Europe has potential
Turning to current views, we quite like what European credit can potentially offer - good diversification qualities and a potential yield pick-up. Although only incrementally, up until very recently European credit traded at a higher spread compared to US credit. In our view, we suggest this modest spread differential offers attractive yield opportunities for investors seeking enhanced returns in a relatively stable credit environment.
European credit also serves as a valuable global diversifier. Despite its potential, it remains internationally under-invested. Consequently, this provides an opportunity for investors to gain exposure to a market where demand/supply dynamics are more in favour of investors.
Finally, while the US credit markets are rightly known for their uniformity (ie based on a single set of laws and rules), the European credit market presents a different landscape. Europe’s market is characterised by its fragmentation, with one monetary policy (the European Central Bank’s!) governing 22 nations, each with its own fiscal rules and regulatory frameworks. This diversity can create unique investment opportunities, in our view, as discrepancies and inefficiencies across different national markets can be leveraged by active credit investors to achieve superior returns.
Fund performance
The fund follows a patient, value based, bottom-up unconstrained approach to multi-asset credit with a performance target of 1m Euribor + 3-5% per annum, gross of fees over a cycle (see Figure 4, below). In our opinion, the opportunity set remains broad with access to public credit markets including investment grade, high yield (with some limits) and occasionally asset backed securities (ABS). As mentioned, the fund is credit focused while trying to minimise interest rate and currency exposure. Duration is hedged to zero and non-EUR exposure is hedged to EUR. Furthermore, diversification is used as a key risk management tool to reduce downside exposure and volatility (currently c.550 issues). In aggregate we think these features results in the fund being an attractive risk and style diversifier for sophisticated fixed income investors.
Fund activity
Themes
- In recent weeks, we have marginally decreased exposure to defensive assets and increased exposure to selective industrial names.
- That said, the fund’s exposure to defensive assets remains high vs. historical levels and we continue to diversify fund allocation through exposure to senior financials, covered bonds and AAA-rated securitised bonds.
- Although overall risk levels in the fund have continued to decrease, in terms of the spread duration contribution, this metric has marginally increased from 2.29 years to 2.33 years.
Trades and positioning
- In terms of derisking, we have reduced exposure to EUR and GBP denominated industrials, following strong performance, eg Sappi Papier (EUR, Basic Industry), Vodafone (GBP, Telecommunications) and Deuce HoldCo (GBP, Leisure).
- In the secondary sector, we increased exposure to USD and EUR denominated Industrials, which now appear attractive on a relative value basis, eg Foundry (USD, Technology & Electronics), Owens & Minor (USD, Healthcare) and OI Europe (EUR, Capital goods). Additionally, we remained active in the primary market, purchasing EUR denominated financials and USD denominated Industrial bonds, which came to market at perceived attractive levels.
- We also switched into bonds where we held existing exposure, based on what we saw as more competitive levels across other areas of the capital structure. Eg switching from shorter dated bonds issued by Celanese Holdings into its longer dated bonds.
Figure 4. M&G Total Return Credit Investment Fund performance at March 31 2025 (EUR A Acc. Share class, gross of fees)
Past performance is not guide to future performance.