M&G Credit trust rotates £15m into private as public spreads stay tight

M&G Credit Income Investment Trust put about £15m into private credit in the six months to 30 June, lifting funded private assets to 52.44 per cent from 46.42 per cent and making private loans the majority of its funded book. The manager describes it as a meaningful rotation out of public credit: public holdings sold at gains, proceeds recycled into private loans, portfolio yield the stated prize. Yet the trust returned 2.36 per cent on net asset value against 3.82 per cent for SONIA plus 4 per cent, so the rotation has not yet paid for itself, and the £80m it holds for future dislocations says the manager expects better prices than these.

The reasoning is familiar: spreads remain close to historically tight levels and, on the manager's own account, do not adequately compensate for macroeconomic, geopolitical and policy risk, while private lending, priced off a lender's appraisal rather than a dealer's screen, is where the yield is supposed to be. Chairman David Simpson framed the portfolio as defensively positioned into tight spreads and geopolitical uncertainty, with the manager still finding selective opportunities across public and private markets.

That gap between the trust's 2.36 per cent and the benchmark's 3.82 per cent is the cost of the trade rather than an argument against it, because a yield advantage built by originating private loans accrues over quarters and six months of it shows up mainly as a larger private book instead of a better headline return. The coverage gives no net asset value for the trust, so the six-point shift cannot be split between new deployment and the gains realised on the public book; the trust's stated criteria—resilient income, defensible cash flows—are the ones that matter when a position's price comes from the manager's own valuation rather than a market.

The capacity itself is backed by specific instruments: roughly £40m in high-quality asset-backed securities funds and an undrawn £40m revolving credit facility, which the trust names as its means of taking advantage of future dislocations. As this publication has argued, the ABS market is where private credit increasingly finds its exit; here the same structure serves as a listed trust's parking place for cash it has not yet committed.

The size is as revealing as the direction. Fifteen million is small enough that the rotation barely registers in this year's running return, and the roughly £80m the trust counts as dislocation capacity suggests the manager would rather buy a wider market than this one. Closed-end capital is the enabling fact: shareholders cannot force the sale of the underlying loans in a bad week, which is precisely the property that lets a trust with a live revolver show up when spreads widen.

A second six-point move would carry the funded private allocation past 58 per cent and turn a credit fund with a private sleeve into something closer to a private credit fund with a liquid one.