Speaker 0:
joining me here in the studio, we have Adam English, manager of the M and G Credit Income Investment Trust. Well, Adam, thanks very much for being here. Thank you for inviting me. Could you give us a sense of how the trust works, the mandate and where it would really fit in investors portfolio?

Speaker 1:
Certainly. So the Credit Income Investment Trust is a fixed income investment trust which invests in floating rates, investment grades, predominantly private, uh, underlying investments. So let me go through those in turn, first off floating rate.

Speaker 1:
So it pays, um, a dividend of Sonia plus 4% in current markets. That's around 8.5%. And the reason it does that is it's investing in underlying assets which are floating rate as well. So it's very simple. It pays out the income that these floating rate assets are generating in terms of that floating rate dividends.

Speaker 1:
The next point is, it's investment rate, and it's a real differentiator because it's the only investment grade fixed income investment trust out there. And this is particularly important because it's lower risk investments. Uh, that investment grade really does set it apart, and it has a lower chance of of default in the underlying investments

Speaker 1:
and the private side. We're generating that very strong dividend, which is much higher than you'd get in a public, Um, a public, um, investment rate, uh, fixed income. Uh, portfolio. We're generating that because we're investing in private assets and these pay a higher return than you'd get in the public assets

Speaker 1:
And these private assets, um, they're difficult to to source. They're difficult to to analyse. They're difficult to to, um, to structure. Um, so we get paid more for all that,

Speaker 1:
and in an essence that gives us that nice return from from the from for the, uh for for a relatively good return for an investment trust. And And I think it's also worth pointing out that that's, um, all that work requires a very significant team. And and at m N g, we have over 100 analysts doing all that work, all that sourcing and analysing and structuring to bring these assets to me. And that's really what I'm levering off this

Speaker 1:
this huge resource within M n g.

Speaker 0:
I want to unpack those three areas in a second, but just taking a step back what's happening broadly in the credit space. So

Speaker 1:
in credit, the the the real dominating factor at the moment is, uh, what the in the central banks are doing

Speaker 1:
and their response to inflation. Um, clearly, they're worried about inflation, and they're, um they're raising, uh, their base rates as a result, Um, this is a particular issue in in the UK, um, where inflation, particularly core inflation, is still increasing. And, um, there is an expectations within the market that, uh, that the Bank of England will continue to raise rates. Um, perhaps another percent from where we are. At the moment. It's currently at 4.5%.

Speaker 1:
So there are a number of base rate increases still predicted by the market, and the knock on effect of that is one

Speaker 1:
we're gonna expect Sonia to continue to increase.

Speaker 1:
So actually that means for our dividends. It's going to continue to increase, but it also creates something of headwinds to the economy. And that's clearly what the Bank of England is trying to do. It's trying to slow the economy down in order to reduce inflation. But the upshot of that is that that puts more pressure on consumers and on companies make it more difficult to refinance existing debts. So there is something of a headwind there, which I think means it is the time not to be taking too much risk

Speaker 1:
going too far down the credit spectrum is potentially going to cause trouble in the in the in the near future. So again,

Speaker 1:
this is very well positioned for that, because as an investment grade portfolio, we're reducing that risk,

Speaker 0:
go back to the floating rate. So with all of that in mind, floating rates, especially for investors, is very, very important at the moment.

Speaker 1:
Well, indeed. And I think the the the the the key benefit of having that floating rate is the return is increasing as interest rates increase. And, of course, that's not the case with, uh in normal interest rate sensitive fixed income, where one would expect the price of the underlying assets to fall.

Speaker 1:
All those interest rates go up the floating rate, the prices stay the same, and you're getting an increase in your income. And as I said, we're expecting those base rates to lead to increase Sonia uh, going forward as well, which will lead to increased dividends as

Speaker 0:
well. And what does the portfolio look like? Is it quite spread across a lot of different sectors?

Speaker 1:
How does it look? It's extremely diversified. So we've got, uh, 100 and 35 different holdings. So the the actual individual stock, uh, risk

Speaker 1:
is very low because it's a very well diversified portfolio. We also invest in, um uh, a plethora of different asset classes and sectors across the fixed income world. So when I say we're investing in private, um, fixed income, it's There's no one particular area we're investing in. We'll investigate in infrastructure debt, in private placements, in direct lending in private asset backed securities. Um, there's a whole gamut of different, um, different parts of the market.

Speaker 1:
And really, what we're doing is using that M and G experience there, that large analyst team to find just pick the best spots. So sometimes, um, say, um, private asset backed securities will be very attractive, so we'll be buying more of that into the portfolio. Sometimes direct lending will be more attractive, so we'll just be picking the best spots which are which are presented to us at any one time

Speaker 0:
and the trust launched in 2018. So within that five years, does this current period offer real difficulty? How does it compare when you look back at

Speaker 1:
all the other years? Well, clearly, we've had some extreme volatility over those five years. We had the covid crisis, uh, some extraordinarily volatile markets at that time. And, um, we we, we manage, went very well through these these episodes, largely because we have a somewhat counter cyclical approach.

