M&G Recovery Fund. a sub-fund of M&G Investment Funds (3) Annual Short Report June 2017 For the year ended 30 June 2017

Transcription

1 M&G Recovery Fund a sub-fund of M&G Investment Funds (3) Annual Short Report June 2017 For the year ended 30 June 2017

2 Fund information The Authorised Corporate Director (ACD) of M&G Investment Funds (3) presents its Annual Short Report for M&G Recovery Fund which contains a review of the fund s investment activities and investment performance during the period. The ACD s Annual Long Report and audited Financial Statements for M&G Investment Funds (3), incorporating all the sub-funds and a Glossary of terms is available free of charge either from our website at or by calling M&G Customer Relations on ACD M&G Securities Limited, Laurence Pountney Hill, London EC4R 0HH Telephone: (Authorised and regulated by the Financial Conduct Authority. M&G Securities Limited is a member of the Investment Association and of the Tax Incentivised Savings Association.) Important information Please note that with effect from 16 December 2016: We have discounted the initial charge to zero on all new investments into sterling share classes that currently carry such a charge. We have waived the exit charges on future withdrawals from all Sterling Class X shares. The initial charge on all sterling share classes and the exit charges on all Sterling Class X shares were effectively removed as from 28 April Fund manager s introduction Dear Shareholder I am pleased to report to you that the fund performed strongly over the 12-month period. Recent meetings with the management teams of the companies on the portfolio have, in the vast majority of cases, reaffirmed our conviction in them. They are making significant strides towards corporate recovery, building the foundations for the future success of the fund. On behalf of M&G, I would like to thank you again for your continued patience, support and encouragement over the past three years, when we struggled in a challenging market environment. By not changing our investment approach and by remaining patient and steadfast when under pressure, we survived the extended period of quantitative easing and low interest rates and the portfolio is now well positioned to benefit from a change in sentiment. We believe that our recovery approach is different and worthwhile, and anything that is worthwhile tends to take more effort. Our aim is to put you, our customers, at the forefront of everything we do and to try to do our best on your behalf. With my appreciation for your ongoing support, Tom Dobell Fund manager An employee of M&G Limited which is an associate of M&G Securities Limited. 1 2

3 Fund information Investment objective and policy The Fund predominantly invests in a diversified range of securities issued by companies which are out of favour, in difficulty or whose future prospects are not fully recognised by the market. The sole aim of the Fund is capital growth. There is no particular income yield target. Investment approach The M&G Recovery Fund invests in companies that are out of favour with the stockmarket where a good management team is making concerted efforts to turn the business around. The fund manager takes a long-term view with a typical holding period of five years or more and aims to provide a diversified portfolio of up to 100 stocks. Developing a constructive dialogue with company management is a fundamental part of the investment process and the fund manager will not invest in a company unless he has met the management team first. Risk profile The fund invests in the shares of UK-listed companies and is, therefore, subject to the price volatility of the UK stockmarket and the performance of individual companies. The fund s focus is on companies that are out of favour with the market, and these stocks could potentially experience a degree of illiquidity in times of market distress. However, the fund is mainly invested in the shares of large and medium-sized companies, which are normally traded with relative ease. The fund also invests in the shares of smaller and AIM-listed companies, which can be more unpredictable and difficult to buy and sell. Diversification across industries and market capitalisation is therefore key in managing liquidity risk and reducing market risk. The fund s risks are measured and managed as an integral part of the investment process. Please note that the risk management policies are set out in full in the financial statements and notes sections of the Annual Long Report and audited Financial Statements of M&G Investment Funds (3). The following table shows the risk number associated with the fund and is based on Sterling Class A shares. Low risk High risk Typically lower rewards The above number: Typically higher rewards is based on the rate at which the value of the fund has moved up and down in the past and is based on historical data so may not be a reliable indicator of the future risk profile of the fund. is not guaranteed and may change over time and the lowest risk number does not mean risk free. has changed during this period. From 1 July 2016 to 30 December 2016 the risk number was

