M&G Corporate Bond Fund

Transcription

1 Fund Questionnaire M&G Corporate Bond Fund A conservative blue chip corporate bond fund that aims to provide income and capital growth At least 70% of the fund is invested in sterling-denominated corporate debt instruments Flexibility to invest a portion of the fund in high yield or government bonds Portfolio constructed through a combination of top-down and bottom-up strategies The key to successful corporate bond investing lies in avoiding the losers rather than picking the winners Key competitive advantage in proprietary credit research, based on the work of one of Europe s largest teams of credit analysts

2 Contents Fund management team Portfolio construction Risk management Key fund facts Additional information Company details Dealing Risk management Compliance Other

3 Fund management team The management team Richard Woolnough is the fund manager of the M&G Corporate Bond Fund and Ben Lord is the deputy manager. Richard has managed the fund since 20 February Fund Manager: Richard Woolnough Richard Woolnough joined M&G in January 2004 and is fund manager of the M&G Optimal Income Fund, the M&G Corporate Bond Fund and the M&G Strategic Corporate Bond Fund, three of the company's flagship fixed interest funds. Richard began his career at Lloyds Merchant Bank in 1985, moving to Italian insurer Assicurazioni Generali two years later, followed by SG Warburg. In 1995, he became a fund manager at Old Mutual. Richard graduated from the London School of Economics with a BSc in economics. Deputy Fund Manager: Ben Lord Ben Lord joined M&G in 2007 and is the fund manager of the M&G UK Inflation Linked Corporate Bond Fund. Ben has also managed the M&G Global Corporate Bond Fund from launch in September 2013 and was appointed fund manager of the M&G Index Linked Bond Fund in July Ben previously worked at Gordian Knot as a credit analyst covering global financial institutions. He obtained an MA (Hons) from the University of Edinburgh and is a CFA charterholder. Team structure and responsibilities M&G Retail Fixed Interest team The fund managers are members of M&G s Retail Fixed Interest team. This focused team, based in our London office, is supported by dedicated resources, including a team of in-house public credit analysts, as well as investment specialists, fund managers assistants, dealers and risk specialists. Head of Retail Fixed Interest: Jim Leaviss Jim Leaviss joined M&G in 1997, and in addition to his role as Head of Retail Fixed Interest, he manages a number of funds. After graduating in 1992, Jim joined the Bank of England as an analyst of monetary statistics and the Public Sector Borrowing Requirement. He later moved within the Bank to become a gilt and money market trader, a position he occupied for three years. Jim graduated from Manchester University with a BA in economics. Experience of the team M&G has considerable experience in all sectors of the fixed interest universe and has been investing in the corporate bond market since 1994 when we introduced the first corporate bond fund in the UK, followed by the first high yield corporate bond fund in the UK in In 2010 we launched both the M&G UK and European Inflation Linked Corporate Bond funds, thought to be the first of their kind and further cementing our reputation for innovation.

4 Investment objective and strategy Top-down macro views impact fund positioning and asset allocation Emphasis on monitoring and managing credit default risk Proprietary credit research Investment objective The fund aims to provide income and capital growth. Investment strategy The fund is managed to maximise total return through investment of at least 70% of the fund in sterling-denominated corporate debt. Fund Manager Richard Woolnough also has the flexibility to invest in high yield corporate bonds, government bonds and other public securities, although typically a minimum of 80% of the fund will always be invested in investment grade corporate bonds in line with the requirements of the IA Sterling Corporate Bond sector. The investment strategy of the fund is based on the principle that returns in the corporate bond market are driven by a combination of macroeconomic, asset, sector and stock-level factors. As different factors dominate returns at different stages of the economic cycle, the manager therefore applies a dynamic investment approach. He changes the blend of duration and credit exposure in the portfolio to give appropriate weight to those drivers of returns at each stage of the economic cycle. The fund is managed without reference to a benchmark. This flexibility gives the manager greater investment freedom and enables him to take a high-conviction approach when selecting credits for the portfolio. Diversification is an essential element of the fund s investment strategy given the potentially large impact on performance of individual bond defaults. The fund therefore aims to be sufficiently diversified across different issuers. Diversification across different industries is also crucial. Downgrades and defaults tend to be concentrated within individual sectors, so diversification across a wide range of sectors helps to limit losses should the fundamentals of any particular sector deteriorate. The following diagram illustrates the fund s investment style, which is a combination of top-down and bottom-up analysis. Source: M&G

