M&G Credit Income returned 10.4% in NAV terms over 2023, ahead of the 9% return on its benchmark. The statement says that outperformance came from tightening credit spreads, which drove capital growth,and strong income returns supported by higher yielding private assets. The portfolio was substantially protected from interest rate rises and rate-driven volatility by the use of interest rate hedges.

During the year, the company bought back 1,613,783 shares as part of its zero discount policy. Nevertheless, the year end discount was 4.2% discount, but fortunately it has since narrowed and the company has re-issued 300,000 shares from treasury at a premium to NAV so far in 2024.

Target dividends are based on SONIA plus 4%. In 2023, these totalled 7.96p.

Extracts from the manager’s report

Portfolio activity in the first half of the year focussed on reducing risk and increasing credit quality as we rotated out of tighter yielding public bonds, redeploying proceeds into comparable or higher rated asset backed securities (ABS) and collateralised loan obligations (CLOs) at new issue. We also paid down the outstanding loan balance on the company’s credit facility. Into the middle of the year we added attractively priced private assets into the portfolio as the pipeline of opportunities picked up. In selling down corporate bonds and reallocating capital into private and alternative sectors of the fixed income market, we were able to achieve a significant spread pick-up and improve both the overall yield and credit quality of the portfolio.

Portfolio activity remained quiet in the third quarter as we continued to favour the up-in- quality trade, selectively adding public and private new issues and taking exposure in an attractively priced secondary market securitisation. Private asset repayments saw cash returned to the portfolio which we invested into the daily dealing M&G Senior Asset Backed Credit Fund as we waited for suitably priced public and private opportunities to arise.

October saw a dramatic escalation in geopolitical tensions in the Middle East after an attack by Hamas militants led Israel to declare war on the group, adding another layer of complexity to an already uncertain economic outlook. The initial aftermath saw a flight to quality and perceived ‘safe- haven’ assets, with government bonds then whipsawing as macro and geopolitics vied for pole position in driving markets. Sentiment was bolstered by the easing of inflationary pressures, optimism about forthcoming rate cuts by central banks and a potential economic ‘soft landing’. The year ended with a powerful two-month rally in bond and equity markets which saw credit spreads compress, driving strong portfolio returns into the close of the year.

Consequently, this also created a more challenging environment in which to add assets to the portfolio that, in our opinion, would provide attractive risk-adjusted returns. We concluded that the most attractive relative value was in both public and private ABS new issues, which offered a significant spread pick-up versus equivalently rated corporate bonds. Into the market strength we also took the opportunity to sell holdings in issuers that had tightened too far relative to their credit fundamentals.

MGCI : M&G Credit Income had a good 2023