company Secretary

 

26 April 2024

 

 

 

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