Annual Investment Report and Financial Statements (audited) March M&G Investment Funds (7)

Transcription

1 M&G IF (7) Annual Investment Report and Financial Statements (audited) March 2011 M&G Investment Funds (7)

2 Contents Introduction Page 1 Company Information [a] Page 1 Authorised Corporate Director s Report [a] Page 2 M&G Investment Funds (7) Page 3 Authorised Corporate Director s Responsibilities Page 3 Depositary s Responsibilities and Report Page 3 Independent Auditors Report Page 4 Aggregated Financial Statements (audited) Page 5 Directors Statement Page 8 Investment Report [a] and Financial Statements for: M&G European Special Situations Fund Page 9 M&G European Strategic Value Fund Page 19 M&G Global Convertibles Fund Page 29 M&G Global Emerging Markets Fund Page 41 M&G Pan European Dividend Fund Page 51 Further Information [a] Page 60 Risk Factor Page 60 Liquidity Page 60 Dilution Page 60 The EU Savings Directive Page 60 Portfolio Turnover Rates Page 60 [a] Collectively, these comprise the Authorised Corporate Director s Report.

3 Introduction COMPANY INFORMATION Company M&G Investment Funds (7) Registered Office Laurence Pountney Hill, London EC4R 0HH Authorised Corporate Director (ACD) M&G Securities Limited, Laurence Pountney Hill, London EC4R 0HH Telephone: (Authorised and regulated by the Financial Services Authority) Directors of the ACD W J Nott (Chief Executive), J R Talbot (Director and Secretary), L U Darby, C I Jackson, M Lewis, G W MacDowall, L J Mumford, L J Scrine Investment Manager M&G Investment Management Limited, Laurence Pountney Hill, London EC4R 0HH Telephone: (Authorised and regulated by the Financial Services Authority) Fund managers The following fund managers are employed by M&G Limited which is an associate of M&G Securities Limited. M&G European Special Situations Fund Richard O Connor During the review period Michael Stiasny and Tim Short were the fund managers. M&G European Strategic Value Fund Richard Halle Customer Services and Administration M&G Securities Limited, PO Box 9039, Chelmsford CM99 2XG Please remember to quote your name and M&G client reference and sign any written communication to M&G. Failure to provide this will affect your ability to transact with us. Telephone: For security purposes and to improve the quality of our service, we may record and monitor telephone calls. You will require your M&G client reference. Failure to provide this will affect your ability to transact with us. Important information Introduction of hedged share classes: On 21 May 2010 the ACD introduced currency hedged share classes in the M&G Global Convertibles Fund and may introduce hedged share classes in the other sub-funds in future. The operation of the new share classes will involve the investment manager undertaking transactions specifically to reduce the exposure of holders of hedged share classes to movements in the base currency of the fund. Gains or losses arising from currency hedging transactions are borne by the shareholders of the respective hedged share classes and the hedging activity will be monitored and controlled to mitigate any risk to other shareholders in the fund. In exceptional circumstances, however, there may be a positive or negative impact on other share classes in the fund arising from this activity. M&G is a member of the Investment Management Association and of the Tax Incentivised Savings Association. The Instrument of Incorporation can be inspected at our offices or at the office of the Depositary. M&G Global Convertibles Fund Léonard Vinville M&G Global Emerging Markets Fund Michael Godfrey & Matthew Vaight M&G Pan European Dividend Fund Richard Halle Registrar International Financial Data Services (UK) Limited, IFDS House, St. Nicholas Lane, Basildon, Essex SS15 5FS (Authorised and regulated by the Financial Services Authority) Depositary The Royal Bank of Scotland plc, Trustee & Depositary Services, The Broadstone, 50 South Gyle Crescent, Edinburgh EH12 9UZ (Authorised and regulated by the Financial Services Authority) Independent Auditors PricewaterhouseCoopers LLP, Hay s Galleria, 1 Hay s Lane, London SE1 2RD ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