5 Internal vs external analysis The fund manager is assisted in selecting individual credits by our in-house team of independent analysts, which covers sovereign bonds and financial issues as well as non-financial corporate bonds (both investment grade and high yield). We believe the proprietary credit analysis provided by this team is a key competitive advantage for M&G in fixed interest investment. Our London-based researchers are dedicated, career credit analysts, many of whom have worked in the industries for which they now have research responsibility. Others have gained experience at credit rating agencies. All are career analysts with expertise in their specialist sectors or countries. The work of the public credit analysts focuses on business risk (considering areas such as management, market position and product strategy), financial risk (for example, cashflow, debt, profit margins) and bond structure and covenants. This research is proprietary and not available externally. In addition to their daily contact with the London-based analysts, the fund manager also has regular interaction with Prudential s highly regarded credit research team based in Chicago. PPM America is a well-resourced and established fixed income fund manager; a formalised relationship gives M&G s fund managers access to the views and proprietary research of their team of on-the-ground analysts. Additionally, our fund managers are able to meet the team in Chicago on a quarterly basis. The fund management team manages a wide range of specialised portfolios including portfolios focused on all the main bond market sectors, such as government bonds, investment grade credit, high yield, emerging markets and inflation-linked bonds as well as running global and strategic bond funds. As a result, the team consists of individuals with expertise spanning the fixed income asset classes. This provides another valuable input to the investment process, with debate, challenge and idea sharing across the team encouraged, helping to generate a large number of investment ideas. While the majority of the investment analysis is generated internally, the team does meet with sell-side analysts, economists and strategists from government agencies and investment banks. Company visits are vital For newly researched credits, our analysts will generally meet company management, often at their premises, before producing a comprehensive note, including an event risk assessment, worst-case rating, momentum indicators and, finally, relative valuation. As we invest in large amounts of corporate bonds, companies are usually willing to meet us to discuss our concerns. Often this will involve an on-site due-diligence visit, as we believe this is vital in order to comprehend the workings of a company, its staff and other assets. We will generally not invest in a credit unless we have spoken to the issuing company beforehand. Valuation models and techniques in stock selection Internal M&G credit ratings are given to the vast majority of issuers in the investment grade and high yield sterling and euro corporate bond markets by our analysts in London and to all those held in the fund. The work of the public credit analysts focuses on business risk (considering areas such as management, market position and product strategy), financial risk (eg, cashflow, debt, profit margins) and bond structure and covenants. This research is proprietary and not available externally. Analysts would normally speak to a company s management, assess its business model, examine trends in financial statements and look in-depth at the sector in which the company operates. A thorough understanding of each bond s structure and covenants is also critical. For example, change of control covenants need to be understood thoroughly as they protect bond investors from the threat of leveraged buyouts, which can have a very damaging effect on bond prices. Formal, comprehensive sector reviews take place twice a year. These are conducted on an interactive basis, providing the fund manager with insight into the prospects for all market sectors.

6 Portfolio construction Aim to maximise total returns within specific risk controls Strategy formulated in terms of duration and yield curve positioning Team approach The process In constructing the portfolio, the manager decides the proportions to be held in the various asset classes investment grade corporate bonds, high yield bonds and government bonds as well as which individual bonds to own. Whilst there is a full range of research, dealing and other support available to Richard, he retains ultimate responsibility for all portfolio construction decisions. A key advantage of the small size of the fund management team is that the manager is able to act quickly when investment opportunities arise, with no committee decision-taking or centrally approved buy and sell lists. Richard forms a macroeconomic overview for the fund, comparing his and the team s views on factors such as economic growth, inflation and the yield curve, with the market s expectations. In light of this analysis, he will, for example, lengthen or shorten the fund s duration depending on his outlook for interest rates. The asset allocation and sector positioning of the portfolio are also influenced by the manager s macroeconomic view. He may, for instance, increase or decrease the amount of credit risk within the portfolio in response to his view of the health of the economy and hence the outlook for corporate profitability. The fund is not constrained to investing purely in investment grade debt. Richard may emphasise higher quality bonds if he believes that default rates are likely to rise, or add lower-rated bonds if his view is that the outlook for the higher yielding area of the market is improving. Duration and credit risk drive bond returns The two main drivers of bond returns are duration and credit risk, and Richard aims to add value through taking active positions in both, relative to his peers, at the appropriate times. The relative importance of these factors varies at different stages of the cycle. Although not managed according to a benchmark, Richard will monitor the fund s positions relative to a comparable index. Corporate bonds offer an asymmetric return profile that is, with only limited upside but a potentially unlimited downside, for example in the event of a company default. In the manager s view, therefore, the key to successful corporate bond investing lies in avoiding the losers rather than picking the winners. Robust credit analysis is therefore essential to the management of the fund. Sell discipline Richard does not have a formal sell discipline, preferring constantly to reassess the valuations of all holdings in the portfolio. He considers selling a bond if the fundamental reasons for holding it are no longer valid, if he can see better opportunities elsewhere, or if the risks associated with holding it have increased to an unjustifiable level. M&G has a rigorous and formalised review process for credits perceived to have significant downside risk. Those thought to be at risk of at least a two-notch downgrade are placed on a to watch list. Also, any credits for which the relevant analyst feels there is a chance of default within the next 12 months are placed on an at risk list. This review process is designed to highlight in advance potential problems with individual credits, creating a discipline for the valuation and potential sale of the relevant bonds. The final investment decision, however, lies with the fund manager. If a bond has been put on a to watch or at risk list, it is highly unlikely that the position will be added to, although this does not make it compulsory to sell. The fund manager is also able to draw on the work of experts in distressed credit ( workout specialists). Their role is to analyse bonds that are close to, or in, default, and to determine whether it is beneficial to sell the bonds or to continue holding them through the restructuring process and realise their recovery value. These analysts often take an active part in the company s restructuring as well. At times, they will recommend holdings in bonds that they believe can benefit from restructuring.

