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 -
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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