4 Introduction FOR EUROPEAN INVESTORS Copies of the Prospectus and the Interim / Annual Investment Report and Financial Statements can be obtained from: M&G International Investments Limited (Niederlassung Deutschland): Bleidenstraße 6-10, D Frankfurt am Main German Paying and Information Agent: J. P. Morgan AG, Junghofstraße 14, D Frankfurt am Main Austrian Paying and Information Agent: Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Wien Luxembourg Paying and Information Agent: J. P. Morgan Bank Luxembourg S.A. 5 Rue Plaetis, L-2338 Luxembourg For Italy: M&G International Investments Limited, Laurence Pountney Hill, London EC4R 0HH Italian Paying and Information Agents: Allfunds Bank, S.A., Via Santa Margherita 7, Milan, Italy Banca Monte dei Paschi di Siena S.p.A. Piazza Salimbeni 3, Siena, Italy Cassa Centrale Raiffeisen dell Alto Adige S.p.A. Via Laurin 1, Bolzano, Italy State Street Bank S.p.A., Via Col Moschin 16, Milan, Italy Société Générale Securities Services S.A., Via Benigno Crespi 19A - MAC 2, Milan, Italy Spanish Representative: Allfunds Bank, S.A. c/ Estafeta nº6 (La Moraleja) Complejo Plaza de la Fuente Edificio 3, 28109, Alcobendas, Madrid, Spain Swiss Paying Agent: JP Morgan Chase Bank, National Association, Columbus, Zürich Branch, Dreikönigstrasse 21, CH-8002 Zürich Swiss Representative: First Independent Fund Services Ltd, Klausstrasse 33, CH-8008 Zürich For France: M&G International Investments Limited, 90 avenue des Champs Elysées, F Paris AUTHORISED CORPORATE DIRECTOR S REPORT The Authorised Corporate Director (ACD) presents its annual investment report and audited financial statements for the year ended 31 January The sub-funds in this report are all part of an umbrella Open-Ended Investment Company (OEIC), M&G Investment Funds (7). This OEIC is an Investment Company with Variable Capital (ICVC) incorporated under the Open-Ended Investment Companies Regulations It is authorised and regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act M&G Investment Funds (7), as an umbrella OEIC, contains 5 sub-funds, each of which is a UCITS (Undertakings for Collective Investment in Transferable Securities) scheme as defined in the Collective Investment Schemes sourcebook, as issued (and amended) by the FSA: M&G European Special Situations Fund M&G European Strategic Value Fund M&G Global Convertibles Fund M&G Global Emerging Markets Fund M&G Pan European Dividend Fund The Company was authorised on 3 July The M&G Global Convertibles Fund was launched on 13 July 2007, the M&G European Special Situations Fund and the M&G European Strategic Value Fund were launched on 1 February 2008, the M&G Pan European Dividend Fund was launched on 18 July 2008 and the M&G Global Emerging Markets Fund was launched on 5 February The Company s principal activity is to carry on business as an OEIC. The Company is structured as an umbrella company, and different sub-funds may be established by the ACD from time to time with the agreement of the Depositary and approval from the FSA. The subfunds are operated separately and the assets of each sub-fund are managed in accordance with the investment objective and policy applicable to that sub-fund. The annual investment report and financial statements for each sub-fund for the year ended 31 January 2011 are set out in detail in their section of this report (see contents page). J R Talbot Director of M&G Securities Limited G W MacDowall Director of M&G Securities Limited 15 March 2011 French Centralising Agent: RBC Dexia Investor Services, Bank France SA 105 rue Réaumur, F Paris Swedish Paying Agent: Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, Stockholm, Sweden 2 ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

5 M&G Investment Funds (7) AUTHORISED CORPORATE DIRECTOR S RESPONSIBILITIES DEPOSITARY S RESPONSIBILITIES AND REPORT Statement of the Authorised Corporate Director s responsibilities in respect of the annual investment report and financial statements of the Company The Collective Investment Schemes sourcebook, as issued (and amended) by the Financial Services Authority (FSA), requires the Authorised Corporate Director (ACD) to prepare the investment report and financial statements for each financial year which give a true and fair view of the financial position of the Company as at the end of the financial year, and the net revenue and the net gains for the year. In preparing the financial statements, the ACD is required to: comply with the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association in October 2010, the Instrument of Incorporation, generally accepted accounting principles and applicable accounting standards subject to any material departures which are required to be disclosed and explained in the financial statements; select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in operation. The ACD is required to keep proper accounting records, and to manage the Company in accordance with the Collective Investment Schemes sourcebook, as issued (and amended) by the FSA, the Instrument of Incorporation and the Prospectus, and to take reasonable steps for the prevention and detection of fraud or other irregularities. Report of the Depositary to the shareholders of M&G Investment Funds (7) for the year ended 31 January 2011 The Depositary is responsible for the safekeeping of all of the property of the Company (other than tangible moveable property) which is entrusted to it and for the collection of income that arises from that property. It is the duty of the Depositary to take reasonable care to ensure that the Company is managed in accordance with the Financial Services Authority s Collective Investment Schemes sourcebook (COLL), as amended, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228), as amended ( the OEIC Regulations ), the Company s Instrument of Incorporation and Prospectus, in relation to the pricing of, and dealings in, shares in the Company; the application of income of the Company; and the investment and borrowing powers applicable to the Company. Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company, acting through the Authorised Corporate Director: has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company s shares and the application of the Company s income in accordance with COLL and, where applicable, the OEIC Regulations, the Instrument of Incorporation and Prospectus of the Company, and has observed the investment and borrowing powers and restrictions applicable to the Company. Edinburgh The Royal Bank of Scotland plc 15 March 2011 Trustee and Depositary Services ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