4 Investment review As at 3 July 2017, for the year ended 30 June 2017 Performance against objective The M&G Recovery Fund aims to deliver capital growth by investing at least 80% of the portfolio in the shares of UK-listed companies that, at the time of investment, are out of favour with the stockmarket, and where the fund manager believes a good management team is making concerted efforts to turn the business around. The fund achieved this objective as it produced a positive total return (the combination of income and growth of capital) across all share classes between 1 July 2016 (the start of the review period) and 3 July 2017.* The fund s returns in all share classes exceeded that of a comparative index, the FTSE All-Share Index. Over the same period, returns for the index were 17.6% and 12.3% in sterling and euros, respectively. To give an indication of the performance of the fund, the following table shows the compound rate of return, per annum, over the period for Sterling Class A (Accumulation) shares and Sterling Class I (Accumulation) shares. Calculated on a price to price basis with income reinvested. Long-term performance One Three Five Since year years years launch % [a] % p.a. % p.a. % p.a. Sterling [b] Class A [c] Class I [d] [a] Absolute basis. [b] Price to price with income reinvested. [c] 23 May 1969, the end of the initial offer period of the predecessor unit trust. [d] 15 January 2010, the launch date of the share class. Please note past performance is not a guide to future performance and the value of investments, and the income from them, will fluctuate. This will cause the fund price to fall as well as rise and you may not get back the original amount you invested. Investment performance The fund delivered strong returns over the 12-month review period, significantly outperforming its comparative index, the FTSE All-Share Index. We saw outperformance in a number of companies across the portfolio, with stock selection in the industrials and healthcare sectors in particular adding value. Politics dominated stockmarkets over the period, which began with the referendum vote in the UK to leave the European Union. Shares initially came under pressure, especially those of companies that generate most of their earnings in the UK. They were particularly hard hit by the sharp fall in the value of sterling that followed the vote. However, the stockmarket reaction proved to be short-lived, recovering strongly over the second half of 2016 (the first half of the review period), as investor expectations of higher interest rates and higher inflation grew. This was characterised by an increase in investor demand for stocks over bonds and for riskier company stocks over safer stocks where there is a greater element of certainty around future earnings. This market rotation was given a further boost in November following the unexpected election of Donald Trump as US president. (Bonds are loans in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid.) Moving into 2017, many riskier company shares initially continued to outperform, but soon began to fade as investors lost faith in some of President Trump s election promises being fulfilled. Closer to home, Prime Minister May triggered Article 50 in March to begin the two-year exit process from the European Union and suggestions that her government was in favour of a hard Brexit prompted nervousness amongst investors and a move back towards perceived safer stocks. This trend continued as concerns around the global growth outlook increased and commodity prices weakened. The prime minister called a snap election in June, which unexpectedly resulted in a hung parliament, with the government needing the support of the Democratic Unionist Party (DUP) to stay in power. Although this raised political uncertainty, positive earnings growth and the prospect of a softer Brexit after the election result enabled investors to shrug aside the uncertainty. Bond yields rose towards the end of the review period amidst speculation about a move towards the end of the era of cheap money quantitative easing - and the potential for higher interest rates from central banks in the UK and Europe. Riskier company shares benefited from this sentiment. (Bond yield refers to the interest 5 6