7 Unconstrained approach The fund does not have a benchmark as we believe this would immediately impose a constraint on its management in effect, any deviation from the benchmark might be considered a risk. Within the portfolio, risk management is focused on absolute duration and credit exposures, and not relative to any specific benchmark. The fund s tracking error against a proxy benchmark index is monitored using a combination of M&G s proprietary risk modelling and Credit Delta, a risk management tool focusing on credit risk. There is, however, no specific tracking error target. We do not regard tracking error compared with a benchmark index as particularly meaningful because the index, being weighted by market capitalisation, is necessarily skewed towards the most indebted issuers in the market. Although the fund is not managed to a benchmark, there are internal guidelines that stipulate the maximum positions that may be taken in individual holdings. These are set out in the Risk Management section. Diversified issuers Richard aims to keep the fund well diversified by holding bonds from different issuers but the number of issuers and individual bonds held within the portfolio varies depending on the size of the portfolio and market conditions. Derivative usage As a wider powers fund under UCITS III, the M&G Corporate Bond Fund is eligible to use derivatives for investment purposes. Such derivatives may include government bond futures and credit default swaps (CDS). Government bond futures can be used as a way of quickly and efficiently adjusting the fund s duration, without having to buy or sell a potentially large amount of physical bonds. Similarly, CDS may be used as an efficient way of expressing a pure view on a company s creditworthiness without having to physically own the bonds, which could also mean being exposed to undesired duration risk. Currency forwards may also be used to hedge underlying currency exposures.

8 Risk management Managing risk is integral to the investment approach Fund is subject to investment guidelines and VaR limits Separate risk team provides ongoing analysis to assess fund s behaviour in various market scenarios Monitoring of investment risk Risk management for a fund is the responsibility of the fund managers. They are supported in this by an independent team of risk analysts and monitoring professionals. The Risk team is independent of the Investment Management team and provides investment risk analysis and monitoring across a broad spectrum of M&G fund management activities including fixed interest, multi-asset and structured fund mandates and investment vehicles. Since 2001 the Risk team has undertaken in-depth risk analysis on client funds that use derivative-based strategies. The team runs risk models that provide regular daily and monthly risk monitoring and analysis reports in order to determine whether the funds remain within their specified risk parameters. Risk analysis A team of risk analysts undertakes quantitative modelling and analysis, providing support and challenge to the investment management process. The funds are reviewed by the Risk Analysis team on a monthly basis, with a focus on their sensitivity to core market risk factors, sector and issuer/country concentration. The analysts pay particular attention to any derivative activity and any implied leverage or shorting. The team has reporting lines independent of the front office and report into the Group Risk Director. Risk monitoring The Risk Monitoring team is responsible for monitoring against risk limits, as required for those funds that have adopted full wider powers under UCITS regulations. The Risk Monitoring team reviews on a daily basis the funds VaR results and compares them with the prescribed limits. VaR limits for the funds have been established in line with the specific fund mandate; compliance/non-compliance with prescribed limits is reported to the fund managers and M&G s Compliance Monitoring unit. For the M&G Corporate Bond Fund, the lower VaR limit is 2.5% and upper limit is 13%, both on a 99% one-month basis. Risk management process The risk management process has several key objectives such as: To monitor each fund s overall risk position against specified risk limits established in line with its objectives and investment policy To provide effective risk analysis on portfolios including; - provision of portfolio risk analysis identifying key risk factor positioning - provision of risk sensitivities including VaR, stress test and scenario analysis To provide oversight for senior management that funds are being managed in line with mandates - highlighting key risks - ensuring that adequate debate on risks takes place between the fund managers and senior management team

9 To provide a further level of risk control, the fund manager employs a range of internal guidelines in terms of maximum positions for asset types and credit bands in addition to sector guidelines, as shown in the table below. Portfolio level Guideline Type of guideline Assets Investment grade corporate bonds % Sector Government bonds 0-20% Sector High yield bonds 0-20% Sector Risk limits VaR upper limit 11% Regulatory VaR lower limit 0% Regulatory Individual bonds Maximum AAA-BBB government bonds 20% Internal AAA-BBB corporate bonds 100% Internal BB and below 20% Internal Source: M&G. Please note: these are internal guidelines and subject to change Weekly performance review The fund s performance is reported on a weekly basis and discussed at the Retail Fixed Interest team s monthly performance meeting. Risk and performance are also reviewed and discussed at the quarterly Fixed Income Oversight Committee meetings attended by the fund manager and senior members of the M&G Retail business.