6 M&G Investment Funds (7) INDEPENDENT AUDITORS REPORT Independent auditors report to the shareholders of M&G Investment Funds (7) ICVC We have audited the financial statements of M&G Investment Funds (7) ICVC ( the Company ) for the year ended 31 January 2011 which comprise the aggregated statement of total return, the aggregated statement of change in net assets attributable to shareholders, the aggregated balance sheet and related notes and for each of the Company s sub-funds, the statement of total return, the statement of change in net assets attributable to shareholders, the balance sheet, the related notes and the distribution tables. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) and the Statement of Recommended Practice Financial Statements of Authorised Funds issued by the Investment Management Association (the Statement of Recommended Practice for Authorised Funds ). Respective responsibilities of the Authorised Corporate Director and auditors As explained more fully in the Authorised Corporate Director s Responsibilities Statement the Authorised Corporate Director is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company s members as a body in accordance with paragraph of the Collective Investment Schemes sourcebook as required by paragraph 67(2) of the Open-Ended Investment Companies Regulations 2001 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Authorised Corporate Director; and the overall presentation of the financial statements. Opinion on the financial statements In our opinion the financial statements: give a true and fair view of the financial position of the Company and each of the sub-funds at 31 January 2011 and of the net revenue and the net gains of the scheme property of the Company and each of the sub-funds for the year then ended; and have been properly prepared in accordance with the Statement of Recommended Practice for Authorised Funds, the Collective Investment Schemes sourcebook and the Instrument of Incorporation. Opinion on other matters prescribed by the Collective Investment Schemes sourcebook In our opinion: We have obtained all the information and explanations we consider necessary for the purposes of the audit; and the information given in the Authorised Corporate Director s Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Collective Investment Schemes sourcebook requires us to report to you if, in our opinion: proper accounting records for the Company have not been kept; or the financial statements are not in agreement with the accounting records and returns. London PricewaterhouseCoopers LLP 15 March 2011 Chartered Accountants and Statutory Auditors The maintenance and integrity of the M&G website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 4 ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

7 Aggregated Financial Statements For the year ended 31 January STATEMENT OF TOTAL RETURN Note Income Net capital gains 3 94,683 91,547 Revenue 4 28,785 15,048 Expenses 5 (12,588) (5,676) Finance costs: Interest 12 (12) (5) Net revenue before taxation 16,185 9,367 Taxation 6 (1,115) (657) Net revenue after taxation 15,070 8,710 Total return before distributions 109, ,257 Finance costs: Distributions 12 (15,268) (8,241) Change in net assets attributable to shareholders from investment activities 94,485 92,016 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 527, ,122 Amounts received on issue of shares 926, ,528 Value of securities transferred from in-specie issues 107,529 21,149 Amounts paid on cancellation of shares (276,495) (73,945) 757, ,732 Stamp Duty Reserve Tax (28) (16) Change in net assets attributable to shareholders from investment activities (see above) 94,485 92,016 Retained distributions on Accumulation shares 19,942 6,477 Closing net assets attributable to shareholders 1,398, ,331 BALANCE SHEET as at as at 31 January January 2010 Assets Investment assets 1,384, ,349 Debtors Amounts receivable on issues 21,441 8,577 Bank interest receivable 1 0 Currency deals outstanding 5,599 1,258 Debt security interest receivable 3,947 1,407 Distributions receivable 16 0 Dividends receivable Overseas tax recoverable Prepaid expenses 4 0 Sales awaiting settlement 3,311 4,588 Tax recoverable ,128 16,435 Cash and bank balances Amounts held at futures clearing houses and brokers Cash held as bank balances 3,404 9,571 Cash held on deposit 0 11,749 3,475 21,408 Total other assets 38,603 37,843 Total assets 1,423, ,192 Liabilities Investment liabilities (35) 0 Creditors Amounts payable on cancellations (1,321) (9,450) Bank overdraft interest payable (1) 0 Corporation tax payable (2) (2) Currency deals outstanding (5,615) (1,261) Expenses payable (1,755) (554) Income tax payable (1,030) (1,013) Net distributions payable on Income shares (2,811) (2,924) Purchases awaiting settlement (11,683) (12,657) Total other liabilities (24,218) (27,861) Total liabilities (24,253) (27,861) Net assets attributable to shareholders 1,398, ,331 ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

8 Aggregated Financial Statements NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies The accounting policies applied are set out in the notes to the financial statements of each of the sub-funds. The aggregated financial statements represent the summation of the financial statements for each of the sub-funds. 2 Risk management policies The risk management policies are set out in the notes to the financial statements of each of the sub-funds. 3 Net capital gains Non-derivative securities 94,467 91,932 Derivative contracts (578) 169 Forward currency contracts 1,598 0 Currency gains / (losses) 45 (547) Special dividends taken to capital Tax on overseas investments [a] (1,180) (25) Transaction charges (66) (54) Net capital gains 94,683 91,547 [a] Brazilian IOF tax is applicable to the purchase of securities with effect from 20 October Revenue Bank interest Currency hedge revenue 21 0 Deposit interest Interest distributions 38 0 Interest on debt securities 17,429 7,789 Overseas dividends 9,872 5,078 Property income dividends 0 3 Stock dividends 351 1,114 UK dividends 970 1,006 Underwriting commission Total revenue 28,785 15,048 5 Expenses Payable to the Authorised Corporate Director or associate Authorised Corporate Director s periodic charge 10,771 4,835 Administration fee 1, Share class hedging fees ,119 5,426 Payable to the Depositary or associate Depositary s fee (including VAT) Distribution fees Other expenses Audit fee (including VAT) Dividend charges 6 4 Registration fees 0 1 Regulatory fees Safe custody charge Tax consultancy fees (including VAT) [a] Total expenses 12,588 5,676 [a] Fees paid to overseas firms affiliated with PricewaterhouseCoopers LLP. 6 Taxation a ) Analysis of charge in the year Corporation tax Overseas tax 1, Overseas tax recoverable: exchange rate movements (20) 5 Overseas tax recoverable: previously withheld at source (32) 0 Overseas tax recoverable: written off Overseas tax recovered: previously written off (35) 0 Double taxation relief 0 (103) Capital gains tax (India) 68 0 Current tax charge (note 6b) 1, Deferred tax (note 6c) 0 0 Total taxation 1, b ) Factors affecting taxation charge for the year Net revenue before taxation 16,185 9,367 Corporation tax at 20% 3,237 1,874 Effects of: UK dividends [a] (194) (202) Stock dividends not taxable (71) (219) Overseas dividends not taxable [a] (1,735) (360) Interest distributions (2,294) (1,097) Prior period expenses utilised 0 (16) Current period expenses not utilised 1, Overseas tax 1, Overseas tax recoverable: exchange rate movements (20) 5 Overseas tax recoverable: previously withheld at source (32) 0 Overseas tax recoverable: written off Overseas tax recovered: previously written off (35) 0 Double taxation relief 0 (103) Capital gains tax (India) 68 0 Current tax charge (note 6a) 1, [a] As an Open-Ended Investment Company these items are not subject to corporation tax. c ) Provision for deferred taxation Provision at the start of the year 0 0 Deferred tax in profit and loss account (note 6a) 0 0 Provision at the end of the year ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