5 Investment review received from a fixed income security and is usually expressed annually as a percentage based on the investment s cost, its current market value or its face value.) The change in market sentiment and investor expectations on growth and inflation, together with a different attitude to risk (particularly in the first half of the period), was beneficial for the fund. Investors were more willing to consider those economically sensitive companies, where the fund has significant exposure. In addition, the accompanying increase in merger & acquisition activity highlighted some of the unrealised value in the portfolio. Contributors to performance came from a broad range of sectors. Our top contributor over the period was industrial threads manufacturer Coats. The company resolved issues with its three pension funds, freeing up management to focus on growing the business. The pension fund issues have undoubtedly held the business back in recent years, but management s resolution, together with Coats entry into the FTSE 250, have boosted the shares. Equipment rental group Lavendon was also a top contributor. In November 2016, Lavendon became the subject of competing hostile bids from two European suitors Belgian group TVH and French group Loxam when the share price was 139 pence. We felt the initial bids were too low and did not acknowledge Lavendon s value potential. The deal was eventually concluded with Loxam in February at 270 pence a share. Stobart Group, owner of London Southend Airport as well as engineering and biomass energy businesses, also added value. Stobart s management has an ambitious plan to develop the company, including growing the passenger numbers at Southend from 1 million per annum to 3 million, and managing the disposals of the infrastructure assets. The company recently spun off the Eddie Stobart transport business at an attractive valuation. Management has also stated its intention to maintain an increased level of quarterly dividend payments to reflect the cash generation of the group. In previous years, when the market environment was rewarding safer stocks, we have on a number of occasions, noted how those stocks that we do not own have been detrimental to performance. Over this review period, it has been pleasing to see that not owning many of these safer stocks, which by definition do not qualify as recovery opportunities, has added to performance. These included Imperial Brands and National Grid. Elsewhere, our underweight position to the large mining companies detracted, as did the holding in Tullow Oil, while a couple of our holdings in the technology sector suffered some stock-specific issues. Tullow Oil had a difficult 12 months as market sentiment deteriorated towards the energy sector. However, in our view, the share price does not reflect the potential of the company: Tullow has good assets, expertise in oil exploration, sound management and an improving balance sheet. In technology, satellite operator Avanti Communications saw further weakness in its share price amidst investor frustration at the speed at which the company is winning new business. However, Avanti recently agreed a new three-year US$100 million debt facility and announced a new contact win for the deployment of satellite communications services for government sites across Africa. In April, Imagination Technologies was informed by Apple Imagination s largest customer that it will no longer use Imagination s intellectual property in its new products in 15 months to two years time. So far, it has been difficult to assess whether or not this will result in any material settlement for the company; however, in June, Imagination s management decided to sell the business. By the end of the period, the shares had recovered somewhat, reflecting interest from a number of parties. Investment activities Merger & acquisition (M&A) activity on the fund picked up over the review period. The takeover of mineral sands miner, Sierra Rutile (held on the fund) by fellow miner, Iluka Resources, completed in December. In the same month, Germany s Deutsche Post completed the takeover of UK Mail (held on the fund). In both takeover deals, we took the cash on to the fund. Lavendon was also taken over by peer Loxam (as noted earlier) and broadcaster Sky received a bid from 21st Century Fox. We took the opportunity to sell the position for cash. The more vibrant M&A activity is particularly helpful for our stage 2 companies and for propelling the portfolio to a higher level of value as our stage 3 companies exit. Crucially though, we are not willing sellers at the wrong price. Where we have the ability and influence to, we are happy to say no. We want to achieve the best for our investors and for all shareholders in the company. It is an ongoing concern for us that there are companies in the portfolio that are undervalued and therefore vulnerable to bids that are too low and we will do our best in preventing our shareholders being disadvantaged in these circumstances. 7 8

6 Investment review Over the 12 months, we made eight new purchases on the fund, including BT, Hutchison China Meditech (Chi-Med), Rolls Royce and IP Group. BT is focused on improving operational performance through restructuring and cost-cutting. The company s pension deficit is also materially improving which should help BT to increase dividends and reduce debt. Chi-Med is a healthcare group based primarily in China. The company continues to make good progress by broadening and deepening its drug research & development (R&D) pipeline through its Innovation Platform. Chi-Med s distribution business in China generates significant cashflow that helps to fund its research & development and the company is successfully transitioning into a fully-fledged pharmaceutical business. However, as part of this transformation, the company has taken a listing on the NASDAQ market in the US, which has led to short-term technical pressure on the shares. We are supportive of Chi-Med s strategy to list on NASDAQ and believe the company is in a strong position for future growth. Rolls Royce is undergoing a restructuring, but has a solid franchise and high-quality technology. The shares have been weakened by contract losses and a large fine from the Serious Fraud Office over bribery payments. We have confidence in the new management and chief executive. IP Groep creates and builds companies based on the intellectual property arising (mainly) from a network of universities with which it has contractual commercialisation and investment agreements. We opened the position by participating in the company s 207 million fund-raising to strengthen the balance sheet, which should enable IP to advance its portfolio and support its new Australian franchise. The company has also recently made an offer for peer Touchstone Innovations, where we await developments. We made a number of complete sales on the fund over the period in addition to those companies that left the portfolio through takeovers. The sales included BCA Marketplace, GlaxoSmithKline (GSK) and C&C. We made a good return on BCA, owner of the second-hand car website Webuyanycar.com, however, the shares had reached fair value and we had corporate governance concerns that we were not convinced would be resolved to shareholders satisfaction. GSK had been a good holding and was sold on valuation grounds, while brewer C&C had run into difficulties with its acquisition of a US cider business and we therefore decided to dispose of the holding. Outlook We are pleased with the fund s performance over the period, with value being realised across the portfolio. During the difficult times, we remained committed to our investment proposition buying where other people have been selling, backing the companies we are invested in and supporting the management and feel we are now starting to reap the benefits of our commitment. A return to a more normal macroeconomic environment, as central banks around the world look to bring the era of quantitative easing to a close, should provide a more conducive market backdrop for recovery investing, even though the UK faces some specific challenges on the domestic front. Nonetheless, we find there are plenty of recovery opportunities regardless of how the market and the economy are performing. Companies follow their own lifecycle and we are looking for those that are valued at a much lower level than we think they are worth. What is important in driving fund performance is our focus on company specifics and company managements continuing to deliver on their promised strategies. Tom Dobell Fund manager An employee of M&G Limited which is an associate of M&G Securities Limited. * For the performance of each share class, please refer to the Long-term performance by share class table in the Fund performance section of the Annual Long Report and audited Financial Statements for M&G Investment Funds (3). 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. 9 10