Speaker 1:
When spreads are tight, we tend to reduce the risk. And when spreads are wide, we tend to add more risk because we're thinking we're getting paid more to take that risk. Um, it seems a fairly obvious point, but it actually is very difficult to do in practise and and it and to actually create that long term return for the portfolio. We can also add further risk because we have a gearing facility as well, which we also add in further risk when we decide to draw up on the gearing facility. So,

Speaker 1:
at times when spreads are wide, we draw up on that, and when they're not so wide, we we we pay that down, so I'll give you for instance, um, back in the, uh, in in September, there was the, uh the emergency budgets under the Liz Truss government, there was a very significant volatility in fixed income assets. Um, that was a great time to be buying fixed income. Very good quality, fixed income, very low risk at extremely attractive pricing.

Speaker 1:
So we were buying those, and we were drawing upon that gearing facility. We have a 25 million gearing facility, I should add. We were drawing upon that facility to buy very attractively priced assets. Um, since then, through the end of last year and going into this year, um, those assets have, um, have performed extremely well, so we've been selling them down as a good profit.

Speaker 1:
And with the proceeds, we reduced that gearing facility. But we've kept the ability to draw upon that going forward. So I think it's very important to your to your question is we have the ability to take advantage of any any volatility in markets going looking forward. So the

Speaker 0:
gearing, you could say, is opportunistic gearing. So an opportunity comes up. Yeah, very much so. Very much so. And any other episodes, like the September Mini budget

Speaker 0:
that you could point to.

Speaker 1:
Um, well, I mean, I mean, going back to the the covid crisis itself. Um, we we were very, um, uh, low in risk going into that crisis. And certainly we weren't predicting it. I don't think anyone was, but at that time, spreads were very, very tight. Um, so we didn't see a great deal of value in taking risk further down the credit spectrum.

Speaker 1:
So we were running with relatively low risk. And that gave us a great position going into the covid crisis as spreads widened out. So much to rotate into more yield product, which is exactly what we did

Speaker 0:
and stay with the lower risk of 76% of leaving investment grades. So when these

Speaker 0:
opportunities come up, how much does that reduce down? Would you say it's hard to say?

Speaker 1:
So we we we would we would never increase our investment grades, uh, part portion to less than 70%. Um, so we are running with a relatively cautious positioning.

Speaker 1:
Um, we think investment grade is looking very attractive right now. Um, and because it is well positioned, um, within the current economic environment, it it has a relatively low risk of defaults. And there are still, uh, sections of that investment grade market are showing very attractive returns historically,

Speaker 0:
and we've touched on the dividend. But could you go over what the current yield is on the trust and incorporate Sonia into that? Because it's more about a forward looking

Speaker 1:
yield? Yes, yes. So the the the the issue is we We've got a backward looking yield, which is based upon Sonia, as it was last year. Clearly, it's been increasing, so Sonia rights now is just below where the Bank of England base rates are. So the Bank of England base rate is 4.5%.

Speaker 1:
Sonia is about, uh, 4.4% and we're paying 4% over that. So if you look at a forward looking basis where our dividend is going to be looking forward, it's going to be 8.4% and it will increase at when the Bank of England increases their rates as well.

Speaker 0:
So when it comes to the the net asset value of the portfolio, how do you manage volatility? How does that work there?

Speaker 1:
Well, I think the volatility of the, uh investment trust is relatively low. And I think this goes back to the point I made earlier that we have relatively low risk in terms of, uh, interest rate risk, low duration and relatively low credit risk, because we have this investment grade portfolio. So when you put those together, we have a relatively low volatility in the net asset value.

Speaker 1:
And if you compare that to other public fixed income indices, it compares extremely well because in times when high duration indices, which generally are an investment grade, indices sell off. Well, we don't because we have that low duration.

Speaker 1:
Conversely, when you see some volatility in the more risky assets, the high yield assets they have, uh, they they sell off when you have periods of economic. Um uh, recession. Um, we don't see that either, because we have a better quality portfolio. So we have a relatively low net asset value volatility.

Speaker 0:
And when this is reflected into the share price, how do you manage the the discount that it that may trade off?

Speaker 1:
So

Speaker 1:
So the shares. Um, we we we have a discount mechanism control. So the the the board has put into a, uh in place a mechanism whereby we keep the the discount and the premium within around a few percentage points of the nav. So the idea is that we'll sell shares or buy back shares from the market in order to keep it within that range. And, um, I'm sure the, uh, the viewers will be able to see that we've We've generally kept within a fairly narrow bound within, uh to to that net asset value since the mechanism was put in place.

Speaker 0:
I I read something recently that the golden age of private equity might be over. But could we be seeing now a golden age of private credit?

Speaker 1:
What do you think? Well, that's a That's an interesting point. Uh, private credit is a is a great diversify. It's a great, um, asset class to have within a fixed income portfolio anyway, because it's it behaves differently from the public markets. And as I said, you can You can extract uh, a lot more value from from those, uh, from those assets.

Speaker 1:
If one is prepared to take the liquidity, which is great for an investment trust with that permanent capital. So I think it is. It's a very great. Uh, it's a great opportunity there to be looking at these these assets, Um, both because it has that additional yields, but also as the diversification within the fixed income markets.

Speaker 0:
Adam, thank you very much. It's a great place to leave it.

Speaker 1:
Great. Thank you.