9 Aggregated Financial Statements NOTES TO THE FINANCIAL STATEMENTS 7 Contingent liabilities and outstanding commitments Rights issues At the balance sheet date, the Company had a contingent liability totalling 15,847 ( : nil), details of which are disclosed in the notes to the financial statements of the relevant sub-fund. 8 Related parties The required disclosures are set out in the notes to the financial statements of each of the sub-funds. 9 Financial instruments The required disclosures are set out in the notes to the financial statements of each of the sub-funds. 10 Portfolio transaction costs a ) Purchases Purchases excluding transaction costs 1,263, ,352 Commissions Taxes Total transaction costs Total purchases including transaction costs 1,264, ,750 b ) Sales Sales excluding transaction costs 496, ,547 Commissions (265) (123) Taxes (50) (28) Total transaction costs (315) (151) Total sales net of transaction costs 496, , Shareholder funds The required disclosures are set out in the notes to the financial statements of each of the sub-funds. 12 Finance costs Income shares (sterling) Class A - Dividend distributions 1, Interest distributions 1,672 1,951 Class I - Dividend distributions 71 0 Accumulation shares (sterling) Class A - Dividend distributions 1, Interest distributions Class I - Dividend distributions 1,573 1,186 Interest distributions 2,182 1,808 Accumulation shares (euro) Class A - Dividend distributions 39 0 Interest distributions 5, Class A-H - Interest distributions 46 n/a Class C - Dividend distributions 1, Interest distributions 4,437 1,071 Class C-H - Interest distributions 2,051 n/a Accumulation shares (US dollar) Class A - Dividend distributions 0 0 Class C - Dividend distributions ,757 9,403 Income tax deducted at source 1,029 1,013 23,786 10,416 Income deducted on cancellation of shares 3, Income received on issue of shares (11,794) (3,139) Finance costs: Distributions 15,268 8,241 Finance costs: Interest 12 5 Total finance costs 15,280 8,246 Net income per statement of total return 15,070 8,710 Expenses offset against capital Relief on expenses offset against capital 0 (25) Stock dividends not distributed (206) (756) Tax relief on stock dividends not distributed 0 2 Capital gains tax offset against capital 68 0 Overseas tax offset against capital Undistributed income brought forward 11 7 Undistributed income carried forward (15) (11) Finance costs: Distributions 15,268 8,241 ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

10 Aggregated Financial Statements DIRECTORS STATEMENT This report has been prepared in accordance with the requirements of the Collective Investment Schemes sourcebook, as issued and amended by the Financial Services Authority. J R TALBOT G W MACDOWALL } Directors 15 March ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