10 Key fund facts Fund name Fund legal structure M&G Corporate Bond Fund OEIC, incorporated in the UK Inception date 15 April 1994 Investment policy/strategy Fund currency Compliance regulation NAV calculation frequency NAV redemption frequency Jurisdictions where the fund is registered Financial services regulator Management company Investment manager Fund manager's name Fund manager's location Administrator/Custodian Registrar and Transfer Agent Dealing point Dealing frequency Pricing frequency Countries where registered for sale At least 70% of the fund is invested in sterling-denominated corporate debt instruments. The Fund s exposure to corporate debt may be gained through the use of derivatives. Derivatives may also be used for efficient portfolio management. Any currency exposures within the Fund may be managed by currency hedges into sterling. The fund may also invest in collective investment schemes, other transferable securities and other debt instruments (including corporate debt and government and public securities denominated in any currency), cash, near cash, other money market securities, warrants and other derivative instruments. GBP UCITS Daily Daily UK Financial Conduct Authority (FCA) M&G Securities Limited M&G Investment Management Limited Richard Woolnough London, UK State Street Bank and Trust Company International Financial Data Services (UK) Limited 12:00 UK time Daily, each UK business day Daily, each UK business day, 12:00 UK time UK, Germany, Austria, Spain, France, Italy, Luxembourg, Switzerland, Netherlands, Denmark, Finland, Norway, Sweden, Ireland, Belgium, Portugal, Korea, Chile. (Please note that the same share classes are not necessarily registered for sale in all countries). Share class Share type Management fees (% pa) Ongoing charge (%) Sedol code ISIN Mex ID Bloomberg ticker code Euro A Acc 1.25% 1.40% GB MGCBEA MGCPBAA LN Euro C Acc 0.50% 0.65% GB MGCBC MGCPBCA LN Sterling A Acc 1.00% 1.15% GB MGCBA MGCOBAA LN Sterling A Inc 1.00% 1.15% GB MGSHI MGSCORI LN Sterling I Acc 0.50% 0.65% B1YBRL5 GB00B1YBRL59 MGCBIA MGCBOIA LN Sterling I Inc 0.50% 0.65% B1YBRM6 GB00B1YBRM66 MGCBII MGCBOII LN Sterling R Acc 0.75% 0.90% B769ZK4 GB00B769ZK48 MGRATE MGCBSRA LN Sterling R Inc 0.75% 0.90% B7513S5 GB00B7513S58 MGPOBO MGCBSRI LN Sterling X Acc 1.00% 1.16% GB MGCXA MGCOBXA LN Sterling X Inc 1.00% 1.16% GB MGCXI MGCOBXI LN Source: M&G, as at 28 February Ongoing charge figures as at 31 December 2016.

11 Additional information Support available to the fund management team Our fund managers are ultimately responsible for all investment decisions. However, they have access to extensive investment resources: Investment specialists Public credit analysts (including work-out specialists) Macro specialists and economists Risk specialists Dealers In addition, support is provided by front, middle and back office departments including the following: Performance Analytics Investment Marketing Marketing Legal & Compliance Business Management This structure is intended to ensure that the management team is focused entirely on fund management. Fund manager responsbilities and focus The managers are fully committed to and focused on fund management activity. They have full responsibility for the investment performance of the funds under their management. As members of the M&G Retail Fixed Interest team, the managers are actively involved in the generation and discussion of investment ideas. They also communicate with clients invested in their funds, and occasionally meet analysts from rating agencies and external consultants. All other activities not directly related to fund management are undertaken by the support teams at M&G. Fund manager succession plan Our succession plan relies on the strength of the investment team and the common elements of our investment processes. All funds have a deputy fund manager who is fully aware of the way the portfolio is managed and its key positions. The deputy fund manager is also supported by the other fund managers and is fully qualified to take over management of the fund, should it be required. Company remuneration policy Internally, M&G has a strong and integrated set of compensation practices designed to reflect people s contribution as well as their output. The objective of M&G s approach to remuneration is to facilitate the achievement of business objectives. Central to this is the need to ensure that M&G can attract, retain and motivate the necessary calibre of talent required to deliver the business objectives. This in turn requires that the remuneration philosophy is flexible enough to respond to market changes, enhances the team-based culture, supports M&G values and delivers fair reward commensurate with the performance achieved. The remuneration structures and policies are designed to reward employees through the investment cycle. For the majority of retail fund managers, bonuses are primarily linked to the three-year investment performance of funds within their remit. The final bonus figure will be determined on a discretionary basis by management taking into account other factors such as net inflows over the year, contribution to the investment floor and wider business, client servicing, risk and compliance (both investment and business related). For a small number of senior retail fund managers there is also a link to the profitability of their franchise. An amount of the annual bonus will be delivered in cash. Processes then apply to ensure an appropriate proportion of their annual award is delivered in long-term form/ deferred. This approach ensures alignment with market and good business practice and is consistent with the direction of remuneration regulation. Sound risk management, appropriate alignment with business objectives and good governance are all critical in the ongoing management of these elements. These are achieved by appropriate oversight and review processes. M&G aims to provide individuals with the potential to earn at the upper quartile of market practice at a total compensation level for exceptional performance.

12 Fund manager stake in the investment management company As M&G is wholly owned by Prudential plc, our fund managers do not have a direct shareholding in the management company. They do, however, have a stake in the ownership of the company through M&G s long-term incentive plan, which combines phantom equity and options over phantom equity in M&G. The scheme is designed to provide a meaningful stake in the future growth of the value of the company to those who have a significant role to play in its development.