7 Investment review Portfolio statement as at 30 June Holding 000 % % Oil & gas producers 358, ,565,018 African Petroleum 8, ,610,000 BP 230, ,592,508 Great Eastern Energy GDR 5, ,970,675 Nostrum Oil & Gas 43, ,688,530 Providence Resources [a] 13, ,175,775 Tap Oil 1, ,291,030 Tullow Oil 54, Oil equipment, services & distribution 29, ,700,000 Cape 12, ,000,682 Lamprell 17, Alternative energy Industrial metals & mining 74, ,000,000 Bluejay Mining [a] 10, ,922,628 First Quantum Minerals 64, Mining 199, ,399,642 Bacanora Minerals [a] 6, ,926,944 Coal of Africa [a] 13, ,855,335 Kenmare Resources 43, ,788 Kenmare Resources wts ,848,162 Petra Diamonds 27, ,625,040 Rio Tinto 53, ,237,094 St Barbara 51, ,247,500 Sylvania Platinum [a] 2, ,536,586 White Energy Company Construction & materials 131, ,636,984 Balfour Beatty 39, ,319,554 CRH 92, Aerospace & defence 81, ,000,000 Cobham 37, ,775,000 Meggitt 18, ,125,132 QinetiQ Group 16, ,000,000 Rolls-Royce Holdings 9, General industrials 169, [b] 130,550,862 Coats Group 101, ,283,430 Smiths Group 68, Electronic & electrical equipment 30, ,228,506 Morgan Advanced Materials 12, ,810,425 Xaar 18, Industrial engineering 49, ,500,000 Renold 13, ,976,192 Severfield 29, ,539,919 TP Group [a] 6, Portfolio statement (continued) as at 30 June Holding 000 % % Industrial transportation 77, ,812,903 Avation 12, ,634,550 Mercantile Ports [a] 2, ,806,726 Stobart Group 61, Support services 165, [b] 3,250,000 Essentra 18, ,641 Grafton Group 6, ,773,967 Homeserve 57, ,401,331 IWG (formerly Regus) 82, Beverages Food producers 29, ,287,630 REA Holdings 23, ,304,408 Zambeef Products [a] 6, Household goods & home construction 14, ,000,000 McCarthy & Stone 14, Healthcare equipment & services 45, ,300,213 UDG Healthcare 45, Pharmaceuticals & biotechnology 318, ,550,000 Eco Animal Health [a] 39, ,874,897 GW Pharmaceuticals ADR 144, ,190,838 Hutchison China Meditech ADR 39, ,081,175 Mesoblast 48, ,038,939 Mesoblast ADR 6, ,658,885 Oxford Biomedica 40, General retailers 121, ,000,000 Dixons Carphone 31, ,500,000 Kingfisher 16, ,899,040 Mothercare 23, ,063,560 Saga 50, Media 75, ,450,941 Entertainment One 58, ,360,000 Pearson 16, Travel & leisure 276, ,600,450 Carnival 81, ,000,000 Dalata Hotel Group 33, ,421,198 easyjet 46, ,650,000 EI Group (formerly Enterprise Inns) 60, ,133,072 fastjet 12, ,321,340 fastjet wts ,380,525 National Express 41,