11 M&G European Special Situations Fund AUTHORISED CORPORATE DIRECTOR S REPORT Investment objective of the M&G European Special Situations Fund The Fund aims to maximise long term total return to investors by investing predominantly in a wide range of European equities of companies in special situations. Investment policy of the M&G European Special Situations Fund The Fund seeks to maximise total return to investors through investment in a range of equities of European companies in special situations where the Investment Manager believes internal company change or external market change will positively affect the value of the company, or where the companies are undervalued due to pricing anomalies. The Fund will invest across a wide range of geographies, sectors and market capitalisations. The Fund may also invest in other assets including other non-eu transferable securities, collective investment schemes, money market instruments, cash and near cash, deposits and derivative instruments. Derivative instruments may be used in support of achieving the Fund s investment objective. Investment approach The M&G European Special Situations Fund is a well diversified fund that invests in companies across Europe (including the United Kingdom). There is a strong focus on a company s returns on capital and valuation drives every investment decision. Change is the common thread linking all stocks in the portfolio. The fund manager looks for undervalued companies and whose undervaluation may bring about positive change at the business. He also seeks out companies that are experiencing positive change in their returns due to internal factors, such as restructuring, or external factors, for example economic trends or industry shifts. The fund manager may also hold stocks in companies after they have experienced change and whose ability to produce high and sustainable returns has not yet been recognised by the market. Using a bottom-up approach to stock selection that is based upon detailed research, the fund manager avoids choosing stocks with reference to an index and will not invest in those companies that make up the biggest proportion of the index if these do not fulfil his investment criteria. Potential investment candidates are found through team discussions, screening and company contact. Screening helps to isolate companies whose return patterns are worthy of further investigation. For example, where there is evidence of step changes in returns on capital, management reorganisation, restructuring and divestures, or where there is a change in the external environment. The company visit is a key part of the investment process; the fund manager uses these meetings to identify themes and trends, as well as to assess the quality of the company and its management. Thorough fundamental analysis is conducted to further narrow down the number of stocks added to the portfolio. Risk management plays a chief role and the fund manager works closely with the risk management team to ensure that the primary driver of the portfolio s performance is stock selection. The risk management team uses a range of tools to expose the intended and unintended biases resulting from the fund manager s active stockpicking approach. INVESTMENT ACTIVITIES OVER THE REPORT PERIOD As at 1 February 2011, for the year ended 31 January 2011 We made significant changes to the portfolio during the review period. Our investment activities focused on switching from less attractive holdings within a sector to positions in the same industry which in our view offered more value. In this sphere, we closed a position in French pharmaceutical firm Sanofi-Aventis due to our assessment that the company would suffer from generic competition to its blood thinner Lovenox. We later reinvested the proceeds in UK drugmaker GlaxoSmithKline as well as Roche and Novartis, both based in Switzerland. We reduced the fund s exposure to oil and gas companies, which rose significantly as investor sentiment improved, including French oil company Total and its Spanish rival Repsol. Similarly, a stake in UKlisted platinum miner Anglo American, established in the first half of the review period, was closed following the strong performance of its shares on the back of higher raw material prices. In the first part of the review period, we also significantly decreased the portfolio s weighting in UK oil explorer BP. In addition, the fund s weighting in banks was increased considerably by initiating holdings in Spain s Banco Santander and UK-based Standard Chartered. Santander boasts sustainable returns and has attractive global operations in the UK, Germany and Latin America. Likewise, Standard Chartered has weathered adverse economic conditions in Europe thanks to its exposure to the booming financial markets of Asia. Finally, in order to reduce the fund s overweight exposure to online gaming companies relative to the FTSE World Europe including UK Index, we decreased positions in PartyGaming, Sportingbet and bwin Interactive Entertainment. Nevertheless, we remain confident about the prospects for the online gaming sector, including the potential for further consolidation within the industry. Richard O Connor Fund manager Richard O Connor is an employee of M&G Limited which is an associate of M&G Securities Limited. During the review period Michael Stiasny and Tim Short were the fund managers. Please note that the views expressed in this Report should not be taken as a recommendation or advice on how the fund or any holding mentioned in the Report is likely to perform. If you wish to obtain financial advice as to whether an investment is suitable for your needs, you should consult a Financial Adviser. ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

12 M&G European Special Situations Fund FUND STATISTICS DISTRIBUTION DATES AND FUND FACTS Distribution type xd payment Final Final distribution Inc Acc Total Expense Ratio [b] [a] [a] Sterling p p % % Class A Class I Euro % % Class A n/a Class C n/a [a] The date on which the final distribution will be paid to Income shareholders and credited to Accumulation shareholders. [b] The Total Expense Ratio (TER) shows the relevant annualised operating expenses of each share class from the most recent reporting period as a single percentage of the average net asset value for that share class over the same period. FUND PERFORMANCE Performance of share classes Net asset value Net asset value per share as at per share as at Net asset value % change Inc Acc Inc Acc Inc Acc Sterling p p p p % % Class A Class I Euro % % Class A n/a n/a n/a Class C n/a n/a n/a PERFORMANCE SINCE LAUNCH six months one year five years since launch % % % p.a. [a] % p.a. [a] Sterling [b] Class A n/a -3.1 [c] Class I n/a -3.1 [c] Euro [d] Class A n/a -6.1 [c] Class C n/a -5.2 [c] [a] Shows the compound rate of return, per annum, over the period. [b] Bid to bid excluding reinvested income. [c] 1 February 2008, the launch date of the fund. [d] Bid to bid with net income reinvested. SINGLE YEAR PERFORMANCE (5 YEARS ENDING JANUARY) From To % % % % % Sterling Class A [a] n/a n/a n/a PRICES Income shares Accumulation shares Calendar year Highest Lowest Highest Lowest Sterling (net) p p p p Class A 2008 [a] [b] Class I 2008 [a] [b] Euro (net) Class A 2008 [a] n/a n/a n/a n/a n/a n/a [b] n/a n/a Class C 2008 [a] n/a n/a n/a n/a n/a n/a [b] n/a n/a [a] From 1 February 2008 (the launch date of the fund) to 31 December [b] To 1 February Past performance is no indication of current or future performance and the performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The price of shares and the income from them may go down as well as up, and you may get back less than you invested. INCOME Dividend income per share Calendar year Distributed Reinvested Sterling (net) p p Class A [a] Class I [a] Euro (net) Class A 2009 n/a n/a [a] n/a Class C 2009 n/a n/a [a] n/a [a] Up to final: ex-distribution date 1 February 2011; payment date 31 March [a] Nominated share class. Source: Morningstar, Inc., bid to bid with net income reinvested. 10 ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