13 Company Questionnaire M&G Company details &G history M&G was founded under its original name of Municipal and General Securities in 1901 as the financial arm of a British engineering company. M&G revolutionised British finance in 1931 when it launched the first mutual fund for the general public. Since that time, the firm has concentrated on the management of investment funds. In 1999, M&G merged with Prudential plc, a leading international financial services group with more than 26 million customers worldwide. Based in London, M&G manages investment funds for its individual and institutional clients, and also acts as European investment manager for Prudential plc. M&G has funds under management with a total value of billion ( billion, US$327.2 billion) as at 31 December 2016, (including Prudential s long-term business funds), making it one of Europe s leading fund providers. Ownership structure M&G is wholly owned by Prudential plc, a UK-listed international financial services company. Source: M&G, 7 June 2016

14 Assets under management As at 31 December 2016, the total assets under management by M&G were billion. These are managed on behalf of retail, institutional and internal clients. Types of assets are shown in the following tables in sterling, euro and US dollar. Total assets under management as at 31 December 2016 Asset class million million US$ million Equity 57,675 67,567 71,267 Fixed Income 168, , ,592 Property 24,231 28,368 29,941 Cash 14,917 17,476 18,249 Total 264, , ,232 Source: M&G as at 31 December 2016 Total assets under management as at 31 December 2015 Asset class million million US$ million Equity 53,712 72,876 79,166 Fixed Income 156, , ,823 Property 23,370 31,708 34,445 Cash 12,381 16,799 18,249 Total 246, , ,683 Source: M&G as at 31 December 2015 Total assets under management as at 31 December 2014 Asset class million million US$ million Equity 64,009 82,479 99,806 Fixed Income 163, , ,784 Property 21,400 27,575 33,368 Cash 14,566 18,769 22,712 Other Total 263, , ,637 Source: M&G as at 31 December 2014

15 Organisational structure Source: M&G, 29 March 2017 Anne Richards was appointed Chief Executive of M&G Investments and executive director of Prudential plc in June Prior to this, Anne was Global Chief Investment Officer and Head of the EMEA region for Aberdeen Asset Management, a U.K. FTSE 100 listed company. Before joining Aberdeen in 2003 Anne was joint Managing Director and Chief Investment Officer of Edinburgh Fund Managers, a boutique investment company also listed on the UK stock exchange. Her investment career as a fund manager and analyst has spanned 24 years and included time with Mercury Asset Management, later MLIM, J P Morgan Investment Management and Alliance Capital. Before moving into investment management, Anne spent six years working as an engineer, including a spell as a research scientist at CERN. Anne has a degree in Electronics and Electrical Engineering from the University of Edinburgh and an MBA from INSEAD. Anne is also on the Board of Leaders of 2020 Women on Boards, a US organisation which aims to increase the proportion of women on corporate boards. From 2012 until February 2016, Anne was a non-executive director of Esure Group plc. Regulation The company is registered in the United Kingdom and registered as necessary in the other jurisdictions in which it operates. M&G Securties Limited (MGSL) and M&G Investment Management Limited are authorised and regulated by the Financial Conduct Authority (FCA). M&G, as part of its commitment to the FCA s principle of open and co-operative dealing with the regulator, holds regular meetings with the FCA to discuss all relevant matters. Investment ethos At M&G we are totally committed to increasing the real value of our customers wealth through active investment management based on consistent adherence to sound investment principles. M&G offers a wide range of investment solutions for retail and institutional clients, including fixed income, equity, multi-asset, property and other alternative strategies. Our culture is based on a shared set of values focusing on investment leadership, innovation and transparency. We believe that talented fund managers should be free to express their views with conviction, supported by a robust framework of portfolio construction and risk management. We are an investment-led business dedicated to the provision of excellent client service.

16 Competitive advantages M&G is a genuinely independent fund manager with no allied distribution network in the various markets in which it operates. We believe the main distinguishing feature that differentiates M&G from its competitors is its specialisation in an active bottom-up process, identifying those investments that will deliver superior returns for shareholders over the long term. In our view, M&G has several competitive advantages over its peers: M&G is specialised in the selection of securities and manages many funds with excellent profitability. Its active management is backed by a long track record in innovation and safety; M&G provides investors with a transparent and robust architecture of research, portfolio construction and risk processes; M&G enhances the freedom of its fund managers, investing in their talent and providing the necessary support to allow them to concentrate on their best investment ideas; Portfolio construction is assisted by specialised in-house research and a dedicated risk management and portfolio strategy team; M&G managers form a closely-knit team: based in a single location, the company s corporate culture stimulates debate and discussion to identify the most promising investment opportunities; M&G s size and presence across multiple markets enables the company to maintain excellent relationships with the management teams of the companies in which it invests. Corporate governance and stewardship M&G has clearly formulated ESG (environment, social, governance) policies and the approach stems directly from our founding values of integrity, security and prudence. These values remain as strong today as ever and drive our commitment to the well-being of our customers, employees, agents and the communities in which we operate. We have five corporate responsibility themes: Fair and transparent products meeting customer needs Best people for the best-performing business Protecting the environment Supporting local communities Accountability and governance At M&G we believe the long-term success of companies is supported by high standards of corporate governance, and that social and environmental factors can also have a meaningful impact on company performance. We expect well-managed businesses as a matter of course to embrace wider social and environmental issues in taking their businesses forward and find it helpful if they publish the guidelines they adopt in dealing with them. We look for a well-reasoned and practical approach and recognise that this can vary according to each company's circumstances. Responsible investment As environmental, social and governance factors are incorporated into our investment processes, everyone at M&G who is involved in investing shares in this responsibility. We also have individuals with specific responsibility for coordinating activity within each asset class. Finally, the M&G Responsible Investment Advisory Committee (RIAC) oversees the governance and management of responsible investment activities. The committee s members include representatives from each business unit involved in investment management as well as from the distribution teams. We produce an annual report 1 which outlines our stewardship activities over the year. In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the board of the company, which oversees the actions of its management. Investors in the company also play an important role in holding the board to account for the fulfilment of its responsibilities. Voting policy At M&G, an active voting policy is an integral part of our investment policy. By exercising our votes we seek to both add value and to protect our interests as shareholders. We have a long history of activism and we have a dedicated

