A closer look at your fund A comprehensive explanation of performance and the outlook for your fund

Transcription

1 A closer look at your fund A comprehensive explanation of performance and the outlook for your fund To accompany the M&G Smaller Companies Fund Annual Short Report August 2014 for the year ended 30 June 2014 All figures show capital performance during the review period between 1 July 2013 and 1 July 2014 unless otherwise stated. The long-term performance shown below is simulated past performance that has been recalculated to take account of the con version from unit trust to OEIC sub-fund and is based on Sterling Class A (Income) shares. Simulated past performance is not a guide to future performance. Sterling Class A has an initial charge of 4% and an ongoing charge of 1.66%. Long-term performance 15,000 12,000 9,000 6,000 4,000 3,000 2,000 1,500 1, September 1967 = 100, plotted annually Chart date 1 July Sterling Class A (Income) shares FTSE All-Share Index Source: M&G Statistics Department CAPITAL PERFORMANCE [a] six months one year five years since ( ) ( ) ( ) launch [b] % % % p.a. [c] % p.a. [c] Sterling Class A M&G Smaller Companies Fund [d] Numis Smaller Companies (ex IT) Index n/a FTSE All-Share Index [a] Excludes reinvested income. [b] 27 September 1967, the end of the initial offer period of the predecessor unit trust. [c] Shows the compound rate of return, per annum, over the period. [d] Bid to bid. SINGLE YEAR PERFORMANCE (5 YEARS ENDING JUNE) From To % % % % % Sterling Class A M&G Smaller Companies Fund Numis Smaller Companies (ex IT) Index FTSE All-Share Index Source: Morningstar, Inc., bid to bid with net income reinvested. UK Retail Prices Index The tables above compare Sterling Class A (Income) shares against comparable indices. Past performance is not a guide to future performance. The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. Fund performance summary Between 1 July 2013 (the start of the review period) and 1 July 2014, the M&G Smaller Companies Fund rose 10.8% in terms of capital performance, while a comparable index, the Numis Smaller Companies (ex IT) Index, rose by 18.1%. In terms of total return (capital performance with net income reinvested) the fund produced 11.1% over the review period while the index produced 21.2%. Past performance is not a guide to future performance. Factors affecting performance Stockmarkets around the world continued to make good progress over the 12 months with shares in the UK bolstered by increasing confidence in an economic recovery. Stocks in the Numis Smaller Companies (ex IT) Index performed strongly, up more than 20% over the period, outpacing shares in large companies, which rose around 12% (FTSE 100 Index), all in total return terms. Consumer-facing sectors such as retail, housebuilding and travel & leisure, which tend to outperform in upturns in the business cycle, posted among the strongest gains. Rising confidence in the economic outlook was also reflected in a pickup in initial public offerings (IPOs), the first sale of shares of private companies to the public, and the return of large-cap mergers and acquisitions (M&A). However, the last quarter of the period witnessed a reversal in the dominant market trends of 2013; the shift out of smaller company shares into stocks of large companies. Relative to large companies, stock valuations had begun to look stretched for domestic cyclical (economically sensitive) medium-sized and smaller companies, while the increased M&A activity and the potential fear of rising interest rates also helped to drive investors switch back into FTSE 100 stocks. The fund had mixed fortunes over the review period; in the first half, performance was strong despite the fund s material below-index weighted position in consumer stocks. In the second half, the fund suffered from a number of stock-specific issues as well as the combined headwind of a market shift out of the shares in smaller companies and some aggressively priced IPOs. Media content distributor, Entertainment One was the top-performing stock. The shares were very undervalued when the holding was purchased for the fund and are still attractive in our view, despite the share price rising substantially in the past 12 months. The company s content model continues to deliver through its international distribution and scale leverage.