13 M&G European Special Situations Fund FUND STATISTICS NET ASSETS Value per share Number of shares Year ended Inc Acc Inc Acc Sterling p p Class A Jan ,132,000 63,100 Jan ,647,000 63,100 Jan ,204, ,100 Class I Jan ,000 15,005,000 Jan ,000 15,005,000 Jan ,000 15,005,000 Euro Class A Jan 2009 n/a n/a 3,000 Jan 2010 n/a n/a 3,000 Jan 2011 n/a n/a 3,000 Class C Jan 2009 n/a n/a 1,000 Jan 2010 n/a n/a 1,000 Jan 2011 n/a n/a 1,000 Total net asset value of sub-fund Year ended [a] Jan ,211,000 37,058,000 Jan ,746,000 49,398,000 Jan ,145,000 47,816,000 [a] Based on the midday exchange rate on the last business day of each financial year. PORTFOLIO PORTFOLIO STATEMENT as at 31 January 2011 Value [a] Holding 000 % % Oil & gas producers ,042 BP ,552 Galp Energia B ,463,868 Norse Energy ,390 Repsol YPF ,266 Total Oil equipment, services & distribution ,355 CGG Veritas ,410 Wellstream Holdings Chemicals ,045 BASF ,825 Bayer ,518 Umicore Mining Electronic & electrical equipment ,000 Hexagon B ,202 Schneider Electric General industrials ,425 Siemens Industrial engineering ,811 MAN ,885 Vallourec PORTFOLIO STATEMENT (continued) as at 31 January 2011 Value [a] Holding 000 % % Industrial transportation ,408 Groupe Eurotunnel ,036 Groupe Eurotunnel (Bonus entitlement) Support services ,295 Amadeus IT Holdings ,397 DCC ,932 De La Rue ,590 Prosegur Compania Securidad Automobiles & parts ,500 Daimler ,408 Valeo ,300 Volkswagen Pref Beverages ,900 Heineken Holding Food producers ,836 Nestlé (Regd.) ,766 Unilever Leisure goods ,772 Philips Electronics Personal goods ,454 LVMH ,735 Swatch Group (Bearer) Healthcare equipment & services ,471 Fresenius ,573 William Demant Holding Pharmaceuticals & biotechnology ,996 GlaxoSmithKline ,000 Grifols ,126 Intercell ,899 Novartis (Regd.) ,898 Roche Holding Genussscheine 1, Food & drug retailers ,232 Morrison (Wm.) Supermarkets General retailers ,399 Inchcape ,700 Inditex Media ,659 Informa Travel & leisure ,100 bwin Interactive Entertainment ,216 PartyGaming ,865,795 Sportingbet ,186 Thomas Cook Group ,000 Unibet Group SDR Fixed line telecommunications ,172 France Telecom ,062 Telefónica ,670 Telekom Austria Mobile telecommunications ,947 Freenet Electricity ,170 Fortum ,818 Public Power Gas, water & multi-utilities ,551 E.ON 1, ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

14 M&G European Special Situations Fund PORTFOLIO PORTFOLIO STATEMENT (continued) as at 31 January 2011 Value [a] Holding 000 % % Banks ,400 Banco Santander 1, ,400 Banco Santander (dividend rights) ,000 Barclays ,843 BNP Paribas 1, ,229 Commerzbank ,192 Credit Suisse Group (Regd.) 1, ,010,667 Lloyds Banking Group ,272 Standard Chartered Equity investment instruments ,911 Reinet Investments Financial services ,687 IG Group Holdings Life insurance ,729 Ageas (formerly Fortis) ,276 Legal & General Group ,629 Storebrand 1, Non-equity investment instruments ,000 Northern Trust Global Fund - Euro Non-life insurance ,373 Allianz ,292 AXA 1, ,500 Gjensidige Forsikring ,626 Zurich Financial Services Group (Regd.) Software & computer services ,911 Micro Focus ,922 Software Technology hardware & equipment ,261 Alcatel-Lucent ,946 ASML Holding ,475 Ericsson B ,347 Nokia Portfolio of investments (notes 1b & 1d on page 13) 41, Net other liabilities (3) (0.01) (0.20) Net assets attributable to shareholders 41, [a] The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. PORTFOLIO TRANSACTIONS for the year ended 31 January 2011 Largest purchases 000 Northern Trust Global Fund - Euro 4,390 Roche Holding Genussscheine 1,482 Anglo American 1,293 Philips Electronics 1,239 Unilever 1,210 Yell Group 1,205 Banco Santander 1,167 AXA 1,156 Temenos Group 1,034 Alcatel-Lucent 1,007 Standard Chartered 993 Galp Energia B 979 Nokia 932 GlaxoSmithKline 871 ASML Holding 821 Carrefour 820 Morrison (Wm.) Supermarkets 813 Umicore 812 Novartis (Regd.) 757 De La Rue 714 Other purchases 23,290 Total purchases 46,985 Largest sales 000 Northern Trust Global Fund - Euro 4,351 BP 1,719 PartyGaming 1,692 Sportingbet 1,524 Total 1,517 Anglo American 1,401 Valeo 1,193 Zurich Financial Services Group (Regd.) 1,107 Siemens 1,088 Storebrand 1,088 Temenos Group 1,079 Sanofi-Aventis 1,027 bwin Interactive Entertainment 975 Vodafone Group 960 IG Group Holdings 959 TNT 929 Bayer 895 Repsol YPF 854 Carrefour 835 Public Power 781 Other sales 24,869 Total sales 50, ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