17 Corporate Finance department that maintains an ongoing dialogue with the companies in which M&G invests. You can find our voting record on our website here. 2 We look to work with the management of companies we hold, and where we have a differing opinion, we will hold management accountable and/or work with them to understand our view point. Investee companies are monitored closely, both in terms of their performance for creating shareholder value and issues arising from how companies are directed and controlled. United Nations Principles for Responsible Investment (UNPRI) M&G is a signatory to the United Nations-backed Principles for Responsible Investment (UNPRI) and has long been an active advocate of responsible share ownership. We have a dedicated Corporate Finance and Stewardship team to oversee our stewardship of investee companies. As professional investors, our overriding obligation is to act in the best interests of our clients. Many factors affect the investment decisions we make in this regard, and we believe that it is our duty to consider all of them. Ensuring the proper governance of investee companies is always central to our thinking, and we believe that environmental and social issues should also be taken fully into account. The UNPRI initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. Further reading Both our voting record and the overall principles we adopt contained within our document, Issues Arising from Share Ownership 3 are available on our public website Please refer to the following link for further information on our approach to responsible investment: M&G Responsible Investment

18 Dealing Equities dealing Equity trades are executed on behalf of all fund managers by a central dealing desk, consisting of five dealers. The fund manager enters trade instructions on M&G s order management system. The instruction is checked for validity against any pre-trade compliance rules (including a restricted dealing list). If the trade is deemed acceptable then it will be sent to the dealing team. Deals are conducted in such a way as to maintain equality of treatment between all client funds. All funds for which a particular deal is being conducted will have their orders completely filled or will receive the same proportion of the stock available if it is not possible to satisfy the overall demand for the stock immediately. This is particularly important when a transaction is completed over a period of time and involves a number of differently priced deals. In these circumstances, stock will be allocated at the same average price to all client funds. Once the broker has confirmed the deal with the dealer the trade is sent electronically from the order management system to M&G s back office. The Quasar accounting system is connected to the trading system (OMS) by a real time interface. Trades are fed straight through to the accounting system as they are dealt and confirmed. Settlement of trades is also carried out using the Quasar system. All accounting records are maintained on Quasar in real time and the system supports production of daily asset valuations and unit prices as well as periodic accounting statements. M&G s dealing team may only deal with approved brokers (where both the risk and legal departments have approved the broker s terms of business and deemed them to be creditworthy). M&G does not use prime brokers. Fixed income dealing M&G s long-standing presence within fixed income markets has helped to establish value-adding relationships and forge a reputation in conduct of putting our clients interests first. The Fixed Income business has a central dealing team of five FCA approved dealers who coordinate trades across M&G s fund management teams to minimise transaction costs and ensure all clients are treated fairly. The dealers have a dedicated support team who liaise with M&G front and back office functions and externally with market counterparties to ensure all issues within the trade lifecycle are resolved in an efficient manner. The team is responsible for transacting a wide array of instruments including but not limited to, government bonds, investment grade and high yield corporates, ABS, emerging market debt as well as exchange-traded and OTC derivatives. Trade instruction and execution is via the front office order management system which includes an integrated compliance module to ensure instructions are within IA (Investment Association) restrictions. Counterparty credit limits are also in place and monitored by the dealers on an intra-day basis. The dealers use a benchmark of seeking three quotes per trade. If the dealer does not deem it appropriate to approach three counterparties due to the characteristics of an order, a rationale will be provided; responses are reviewed by the head of the desk as well as (in due course) Compliance and Internal Audit. Best execution M&G will take all reasonable steps to obtain, when executing orders, the best possible result for our clients, taking into account the following execution factors: price, cost, speed, assurance of execution/settlement, size, nature or any other consideration relevant to the execution of the order. In most cases, price (and size) will be the main factor(s) determining whether or not we will execute an order. The dealing desk executes orders with a variety of counterparties who are each under obligation to provide us with best execution too. The dealers will decide on the counterparty and/or the venue according to the requirements of each and every order. We take all reasonable steps to ensure that our order execution policy is properly applied. Consequently, our dealing processes are overseen by senior management who evaluate, on a periodic basis, the range of all the execution channels used to determine whether the best result has been achieved on a consistent basis or whether changes to our execution arrangements are needed. This oversight is monitored by our Compliance department. In addition, our order execution policy is reviewed annually.

