M&G CREDIT INCOME INVESTMENT TRUST PLC

 

(the “Company”)

 

LEI: 549300E9W63X1E5A3N24

 

Quarterly Review

 

The Company announces that its quarterly review as at 30 June 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 second quarter of the year got off to a shaky start as US CPI for March showed a third straight month of higher-than-expected inflation. This prompted a US-led repricing of global rate expectations and investors also moved to push back the probability of rate cuts from other central banks. However, from there onwards it was very much a story of disinflationary progress, as core US CPI in May came in at 3.4% YoY, down from 3.6% in April - its slowest pace in 3 years. As the period progressed, a slew of data releases painted a picture of a slackening labour market and suggested the US may be approaching an inflection point, with a steady decline in job vacancies and a gradual pickup in unemployment. As these developments lent support to Fed rate cuts, in the UK, headline CPI also notably fell to 2.0% YoY in May, returning to the Bank of England's inflation target for the first time since July 2021. Although in the UK core inflation remains elevated (as in many G7 economies), the Bank of England hinted that more MPC members may be close to backing interest rate cuts, keeping alive hopes of a loosening by the end of the summer and although the base rate was left at its 16-year high, it was seen as a “dovish hold”. This was in contrast to action taken by the ECB during the quarter, which delivered its well flagged initial cut but warned against the expectation that this would be the beginning of a sustained easing cycle. This was perceived as a “hawkish cut” and market pricing adjusted to predict a shallower path for European rates. However, in Europe it was the political narrative which dramatically affected markets during the quarter as major gains by far-right parties in the European parliamentary elections also saw Marine Le Pen’s National Rally party dominate the French polls. The result prompted the surprise decision by French President Macron to call a snap legislative election which led to a sizeable bond and equity sell-off across Europe with France at the epicentre. The groundswell of support for populist political parties not only in France but across other core EU member states raised the spectre of future disruption to Euro-market status quo, spooking financial markets. French risk remained on the backfoot throughout the month, dragging down other European markets.

 

Manager Commentary

The Company continues to deliver positive performance which year-to-date is closely tracking its SONIA+4% benchmark. The Company’s NAV total return in Q2 was +2.12% which notably outperformed comparative investment grade fixed income indices such as the ICE BofA Sterling Corporate and Collateralised Index (-0.26%), the ICE BofA 1-3 Year BBB Sterling Corporate Index (+1.07%), and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (+1.49%). Performance was driven predominantly by income accrued over the quarter.

 

Overall, in public bond markets, the quarter saw a softening in investment grade credit spreads. In April this was driven by an escalation in geopolitical tensions in the Middle East, higher for longer rate concerns and a high volume of new issuance. Whilst May saw a stabilisation supported by positive inflation reports and resilient economic growth, financial markets in June were roiled by the political uncertainty resulting from the surprise announcement of a snap election in France. This led to credit spreads widening notably with weaker economic data also contributing to the risk-off tone.

 

We added bonds selectively during the period, continuing to favour the up-in-quality trade and in particular the additional return that can be earned by rotating from BBB corporate bonds into A-rated, CLO tranches. As part of this rotation we sold down banking and insurance paper that had tightened significantly since initial purchase and redeployed £2.7m of proceeds into new issues from managers Ares (ARESE XIX), Anchorage Capital (ANCHE 10X) and M&G (MARGAY II C). We also participated (£0.75m) in the high yield new issue from 888 (Gaming) which we felt was priced attractively. Recent months have seen a notable pick up in private market activity, both in terms of the number of deals we are being shown and of those we have chosen to participate in which have progressed through to completion. During the quarter we deployed £3.9m across four private assets. These included taking additional exposure in existing facilities in the portfolio, lending to a waste-to-energy business (£1.5m) and an invoice financing business focussed on servicing large corporates and SMEs mainly in France (£0.4m). Two new private loans were entered into, the first of which saw £1m invested in a floating-rate, 7-year term loan to a provider of fresh food and catering services to healthcare facilities such as care homes and hospitals in the Netherlands, returning the equivalent of EURIBOR +600bps over its term. We also invested £1m in a UK headquartered business which provides fall protection equipment/systems and safe access solutions, with the 4-year term loan returning SONIA+500bps.