15 M&G European Special Situations Fund FINANCIAL STATEMENTS For the year ended 31 January STATEMENT OF TOTAL RETURN Note Income Net capital gains 3 2,182 8,968 Revenue 4 1,054 1,313 Expenses 5 (691) (660) Finance costs: Interest 12 (1) 0 Net revenue before taxation Taxation 6 (112) (125) Net revenue after taxation Total return before distributions 2,432 9,496 Finance costs: Distributions 12 (250) (528) Change in net assets attributable to shareholders from investment activities 2,182 8,968 STATEMENT OF CHANGE IN NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS Opening net assets attributable to shareholders 42,746 33,211 Amounts received on issue of shares Amounts paid on cancellation of shares (4,050) 0 (3,954) 314 Change in net assets attributable to shareholders from investment activities (see above) 2,182 8,968 Retained distributions on Accumulation shares Closing net assets attributable to shareholders 41,145 42,746 BALANCE SHEET as at as at 31 January January 2010 Assets Investment assets 41,148 42,830 Debtors Currency deals outstanding Dividends receivable 2 28 Overseas tax recoverable Prepaid expenses 1 0 Sales awaiting settlement Cash and bank balances Cash held as bank balances Total other assets 151 1,207 Total assets 41,299 44,037 Liabilities Creditors Currency deals outstanding (15) (231) Expenses payable (77) (60) Net distributions payable on Income shares (62) (275) Purchases awaiting settlement 0 (725) Total liabilities (154) (1,291) Net assets attributable to shareholders 41,145 42,746 NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies a) Basis of accounting The financial statements have been prepared in accordance with the historical cost convention, as modified by the revaluation of investments, and in accordance with the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association (the IMA SORP 2010) in October During the year, the sub-fund has adopted the IMA SORP There are no presentational changes to the 2010 comparatives. b) Basis of valuation of investments All investments are valued at their fair value as at 12 noon on 31 January 2011, being the last business day of the financial year. The fair value of non-derivative securities is bid price. c) Investment gains and losses Gains and losses, including exchange differences, on the realisation of investments and increases and decreases in the valuation of investments held at the balance sheet date, including unrealised exchange differences, are treated as capital. d) Exchange rates Transactions in foreign currencies are translated at the rate of exchange ruling on the date of the transaction. Where applicable, assets and liabilities denominated in foreign currencies are translated into sterling at the rate of exchange ruling as at 12 noon on 31 January 2011, being the last business day of the financial year. ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March

16 M&G European Special Situations Fund FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) e) Dividend and interest income Dividends from quoted equity and non-equity shares are recognised net of attributable tax credits when the security is quoted ex-dividend. Overseas dividends received after the deduction of withholding tax are shown gross of taxation, with the taxation consequences shown within the taxation charge. Dividends are recognised as either revenue or capital depending upon the nature and circumstances of the dividend receivable. Bank interest is recognised on an accruals basis and treated as revenue. f) Stock dividends The ordinary element of stocks received in lieu of cash dividends is recognised as revenue of the sub-fund. Any enhancement above the cash dividend is treated as capital. g) Underwriting commission This is treated as revenue and recognised when the issue takes place, except where the sub-fund is required to take up all or some of the shares underwritten, in which case the commission is deducted from the cost of these shares. h) Expenses For accounting purposes, all expenses (other than those relating to the purchase and sale of investments and Stamp Duty Reserve Tax) are charged against revenue for the year on an accruals basis. i) Apportionment of income and expenses to multiple share classes With the exception of the Authorised Corporate Director s periodic charge, which is directly attributable to individual share classes, all income and expenses are apportioned to the sub-fund s share classes pro-rata to the value of the net assets of the relevant share class on the day that the income or expenses are recognised. j) Taxation The rate of corporation tax for the sub-fund is 20%, with relief for double taxation taken where appropriate. The tax accounting treatment follows the principal amounts involved. k) Deferred taxation Deferred tax is provided for in respect of timing differences that have originated but not reversed by the balance sheet date, with the exception of those regarded as permanent differences. Any liability to deferred tax is provided at the average rate of tax expected to apply. A deferred tax asset is recognised to the extent that it is expected to be utilised, based on the likelihood of taxable profits arising in the next twelve month period from which the future reversal of timing differences can be deducted. Deferred tax assets and liabilities are not discounted to reflect the time value of money. l) Distribution policy The policy of the sub-fund is to distribute all available income, excluding any items treated as capital in accordance with the above policies and after deduction of expenses properly chargeable against revenue. Stock dividends form part of the distributable income. Income attributable to Accumulation shareholders is retained at the end of each distribution period and represents a reinvestment of income. All remaining income is distributed in accordance with the Collective Investment Schemes sourcebook. Distributions which have remained unclaimed by shareholders for more than six years are credited to the capital property of the sub-fund. 2 Risk management policies In pursuing the sub-fund s investment objective, as set out in the Authorised Corporate Director s (ACD s) Report, the ACD accepts market price risk and currency risk in relation to the investment portfolio and euro cash positions. Generally, the ACD will not seek to hedge these exposures since the ACD believes that, in the long term, such hedging would be detrimental to total return. The sub-fund holds overseas investments and exchange rate fluctuations can affect both capital and income values. Short-term exposures to foreign currencies, other than euros, are generally covered by short dated currency contracts. Income arising in foreign currencies is generally converted into sterling shortly after receipt and is not hedged in advance of receipt. Since the objective of the sub-fund is to deliver returns over the long term, transactions with the sole objective of realising short-term returns are generally not undertaken. The sub-fund s assets comprise securities that can be readily realised to meet obligations that may arise on the redemption of shares. As noted on page 60, the ACD s policy is that the sub-fund should normally be close to fully invested. These policies have been consistently applied since the beginning of the financial year ( : same). 3 Net capital gains Non-derivative securities 2,176 8,996 Currency gains / (losses) 21 (21) Transaction charges (15) (7) Net capital gains 2,182 8,968 4 Revenue Bank interest 0 2 Overseas dividends Stock dividends UK dividends Underwriting commission 1 12 Total revenue 1,054 1, ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March 2011