19 Risk management Operational risk The board of MGSL is responsible for ensuring it has robust risk governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility. The board delegates responsibility for oversight of the investment management and operational activities carried out for the funds to two senior committees, namely the Retail Investment Committee (RIC) and the Retail Investment Operations Committee (RIOC). RIC maintains oversight of fund investment risks and RIOC maintains oversight of fund operational risks. The MGSL Board includes the following key representatives: MGSL Chief Executive Officer (Chair) MGSL Legal Director MGSL Compliance Director M&G Chief Operating Officer M&G Risk Director MAGIM Business Management Director MGSL delegates investment management responsibilities to MAGIM. The MAGIM Board is responsible for overall risk control and receives quarterly reports from all business units. The MAGIM Board delegates to the MAGIM Risk Committee responsibility for ensuring that all MAGIM business units establish and maintain appropriate systems for monitoring and controlling investment exposures. These business units are supported by several centralised functions: Compliance, Risk, Operations, Human Resources, Finance and Audit. On an annual basis each business unit presents its investment risk controls to the MAGIM Risk Committee for review and challenge, with specific reference to changes in process and control over the previous 12 months. Additionally, the committee, which meets on a monthly basis, is ultimately responsible for the fair value and new markets process. Fund level risk At the individual fund level, risk management is the responsibility of the relevant fund management team, supported by risk teams applicable to each asset class. M&G has two primary independent risk teams: the Portfolio Construction & Risk team (PCR) and the Risk Analysis team. The PCR team is devoted to monitoring equity strategies, whilst the Risk Analysis team focuses on fixed income, convertibles and multi-asset funds. The risk teams are independent of fund management and have different reporting lines. Their roles are consultative and they therefore do not impose decisions on the fund managers. Each quarter, risk results from all funds are reviewed by M&G s Investment Oversight Committee, which ensures each fund is managed in line with its investment objectives. The committee also provides senior management insight into how each fund is being managed in terms of the drivers of investment risk and performance, as well as acting in a supportive role to help fund managers in delivering performance. The oversight committee considers relevant risk metrics, fund positioning, performance attribution, trading activity and liquidity analysis, with any issues raised discussed with the relevant fund managers as required. They will then decide whether or not they are comfortable with the analysis and subsequent fund manager comments and hence, whether any further investigation and possible action are required. Business continuity Full disaster recovery procedures are in place at M&G and disaster recovery tests are carried out annually. The disaster recovery site is situated at Chelmsford with a separate site designated for file storage and systems back-up. We define a disaster recovery event as a situation that prevents access to our normal offices and requires the relocation of staff and/or systems. We define business continuity disruption as an event that causes a temporary interruption to our business processes. This disruption can be of varying scale and duration. The objectives of the M&G disaster recovery plans are to: Establish an effective organisational structure to manage a disaster affecting any M&G offices Ensure the safety and welfare of M&G staff affected by an incident

20 Ensure the rapid re-establishment of critical assets and business functions Ensure effective relations with the media and clients Organise internal communications with affected employees A nominated member of the M&G board has specific responsibility for the strategic development of company-wide business continuity and disaster recovery programmes. Day-to-day management of disaster recovery planning in M&G is the responsibility of the Information & Risk Management department. Each senior manager in M&G has responsibility for business continuity planning for their area or department. The FCA requires a specific level of business continuity and disaster recovery planning. To date it has not been necessary to activate the off-site Disaster Recovery site in Chelmsford. The plan is tested at least annually.

21 Compliance Compliance team The Chief Compliance Officer (CCO) leads, directs and manages the activity of the Compliance Department and retains overall accountability for Compliance services delivered. The CCO ensures that the Compliance Department actively supports the Business in delivering M&G s corporate strategy in a manner that is compliant with applicable laws, regulations, business standards, rules of conduct and established industry practices. The CCO reports to the M&G Chief Executive. The M&G Compliance Department comprises the following teams: Compliance Strategy and Regulatory Development Regulatory Liaison Compliance Advisory Central Compliance Financial Crime Compliance The Compliance Department, on a day-to-day basis, is responsible for overseeing the operation of the compliance framework, for undertaking key compliance activities and for providing assurance on whether Compliance policies and procedures are being complied with. The Compliance Department provides: Independent oversight over the the M&G regulated entities and third party outsourced operations through an agreed risk based Compliance Plan and Compliance Monitoring Plan; Ongoing advice, support and training to the business on Compliance matters and regulatory obligations and risks; Policies and procedures to support the business in meeting their obligations and managing their risks; Regular reporting to relevant boards and committees on the regulatory risk profile of the firm and results of Compliance oversight activities; Reporting to the FCA in line with FCA requirements; and Systems and controls to prevent the exposure of M&G and its customers to the threat of financial crime.