2 Marine services provider, James Fisher & Sons also performed well. The stock, which has been held in the fund since 1987, saw a significant gain in its share price over the past 12 months so we took advantage and trimmed the holding to take profits. Two stocks that were sold over the period also added significant value: engineering group, Kentz and Carphone Warehouse. The fund was hurt by a number of stock-specific issues over the 12 months, notably those in Anite, Xaar and blinkx. Anite, which delivers handset and network test equipment for the mobile wireless market, suffered after a weakerthan-expected trading update disappointed the market. However, towards the end of the period, the share price recovered as the company s increasingly cheap valuation began to attract buyers. Having almost quadrupled in 2013, digital printer Xaar s share price has fallen about 50% in the first half of We had been selling down the holding over the past 12 months, but because the share price had risen so rapidly, it remained a large proportion of the portfolio. Although management repeatedly guided that 2014 would be a year of more modest growth, pricing pressure in the ceramics industry has been higher than expected and this new guidance has been taken very badly by the market. We believe this is overdone; the valuation fails to ascribe any value to the progress made by Xaar in research and development (R&D) and its pipeline of new products, each of which could be at least as large as the current business. Xaar has been held in the portfolio for at least 14 years and remains a profitable holding for the fund, despite recent falls in the share price. Xaar continues to be a well-invested business, with cash on its balance sheet, a scarce asset and strong intellectual property that could transform the adoption of digital printing in industrial applications. Blinkx, one of the world s largest video search engines, has been a difficult holding for the fund. The share price suffered a large fall in the first quarter of 2014 after an article questioning the company s business model was posted on a blog site. Although blinkx s management released a statement strongly refuting the assertions to reassure investors, an unexpected trading update from it at the end of the review period outlining difficulties in the industry caused us to lose confidence in the business and the position was sold at the end of the period. Outlook With the trading statement season upon us for the first half of 2014, we are seeing the strengthening in the pound reduce the underlying profit growth that companies are experiencing when overseas profits are translated back into sterling. We think this will prevent smaller companies making huge progress in the short term. That said, there has been a shakeout on selective company valuations and as we have mentioned in previous reports, we believe these companies remain very vulnerable to takeovers. The level of M&A activity is at historically low levels in the UK smaller companies sector, and US companies in particular are keen to deploy cash trapped overseas at sensible prices. We believe this theme will be more prevalent in the second half of 2014 and this will allow small-cap investors to recycle profits and potentially return some capital to the market. Louise Nash Fund manager An employee of M&G Limited which is an associate of M&G Securities Limited. The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. (If you are unsure about the suitability of your investment, speak to your financial adviser.) YIELD The net historic yields on 1 July 2014 were as follows: Historic % Sterling Class A 0.60 Class I 1.30 Class R 1.08 Class X 0.60 Historic yield: The historic yield reflects distributions declared over the past twelve months as a percentage of the mid-market price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions. The level of any income earned by the fund will fluctuate. Past performance is not a guide to future performance. SHARE PRICES On 1 July 2014 the share prices were as follows: Income Accumulation p p Sterling Class A xd Class I 1, xd 1, Class R xd Class X xd

3 Portfolio information Portfolio information The following tables have been extracted from the Investment Report and Financial Statements for M&G Investment Funds (3), which is for the financial year ended 30 June PORTFOLIO TRANSACTIONS for the year ended 30 June 2014 Largest purchases 000 Premier Foods 8,724 Arrow Global Group 5,850 Innovation Group 5,523 Restore 5,437 Games Workshop Group 5,054 Stock Spirits Group 5,000 Dairy Crest Group 4,964 Vitec Group 4,815 Gulf Marine Services 4,725 LondonMetric Property 4,386 OneSavings Bank 4,186 Telecom Plus 4,032 Thorntons 3,992 DX (Group) 3,438 FDM Group (Holdings) Plc 3,123 EMIS Group 2,347 Northgate 1,813 Hunting 1,535 Anite 1,523 Cape 1,503 Northern Trust Global Fund - Sterling [a] 121,979 Other purchases 15,339 Total purchases 219,288 Largest sales 000 Kentz 10,125 Howden Joinery Group 9,328 Jupiter Fund Management 7,912 Entertainment One 7,693 Xaar 7,557 Booker Group 6,658 Victrex 6,556 Tullett Prebon 6,486 DCC 6,385 James Fisher & Sons 6,167 Close Brothers Group 6,056 Regus 5,456 Devro 4,849 Clarkson 4,754 Euromoney Institutional Investor 4,453 SThree 4,353 WANdisco 3,917 Spirax-Sarco Engineering 3,627 Carphone Warehouse 3,504 Ashtead Group 3,226 Northern Trust Global Fund - Sterling [a] 124,292 Other sales 48,394 Total sales 291,748 [a] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. PORTFOLIO STATEMENT as at 30 June 2014 Value Holding 000 % % Oil & gas producers ,000 GeoPark 3, Oil equipment, services & distribution ,077,773 Cape 6, ,300,000 Gulf Marine Services 4, ,714 Hunting 3, Chemicals ,183 Carclo ,835,766 Elementis 7, ,882,935 Synthomer 6, Mining ,516 Petra Diamonds 1, Construction & materials ,761 Galliford Try 5, ,811,324 Low & Bonar 11, ,330,157 Tyman 6, Aerospace & defence ,185,650 Senior 8, ,704 Ultra Electronics Holdings 4, Electronic & electrical equipment ,431,772 e2v Technologies 5, ,898,744 Volex 2, ,337,258 Xaar 6, Industrial engineering ,369,743 Fenner 4, ,097,631 Hill & Smith Holdings 5, ,000 Vitec Group 4, Industrial transportation ,531,643 DX (Group) 3, ,040 James Fisher & Sons 10, Support services ,030,234 Hyder Consulting 4, ,313,916 Northgate 6, Beverages ,492,660 Stock Spirits Group 4, Food producers ,876 Dairy Crest Group 4, ,880 New Britain Palm Oil 2, ,190,870 Premier Foods 4, Leisure goods ,000 Games Workshop Group 4, Healthcare equipment & services ,699 Consort Medical 3, Pharmaceuticals & biotechnology ,315 Dechra Pharmaceuticals 6, Food & drug retailers ,220,230 Booker Group 6, ,798,772 Thorntons 2, General retailers ,342,858 Carphone Warehouse 7, ,490,000 N Brown Group 6, Media ,643,043 Entertainment One 8, ,348 Euromoney Institutional Investor 6, ,995,066 Wilmington Group 5,