 

Outlook

Policy makers remain cautious and keen to emphasise a data dependent approach to future decisions on the path of interest rates, despite positive progress on reducing inflation. This lends itself to ongoing volatility in interest rate markets, although we continue to mitigate against this risk by maintaining low portfolio duration – a function of holding mostly floating-rate assets but also hedging the interest rate risk on the fixed portion of the portfolio. Currently, core inflation across European and US economies remains undesirably high (despite recent positive trends in the underlying components) and remains an obstacle to the path of rate cuts the market is anticipating. Acknowledging the challenges and speed bumps that can occur in returning inflation to target over the last mile, the good news is that a soft landing looks to be on track in the UK, Eurozone and the US. The UK economy particularly is faring much better than expected with consumer spending projected to be the main driver of an acceleration in UK GDP growth which mostly reflects improvements in households' real incomes, due to falling inflation and firm wage growth. Looking further ahead, there are numerous structural drivers for higher inflation. A decline in labour supply, deglobalisation arising from geopolitical tensions, as well as effects from the global energy transition are just some of the contributing factors expected to add to higher price pressures in the long term, which would imply that interest rates will also need to remain higher.

 

Geopolitical risk remains elevated, noting the ongoing conflicts in Ukraine and the Middle East, the pending US election, and closer to home the rise of populist parties in Europe. The mood music in the UK feels slightly more sanguine, with anticipation that the parliamentary majority for the Labour party will provide a more predictable and stable backdrop for investment, whilst the recent “mini-budget” episode should provide enough of a deterrent against fiscal imprudence.

 

In public bond markets, credit spreads remain at historically tight levels and whilst rate cuts in the US and UK might provide a catalyst for further tightening in High Yield, in Investment Grade we see most good news as more-or-less already fully priced in. With strong demand from all-in yield buyers outstripping issuance, our expectation is that the market technical created by this imbalance will keep credit spreads anchored and fairly range bound in the near-to-medium term. Whilst the current macroeconomic environment remains relatively supportive for investment grade credit, which is positive for the existing portfolio, the question then becomes, where do we as spread buyers find value? If public credit markets continue in their current holding pattern and with a strong pipeline of private investment opportunities coming through, we are actually presented with an advantageous combination of conditions to realise capital gains on public bond sales whilst being able to redeploy proceeds into higher yielding private issuance. We have been successfully executing this rotation play in Q2 and see further opportunity to extend it as we move through Q3.

 

At time of writing, current market pricing is implying just shy of 4 rate cuts by June 2025 which would take the Bank of England base rate (tracked by SONIA) to 4.25%. Should this transpire, the Company’s SONIA +4% dividend target would remain in the high single digits for the foreseeable future. We believe this is an attractive return for a strongly diversified portfolio with an average credit rating profile of BBB (considered firmly investment grade). Indeed, on a one-year basis, the NAV total return (+11.5%) has outperformed the European High Yield index (+10.98%) whilst carrying inherently less volatility and risk. The pipeline of private asset opportunities looks very strong right now and we are negotiating on a number of new facilities which we hope to add to the portfolio in the coming months. The portfolio is currently more defensively positioned than at the start of the year, with £10m held in a daily dealing ABS fund of AAA credit quality (held in lieu of cash) whilst also remaining fully undrawn on our £25m credit facility. When market volatility creates opportunity we are therefore well positioned to add risk into the portfolio as we have done effectively during previous episodes.

 

Link Company Matters Limited

Company Secretary

 

30 July 2024

 

 

 

- ENDS -

 

 

 

 

 

The content of the Company’s web-pages and the content of any website or pages which may be accessed through hyperlinks on the Company’s web-pages, other than the content of the Update referred to above, is neither incorporated into nor forms part of the above announcement.

 

 

 

For further information in relation to the Company please visit:  https://www.mandg.com/investments/private-investor/en-gb/investing-with-mandg/investment-options/mandg-credit-income-investment-trust