M&G Credit benefits from discount narrowing but tougher times await – M&G Credit Income Trust has published results covering the year ended 31 December 2021. The fund exceeded its target return of LIBOR+4%, returning 4.3% against 4.1% for the benchmark. Rates are rising though and so this target is going to be tougher to achieve. The trust also outperformed comparably rated public indices such as the ICE BofA Sterling and Collateralised Index (down by 3.0%) and the ICE BofA European Currency Non-Financial High Yield 2% Constrained Index (up by 3.3%). The dividend for the year was 4.04p. As at 31 December 2021, in line with an industry-wide change, LIBOR ceased to exist and a new measure called Sterling Overnight Index Average (SONIA) has been adopted. SONIA has replaced LIBOR in the benchmark.
The chairman says “2021’s benign credit but volatile sovereign debt markets provided challenging conditions in which to generate returns. The start of the year saw an increase in government bond yields, prompted by investor concerns over the risks associated with inflation and economic overheating. At the same time, corporate credit spreads tightened to inside pre-pandemic levels, buoyed by the support offered by central bank bond purchasing programmes. This reduced the pool of both primary and secondary public investment opportunities that met the risk adjusted return profile of the company. The continued tightening in credit markets did, however, allow our investment manager to sell down corporate public bonds into the market strength, realising pleasing capital gains. Proceeds were reinvested into higher yielding private assets which both improved the credit quality of the portfolio and generated income in excess of comparably rated public bonds.
In the latter part of the year, inflation reached multi- decade highs in core economies, as disruption to global supply chains and soaring energy prices began to exert pressure on corporate margins. After stabilising over the summer months, government bond yields resumed their climb higher into the final quarter of the year. By hedging interest rate risk and maintaining low modified duration (low sensitivity to interest rate movements), our investment manager offset the effect of rising risk-free rates on the portion of portfolio returns derived from fixed income securities.”
On 30 April 2021, the board announced a zero discount policy. At the end of the year the discount was 1.9%, down from its 12-month average of 5.4%. This narrowing of the discount helped drive a total return for shareholders of 13.0% for the year.
MGCI : M&G Credit benefits from discount narrowing but tougher times await