4 PORTFOLIO STATEMENT (continued) as at 30 June 2014 Value Holding 000 % % Travel & leisure ,351,245 bwin.party digital entertainment 2, ,040,000 Mitchells & Butlers 4, ,118 Restaurant Group 3, Fixed line telecommunications ,715 Telecom Plus 3, Banks ,431 Bank of Georgia Holdings 5, ,428,062 OneSavings Bank 4, Real estate investment & services ,950,000 LSL Property Services 7, ,900,000 Quintain Estates & Development 6, ,165,656 Safestore 4, Real estate investment trusts ,523,540 Hansteen Holdings 5, ,450,000 LondonMetric Property 4, Financial services ,720,000 Arrow Global Group 6, Software & computer services ,209,611 Anite 10, ,812 AVEVA 3, ,088,000 FDM Group (Holdings) Plc 3, ,250 Fidessa Group 5, ,839,820 Innovation Group 5, ,294 Micro Focus International 8, Technology hardware & equipment ,725,994 Spirent Communications 2, ,995,400 Wolfson Microelectronics 4, AIM quoted ,250,000 1Spatial 1, ,334,497 accesso Technology Group (formerly LO-Q) 6, ,707,434 blinkx 3, ,732,945 Borders & Southern Petroleum ,382,600 Digital Barriers 3, ,801,014 EMIS Group 13, ,737,465 Enteq Upstream 1, ,418 Epistem Holdings 1, ,474,178 Faroe Petroleum 3, ,552,350 Hargreaves Services 11, ,421,782 IQE 4, ,065,787 Max Property Group 5, ,066,572 OPG Power Ventures 4, ,124 Providence Resources ,581,667 Restore 6, Unquoted / unlisted ,000 Betex Group [a] ,429 Black Lion Resources 0.00 AAA rated money market funds [b] ,574,000 Northern Trust Global Fund - Sterling 7, Portfolio of investments 378, Net other liabilities (1,207) (0.32) (0.75) Net assets attributable to shareholders 377, All securities are on an official stock exchange listing except where referenced. [a] Delisted on 19 October [b] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. All investments are valued at their bid price, excluding any accrued interest, as at 12 noon on 30 June 2014, being the last business day of the financial year.

5 Additional information Details of the latest estimated yields and prices for the fund are available on our website at where you can also register for My Account and have access to the latest valuation of your holding 24 hours a day, seven days a week. The latest estimated yields and prices can also be obtained by calling our Customer Relations team on Shares may be purchased or sold at any time by giving your instructions to us either in writing or by calling our Dealing Line on We are open for dealing each business day between 8.00am and 6.00pm Monday to Friday. Before investing, always read the up-to-date version of the Key Investor Information Document (KIID) in conjunction with the Important Information for Investors document. The KIID, the Important Information for Investors document and the Prospectus are available free of charge on request from our Customer Relations team. All literature will be provided in English _MP_310815