Being patient = Key when identifying value in credit. M&G Total Return Credit Investment Fund

Are we being compensated for risk?

As value-based investors, we seek to identify attractive opportunities where we conclude that the price and fundamental credit risks of a security are misaligned. As the price of a security rallies over time towards its fair value, or becomes overvalued, we will look to sell. The proceeds will be reinvested in what we consider as other attractive opportunities. If none are apparent, we will hold liquid and so-called defensive assets until we see opportunities emerge (see Figure 1). These can be cash, money market funds, Treasury Bills, short-dated government bonds, and AAA-rated Asset Backed Securities (ABS) or Residential Mortgage Backed Securities (RMBS). Crucially, in the absence of compelling opportunities, we will not chase marginal ones.

And this is what we see today, with a few exceptions. For example, although the attractiveness of financial bonds has somewhat diminished compared to 12-24 months ago, there’s still some value in this sector, particularly within banks. Currently, we prefer the senior part of a bank’s capital structure: it offers increased protection against market volatility for a small reduction in spread compared to junior paper.

Lately, fund exposure to Financials and Real Estate have been supportive of performance, where higher beta sectors have outperformed as credit spreads compressed across rating bands and capital structures.

However, true to our value-based bottom up approach, we have used this market strength to further de-risk where spreads are approaching historical tights, patiently waiting for opportunities to arise. In this regard, portfolio spread duration is relatively low at around 2.33 years. 

Figure 1. How our allocation to liquid/’defensive’ assets responds to changing valuations – in this case high yield

Source M&G, ICE BofA Indices (Ref. HEAD) asset swap spreads as at 28 February 2025. 

Disney bond case study

A good example when our credit experts cited an opportunity, because fundamental risks and market pricing were “out of alignment”, was on Disney’s 30 year bond - issued by the US entertainment company in 2019 at a coupon of 2.75%. We added this bond to our portfolio as it suffered an ‘episodic’¹ event (early 2020, Covid lockdowns begin) and there was a sharp fall in its price presenting what we saw as a value opportunity.

¹We think of episodes as investment opportunities created by phases of emotional and behavioural investor bias. A common episodic dynamic is investor panic and a focus on the short term in periods of market stress. They can also manifest themselves as periods of investor complacency or excitement. Episodes involve rapid movements in asset prices that we think are inconsistent with economic fundamentals – in our view, these can create opportunities to make (usually short-term) tactical changes to asset allocations.

As shown in Figure 3, Disney’s 2.75% bond rebounded during the remainder of 2020 and we exited our position by November of that year following an improvement in the company’s fortunes.

Figure 3. Disney case study: episodic market event 2020

Source: M&G, Bloomberg, Disney 2.75 01/09/2049 US Dollar bond. Price data as at 31 August 2021  

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.

Source: M&G, as at 31 March 2025. ¹This is an institutional share class launched 4^th March 2013 – other share classes are available. The Annual Charge for the Euro A Institutional share class is 0.45% p.a. This will affect the return investors will receive. 

Figure 5. M&G Total Return Credit Investment Fund performance at March 31 2025 (EUR A Acc. Share class, net of fees)

Past performance is not guide to future performance.

Source: M&G, as at 31 March 2025. ¹This is an institutional share class launched 4^th March 2013 – other share classes are available. The Annual Charge for the Euro A Institutional share class is 0.45% p.a. This will affect the return investors will receive.

Figure 6. M&G Total Return Credit Investment Fund performance at March 31 2025 (Proxy long term USD, gross of fees)

Past performance is not guide to future performance.

Source: M&G, as at 31 March 2025. ¹This is an institutional share class launched 27th September 2021, other share classes are available, USD Proxy track record performance calculated using the base EUR A share class hedged into USD using historic foreign exchange rates (source: Bloomberg) for the period inception to September 2021, and thereafter USD A Acc Hedged share class; ²from inception of track record until retirement of US LIBOR measure 1 July 2021 and replacement with SOFR. Inception date of strategy, 4 March 2013. The Annual Charge for the USD A Acc share class is 0.45% p.a. This will affect the return investors will receive.

Figure 7. M&G Total Return Credit Investment Fund performance at March 31 2025 (Proxy long term USD, net of fees)

Past performance is not guide to future performance.

Source: M&G as at 31 March 2025. ¹This is an institutional share class launched 27th September 2021, other share classes are available, USD Proxy track record performance calculated using the base EUR A share class hedged into USD using historic foreign exchange rates (source: Bloomberg) for the period inception to September 2021, and thereafter USD A Acc Hedged share class; ²from inception of track record until retirement of US LIBOR measure 1 July 2021 and replacement with SOFR. Inception date of strategy, 4 March 2013. The Annual Charge for the USD A Acc share class is 0.45% p.a. This will affect the return investors will receive.