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
- ENDS -
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announcement.