8 Investment review Portfolio statement (continued) as at 30 June Holding 000 % % Fixed line telecommunications 22, ,795,787 BT Group 22, Mobile telecommunications 2, ,359,073 Avanti Communications [a] 2, Electricity 34, ,149,791 KSK Power Ventur 17, ,681,231 OPG Power Ventures [a] 17, Banks 463, ,453,004 HSBC Holdings 252, ,100,000 Lloyds Banking Group 107, ,825,000 Royal Bank of Scotland Group 47, ,171,057 Standard Chartered 55, Non-life insurance 15, ,642,930 Novae Group 15, Life insurance 202, ,968,153 Aviva 95, ,990,831 Prudential [c] 106, Financial services 38, ,857,142 IP Groep 24, ,000,000 TP Icap (formerly Tullett Prebon) 14, Equity investment instruments 3, ,580 Gresham House Strategic [a] 3, Software & computer services 38, [b] 6,615,674 Actual Experience [a] 17, ,302,515 Blancco Technology [a] 16, ,916,666 Watchstone 4, Technology hardware & equipment 36, ,951,272 Frontier Smart Technologies (formerly Toumaz) [a] 7, ,025,797 Imagination Technologies Group 28, Unquoted / unlisted ,761,085 African Minerals [d] ,868,814 Alizyme [d] ,094,020 Izodia [d] Portfolio of investments 3,107, AAA rated money market funds [e] 4, ,680,000 Northern Trust Global Fund - Sterling 4, Portfolio statement (continued) as at 30 June Holding 000 % % Total portfolio 3,111, Net other assets / (liabilities) (26,643) (0.86) (0.27) Net assets attributable to shareholders 3,085, All securities are on an official stock exchange listing except where referenced. [a] AIM quoted. [b] The comparative sector weightings have been re-analysed to reflect changes to the quoted sector classifications. [c] Related party to the fund. [d] Suspended. [e] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. Top ten portfolio transactions for the year to 30 June 2017 Largest purchases 000 Kenmare Resources 37,236 BT Group 25,378 IP Group 25,000 Essentra 17,611 McCarthy & Stone 16,831 Tullow Oil 15,939 Hutchison China Meditech ADR 15,631 fastjet 12,462 HSBC Holdings 11,976 Standard Chartered 11,113 Other purchases 103,966 Total purchases 293,143 Largest sales 000 GlaxoSmithKline 97,945 Royal Dutch Shell B 78,960 Lavendon Group 78,051 BP 66,242 BCA Marketplace 57,017 HSBC Holdings 45,371 Sky 44,391 Sierra Rutile 41,528 CRH 40,364 STERIS 37,321 Other sales 614,782 Total sales 1,201,972 Purchases and sales exclude the cost and proceeds of AAA rated money market funds

9 Financial highlights Fund performance Please note past performance is not a guide to future performance and the value of investments, and the income from them, will fluctuate. This will cause the fund price to fall as well as rise and you may not get back the original amount you invested. The following chart(s) and tables show the performance for two of the fund s share classes Sterling Class A (Accumulation) shares and Sterling Class I (Accumulation) shares. We show performance for these two share classes because: The performance of the Sterling Class A (Accumulation) share is what most individuals investing directly with M&G have received. It has the highest ongoing charge of all the share classes. Performance is shown after deduction of this charge. All investors in the fund therefore received this performance or better. The performance of the Sterling Class I (Accumulation) share is the most appropriate to compare with the average performance of the fund s comparative sector. It is the share class used by the Investment Association in the calculation of the comparative sector s average performance. This share class is available for direct investment with M&G subject to minimum investment criteria, or via third parties who may charge additional fees. The performance shown takes the deduction of the ongoing charge for this share class into account but it does not take account of charges applied by any other party through which you may have invested. Performance since launch To give an indication of how the fund has performed since launch, the chart below shows total return of Sterling Class A (Accumulation) shares and Sterling Class I (Accumulation) shares. 60,000 40,000 25,000 15,000 10,000 7,000 5,000 3,000 2,000 1,500 1, May 1969 = 100, plotted monthly Chart date 3 July Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* Sterling Class I (Accumulation) shares* Sterling Class A (Accumulation) shares* * Income reinvested Source: Morningstar, Inc. and M&G The fund is available for investment in different share classes, each with varying levels of charges and minimum investments; please refer to the Prospectus for M&G Investment Funds (3), which is available free of charge either from our website at or by calling M&G Customer Relations. For the specific performance tables of all share classes, please refer to the Annual Long Report and audited Financial Statements for M&G Investment Funds (3), which is available free of charge either from our website at or by calling M&G Customer Relations. Fund level performance Fund net asset value as at 30 June Fund net asset value (NAV) 3,085,097 3,248,531 4,505,

