M&G CREDIT INCOME INVESTMENT TRUST PLC The Company holds an investment in M&G European Loan Fund which is managed by M&G Investment Management Limited. At the year end this was valued at GBP17,287,306 (31.12.2019: GBP14,018,558) and represented 11.98% (31.12.2019: 10.81%) of the Company's investment portfolio.
The Directors of the Company are related parties. The details of the fees payable to Directors and details of Directors' shareholdings are given in the Directors' Remuneration Report in the full annual report.
14 Financial instruments
In pursuing the Company's objectives, the Company accepts market price risk and interest rate risk, in relation to the portfolio of investments. Since the Company's investment objectives are to deliver returns over the long term, transactions with the sole intention of realising short-term returns are not undertaken.
The quantitative data disclosed is representative of the Company's exposure to risk throughout the year.
The AIFM attempts to gain the best and most consistent returns for clients via the following: ? a bottom-up approach, centred around a detailed evaluation of individual investments; and ? diversification across issuer, to minimise the impact of default.
Portfolio management decisions are based on an in-house credit assessment and instrument rating which is carried out by the AIFM's credit analysts.
Market risk
Market risk embodies the potential for both losses and gains and includes foreign currency risk, interest rate risk and price risk, which are discussed in detail under separate headings within this note.
Market risk arises mainly from uncertainty about future values of financial instruments influenced by other price, currency and interest rate movements. It represents the potential loss the Company may suffer through holding market positions in investments in the face of market movements.
Management of market risk
The Board meets formally at least four times a year with the Investment Manager to review, inter alia, the Company's strategy and performance, the composition of the investment portfolio and the management of risk. The investment management team has responsibility for monitoring the portfolio, which is selected in accordance with the Company's investment objective and seeks to ensure that any investments meet an acceptable risk/reward profile.
Market risk arising from foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
The fair values of the Company's monetary items which have foreign currency exposure at 31 December 2020 are shown below.
Australian Euro Australian Euro
US dollar US dollar
dollar 2020 dollar 2019
2020 2019
2020 2019
GBP'000 GBP'000 GBP'000 GBP'000
GBP'000 GBP'000
Debtors 18 163 61 - 80 8
Investments 4,198 15,710 14,802 - 9,434 6,582
Total foreign currency exposure on net monetary items 4,216 15,873 14,863 - 9,514 6,590 The Company is exposed to risks that the exchange rate of its reporting currencies relative to other currencies may change in a manner which has an adverse effect on the value of the portion of the Company's assets which are denominated in currencies other than their own currencies. Typically, the fund manager will substantially hedge these risks using foreign exchange forward contracts.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to Shareholders to an increase of or decrease of 5% in exchange rates. A 5% increase in the value of the fund's currency exposure would have the effect of increasing the return and net assets by GBP1,727,000 (2019: GBP797,000). A 5% decrease would have an equal and opposite effect.
Increase in Decrease in Increase in Decrease in
exchange rates exchange rates exchange rates exchange rates
2020 2020 2019 2019
GBP'000 GBP'000 GBP'000 GBP'000
Income statement
Revenue return (9) 9 (4) 4
Capital return 1,736 (1,736) 801 (801)
Total change to net return on ordinary 1,727 (1,727) 797 (797)
activities after tax
Change to net assets attributable to 1,727 (1,727) 797 (797)
shareholders Market risk arising from interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The Company's investments may be subject to interest rate risk. When interest rates decline, the value of fixed rate obligations can be expected to rise, and conversely when interest rates rise, the value of fixed-rate obligations can be expected to decline. In general, if prevailing interest rates fall significantly below the interest rates on any Debt Investments held by the Company, such investments are more likely to be the subject of prepayments than if prevailing rates remain at or above the rates borne by such investments.
Since the global financial crash there has been a sustained period of very low levels of central bank-set interest rates. It is expected that central banks will raise their interest rates in the near future. For investments that have a fixed rate of return, any such interest rate rises may negatively impact the returns on the investments and the returns realised by the investors.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to shareholders to an increase or decrease of 2% in interest rates. As at 31 December 2020 the prevailing base rate was 0.1%. The decrease in interest rates illustrated below of 2% is reasonably possible based on observation of market conditions and historic trends. The sensitivity analysis is based on the Company's bond holdings at each reporting date, with all other variables held constant.
Decrease in Decrease in
interest rates Increase in interest interest rates Increase in interest
rates 2020 rates 2019
2020 2019
GBP'000 GBP'000
GBP'000 GBP'000
Income statement
Revenue return 15 (15) 13 (13)
Capital return 2,947 (2,947) 2,633 (2,633)
Total change to net return on ordinary 2,962 (2,962) 2,647 (2,647)
activities after tax
Change to net assets attributable to 2,962 (2,962) 2,647 (2,647)
shareholders Market risk arising from other price risk
Market price risk includes changes in market prices, other than those arising from interest rate risk, which may affect the value of investments.
The following table illustrates the sensitivity of revenue and capital return on ordinary activities after tax and net assets attributable to shareholders to an increase or decrease of 10% in the fair value of the Company's investments. This level of change is considered to be reasonably possible based on observation of market conditions and historical trends. The sensitivity analysis is based on the Company's investments at each reporting date, with all other variables held constant.
Increase
in Increase in fair
Decrease in fair value Decrease in fair
fair value 2020 value 2019
value 2019
GBP'000 GBP'000
2020 GBP'000
GBP'000
Income statement
Revenue return (70) 70 (63) 63
Capital return 14,009 (14,009) 12,679 (12,679)
Total change to net return on ordinary 13,939 (13,939) 2,616 (2,616)
activities after tax
Change to net assets attributable to 13,939 (13,939) 2,616 (2,616)
shareholders Liquidity risk
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