This week’s slump in global stockmarkets has been a bit of a shocker for many investors. Some might see the fallback as a great short-term opportunity to ‘Buy the Dip’ and trade volatility, as The Armchair Trader explained earlier this week. However, some investors, maybe because they are on the beach, or just don’t want the hassle of being on alert for trading opportunities, might just prefer to park their money somewhere safe and unexciting until all the fuss dies away.
One such option is a fixed income fund. It’s no crime not to enjoy the ups and downs of equity markets and fixed income funds have this year been giving proper real rate returns, ahead of inflation after fees, without that sickening feeling in your stomach that you get when you are strapped into a fast rollercoaster. With high interest rates, cash has been attractive, but some investors have been encouraged to climb a few rungs up the risk ladder by diversifying into gilts and corporate bonds.
The GBP226m CVC Income & Growth [LON:CVCG] fund is CVC Capital Partners’, a leading global private markets manager focused on private equity, secondaries, credit and infrastructure with EUR193bn of assets under management, European credit opportunities investment vehicle.
Opportunity in senior secured loans and sub-investment grade
It’s been listed as an investment trust since 2013, is currently the largest LSE-traded closed-ended investment company focused on opportunities in senior secured loans and other sub-investment grade corporate credit. Part of the Association of Investment Companies’ (AIC) Debt – Loans & Bonds sector in which the fund is listed twice, under both its Sterling and Euro tranches.
The investment manager is CVC Credit Partners, the debt arm of private equity house CVC Credit Partners which was created as a standalone investment manager in 2006 and garnered a reputation of specialising in sub-investment grade European credit.
CVC markets the fund as the ‘entry-level’ fund for investors seeking exposure to sub-investment grade credit and looking for both income and growth from a fixed income perspective, and the manger Pieter Staelens’ objective is to invest predominantly in debt instruments issued by companies domiciled, or with material operations, in Western Europe across various industries.
CVC Income & Growth is a fully-invested fund
The fund’s investments are focused on the senior secured obligations of such companies, but investments are also made across the capital structure of such companies. The fund pursues its investment policy by investing all of its assets, save for a working capital balance, in the fund.
Staelens joined CVC Credit in 2018 from Janus Henderson Investors in London where he was involved in various High Yield strategies and a credit long/short strategy. Prior to this, Staelens was at James Caird Asset Management, CQS, Remus Partners and Bear Stearns.
As the Investment Vehicle Manager, CVC Credit Partners employs a research-led approach to investment, systematically monitoring more than 4,000 companies. The CVC group network and the Investment Vehicle Manager’s relationships with banks, private equity sponsors and institutional investors give its team of credit experts unique access to investment opportunities.
All-weather proposal
The fund is an all-weather proposal. Over its 14-years it has made money in zero-to-low interest rate environments. Since the world’s central bankers started putting up interest rates, to a historic point over the past two decades, it is still making money in an environment where rates are now considerably higher and the yield-to-maturity on the fund’s portfolio is now in the high teens, so investors get equity-like returns to take on credit risk. The combination of downside protection offered by the senior secured position in the capital structure of investee companies provides an ideal entry point for investors looking to generate both income and growth. Also, unlike a lot of bond funds the fund also gives access to leveraged loans.
For those new to the asset class, leveraged loans are like high yield bonds but with two important differences. First, leveraged loans have floating rate coupons, meaning they go up and down in line with base interest rates set by central banks. In times when inflation is high and central banks increase base interest rates, investing in floating rate helps to protect an investor’s assets.
Second, leveraged loans are typically secured and offer greater protection in the event of an underlying company not being able to repay, known as a default, whereas most high yield bonds are unsecured and less protected. This effectively means that the owners of leveraged loans are first in line to recover their investments should a company not be able to repay. Historically, leveraged loan investors have seen considerably higher recovery rates than high yield bond investors in the event of a default.
Top performer in sector over all time periods
The fund (in its GBP format) is top performer in sector over five-years with +53.3% return (on a share price total return basis to 5th August) against a sector average of 28.5%. There are nine funds in the sector. Over the last year the fund is also top in sector with a +26.1% return against a sector average of +17.9%. Over the longer-term, CVC Income & Growth is also the top fund with a +93.2% against a sector average of +35.2%.
The fund has an ongoing charge of 1.82% and a five-year dividend growth of 12.13% against a sector average of 4.2% and a dividend yield of 8.4%. The fund is trading at a discount-to-premium of -0.64%.
Top five holdings as at 30th June 2024
| Investment | Sector | Region | Weighting |
| Doncasters | Diversified/Conglomerate Manufacturers | UK | 4.5% |
| Ekattera | Food & Beverage | Netherlands | 4.2% |
| Keter | Consumer Goods | Netherlands | 3.4% |
| Weller | Consumer Goods | UK | 2.7% |
| Colouroz | Chemicals | Germany | 2.5% |
Source: CVC Credit Partners
CVC Income & Growth boasts a compelling investment proposition for those seeking income and growth with a degree of protection. Its consistent outperformance, exposure to leveraged loans, and focus on senior secured debt offer a compelling alternative to traditional fixed income options. However, the credit cycle is at a interesting junction at the moment, but CVC Income & Growth is a good entry-level fund to the asset class.