22 Other Custodian The custodian of M&G Retail funds is State Street (appointed by NatWest/RBS, the depositary). The depositary is responsible for the safekeeping of fund assets and has appointed State Street to act as custodian. However, the depositary remains responsible for the actions of the custodian and monitors its effectiveness and standing on an ongoing basis. Non-cash assets of the M&G funds are held in separate client accounts with the custodian, in the name of the depositary on behalf of each M&G fund. These assets are ring-fenced from the assets of both the custodian and depositary and are therefore protected from claims of the creditors of those entities. Counterparties Custodian State Street Depositary National Westminster Bank Registrar International Financial Data Services (UK) Auditor Ernst & Young The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. For Investment Professionals and Institutional Investors only. Not for onward distribution. No other persons should rely on any information contained within. For Switzerland: Distribution of this document in or from Switzerland is not permissible with the exception of the distribution to Qualified Investors according to the Swiss Collective Investment Schemes Act, the Swiss Collective Investment Schemes Ordinance and the respective Circular issued by the Swiss supervisory authority ("Qualified Investors"). Supplied for the use by the initial recipient (provided it is a Qualified Investor) only. In Spain the M&G Investment Funds are registered for public distribution under Art. 15 of Act 35/2003 on Collective Investment Schemes as follows: M&G Investment Funds (1) reg. no 390, M&G Investment Funds (2) reg. no 601, M&G Investment Funds (3) reg. no 391, M&G Investment Funds (5) reg. no 972, M&G Investment Funds (7) reg. no 541, M&G Investment Funds (9) reg. no 930, M&G Investment Funds (12) reg. no 1415, M&G Investment Funds (14), reg. no 1243, M&G Global Dividend Fund reg. no 713 M&G Dynamic Allocation Fund reg. no 843, M&G Global Macro Bond Fund reg. no 1056 and M&G Optimal Income Fund reg. no 522, M&G (Lux) Investment Funds 1 reg. no The collective investment schemes referred to in this document (the "Schemes") are open-ended investment companies with variable capital, incorporated in England and Wales in respect of M&G Investment Funds and in Luxembourg in respect of M&G (Lux) Investment Funds. In the Netherlands, all funds referred to are registered with the Dutch regulator, the AFM. This information is not an offer or solicitation of an offer for the purchase of investment shares in one of the Funds referred to herein. Purchases of a Fund should be based on the current Prospectus. The Instrument of Incorporation, Prospectus, Key Investor Information Document, annual or interim Investment Report and Financial Statements, are available free of charge, in paper form, from the ACD: M&G Securities Limited, Laurence Pountney Hill, London, EC4R 0HH, GB; or one of the following - M&G International Investments Limited, German branch, mainbuilding, Taunusanlage 19, Frankfurt am Main; the Austrian paying agent: Société Générale Vienna Branch, Zweigniederlassung Wien Prinz Eugen-Strasse, 8-10/5/Top 11 A-1040 Wien, Austria; the Luxembourg paying agent: Société Générale Bank & Trust SA, Centre operational 28-32, place de la Gare L-1616 Luxembourg; the Danish paying agent: Nordea Bank Danmark A/S Issuer Services, Securities Services, Hermes Hus, Helgeshøj Allé 33, Postbox 850, DK-0900, Copenhagen C, Denmark; Allfunds Bank, Calle Estafeta, No 6 Complejo Plaza de la Fuente, La Moraleja, 28109, Alcobendas, Madrid, Spain; M&G International Investments Limited, the French branch; from the French centralising agent of the Fund: RBC Investors Services Bank France; or from the Swedish paying agent: Nordea Bank AB (publ), Smålandsgatan 17, Stockholm, Sweden. For Switzerland, please refer to by M&G International Investments Switzerland AG, Talstrasse 66, 8001 Zurich or Société Générale, Paris, Zurich Branch, Talacker 50, P.O. Box 5070, 8021 Zurich, which acts as the Swiss representative of the Schemes (the "Swiss Representative") and acts as their Swiss paying agent. For Italy, they can also be obtained on the website: For Germany and Austria, copies of the Instrument of incorporation, annual or interim Investment Report, Financial Statements and Prospectus are available in English and the Prospectus and Key Investor Information Documents/s are available in German. Before subscribing investors should read the Prospectus, which includes investment risks relating to these funds. The information contained herein is not a substitute for independent advice.in Switzerland, this financial promotion is issued by M&G International Investments Switzerland AG, Talstrasse 66, 8001 Zurich, authorised and regulated by the Swiss Federal Financial Market Supervisory Authority; in the UK, by M&G Securities Limited (registered in England, No ) and, elsewhere, by M&G International Investments Ltd (registered in England, No ). Both M&G Securities Limited and M&G International Investments Ltd are authorised and regulated by the Financial Conduct Authority in the UK and have their registered offices at Laurence Pountney Hill, London EC4R 0HH. M&G International Investments Ltd also has a branch located in France, 6 rue Lamennais 34, Paris 75008, registered on the Trade Register of Paris, No and a branch in Spain, with corporate domicile at Plaza de Colón 2, Torre II, Planta 14, 28046, Madrid, registered with the Commercial Registry of Madrid under Volume , sheet 30, page M , inscription 1, CIF W B and registered with the CNMV under the number 79. The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários, the CMVM ) has received a passporting notification under Directive 2009/65/EC of the European Parliament and of the Council and the Commission Regulation (EU) 584/2010 enabling the fund to be distributed to the public in Portugal. M&G International Limited is duly passported into Portugal to provide certain investment services in such jurisdiction on a cross-border basis and is registered for such purposes with the CMVM and is therefore authorised to conduct the marketing (comercialização) of funds in Portugal _218201