17 M&G European Special Situations Fund FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS 5 Expenses Payable to the Authorised Corporate Director or associate Authorised Corporate Director s periodic charge Administration fee Payable to the Depositary or associate Depositary s fee (including VAT) 4 3 Other expenses Audit fee (including VAT) Regulatory fees 5 5 Safe custody charge 6 8 Tax consultancy fees (including VAT) [a] Total expenses [a] Fees paid to overseas firms affiliated with PricewaterhouseCoopers LLP. 6 Taxation a ) Analysis of charge in the year Corporation tax 0 11 Overseas tax Overseas tax recoverable: exchange rate movements (9) 4 Overseas tax recoverable: previously withheld at source (7) 0 Overseas tax recoverable: written off 35 0 Overseas tax recovered: previously written off (11) 0 Double taxation relief 0 (11) Current tax charge (note 6b) Deferred tax (note 6c) 0 0 Total taxation b ) Factors affecting taxation charge for the year Net revenue before taxation Corporation tax at 20% Effects of: UK dividends [a] (41) (64) Stock dividends not taxable (12) (27) Overseas dividends not taxable [a] (127) (29) Current period expenses not utilised Overseas tax Overseas tax recoverable: exchange rate movements (9) 4 Overseas tax recoverable: previously withheld at source (7) 0 Overseas tax recoverable: written off 35 0 Overseas tax recovered: previously written off (11) 0 Double taxation relief 0 (11) Current tax charge (note 6a) [a] As a sub-fund of an Open-Ended Investment Company these items are not subject to corporation tax. c ) Provision for deferred taxation Provision at the start of the year 0 0 Deferred tax in profit and loss account (note 6a) 0 0 Provision at the end of the year 0 0 The sub-fund has not recognised a deferred tax asset of 108,000 ( : nil) arising as a result of having excess management expenses. We do not expect this asset to be utilised in the foreseeable future. 7 Contingent liabilities and outstanding commitments Rights issues At the balance sheet date, the sub-fund had a contingent liability of 15,847 ( : nil) in respect of 134,440 Banco Santander dividend rights resulting from a rights issue whereby one dividend right was issued for every ordinary share held. The dividend right may be exercised on 31 January 2011 at 0.14 per share. Subsequent to the year end, the rights were exercised. 8 Related parties M&G Securities Limited, as Authorised Corporate Director, is a related party and acts as principal on all the transactions of shares in the sub-fund except with in-specie transactions, where M&G Securities Limited acts as an agent. The aggregate monies received through issues, and paid on cancellations, are disclosed in the statement of change in net assets attributable to shareholders and note 12. Amounts due to / from M&G Securities Limited in respect of share transactions at the year end are disclosed in the balance sheet where applicable. Amounts paid to M&G Securities Limited in respect of the Authorised Corporate Director s periodic charge and administration fee are disclosed in note 5. Amounts due at the year end are disclosed in the balance sheet where applicable. During the year, there were no transactions in shares in related parties of M&G Securities Limited (2010: 314,000). At the balance sheet date, material shareholders from within Prudential plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 99.53% ( : 99.66%) of the sub-fund s shares. 9 Financial instruments The policies applied in the management of financial instruments are set out in note 2. Short-term debtors and creditors have been included in respect of the currency exposure only when this is applicable ( : same). Currency exposure The currency profile of the sub-fund s financial instruments at the balance sheet date was: Portfolio of Net other investments assets / (liabilities) Total as at as at as at as at as at as at Danish krone Euro 24,003 24, ,022 24,987 Norwegian krone 1,727 2,123 7 (23) 1,734 2,100 Swedish krona 1, ,103 0 Swiss franc 4,400 3, ,459 3,715 31,663 30, ,748 30,802 Sterling 9,485 12,218 (88) (274) 9,397 11,944 Total 41,148 42,830 (3) (84) 41,145 42,746 Interest rate profile The majority of the sub-fund s assets comprise equity shares which neither pay interest nor have a maturity date ( : same). ANNUAL INVESTMENT REPORT AND FINANCIAL STATEMENTS (AUDITED) March