10 Financial highlights Fund performance Ten-year performance Please note that comparative data is not available from fund launch. Therefore a ten-year comparable performance chart is shown below Ten years, 3 July 2007 = 100, plotted monthly Chart date 3 July 2017 Sterling Class I (Accumulation) shares* Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* FTSE All-Share Index Morningstar (IA) UK All Companies sector average* Sterling Class A (Accumulation) shares* * Income reinvested Source: Morningstar, Inc. and M&G The fund s Sterling Class I (Accumulation) shares were launched on 15 January Performance data shown prior to this date is that of the fund s Sterling Class A (Accumulation) shares. To give an indication of how the fund has performed during the period the tables below show the performance of Sterling Class A (Accumulation) shares and Sterling Class I (Accumulation) shares. All Performance and charges percentages represent an annual rate except for the Return after operating charges which is calculated as a percentage of the opening net asset value per share (NAV). Dilution adjustments are only in respect of direct portfolio transaction costs. Sterling Class A Accumulation share performance The share class was launched on 23 May for the year to 30 June Change in NAV per share UK p UK p UK p Opening NAV Return before operating charges and after direct portfolio transaction costs (28.67) (4.93) Operating charges (4.97) (4.31) (4.73) Return after operating charges (32.98) (9.66) Distributions (1.22) (2.91) (1.97) Retained distributions Closing NAV Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.13) (0.07) (0.17) Total direct portfolio transaction costs Performance and charges % % % Direct portfolio transaction costs [b] Operating charges Return after operating charges Historic yield Effect on yield of charges offset against capital Other information Closing NAV ( 000) 769, ,361 1,646,231 Closing NAV percentage of total fund NAV (%) Number of shares 237,792, ,051, ,521,234 Highest share price (UK p) Lowest share price (UK p)

11 Financial highlights Fund performance Financial highlights Operating charges and portfolio transaction costs Sterling Class I Accumulation share performance The share class was launched on 15 January for the year to 30 June Change in NAV per share UK p UK p UK p Opening NAV Return before operating charges and after direct portfolio transaction costs (29.81) (5.03) Operating charges (2.89) (2.44) (2.69) Return after operating charges (32.25) (7.72) Distributions (3.68) (5.07) (4.27) Retained distributions Closing NAV Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.14) (0.07) (0.17) Total direct portfolio transaction costs Performance and charges % % % Direct portfolio transaction costs [b] Operating charges Return after operating charges Historic yield Effect on yield of charges offset against capital Other information Closing NAV ( 000) 672, , ,780 Closing NAV percentage of total fund NAV (%) Number of shares 197,234, ,343, ,139,455 Highest share price (UK p) Lowest share price (UK p) [a] In respect of direct portfolio transaction costs. [b] As a percentage of average net asset value. 19 We explain below the payments made to meet the ongoing costs of investing and managing the fund, comprised of operating charges and portfolio transaction costs. Operating charges Operating charges include payments made to M&G and to providers independent of M&G: Investment management: Charge paid to M&G for investment management of the fund (also known as Annual Management Charge). Administration: Charge paid to M&G for administration services in addition to investment management any surplus from this charge will be retained by M&G. Oversight and other independent services: Charges paid to providers independent of M&G for services which include depositary, custody and audit. Operating charges do not include portfolio transaction costs or any entry and exit charges (also known as initial and redemption charges). The charging structures of share classes may differ, and therefore the operating charges may differ. Operating charges are the same as the ongoing charges shown in the Key Investor Information Document, other than where an estimate has been used for the ongoing charge because a material change has made the operating charges unreliable as an estimate of future charges. For this fund there is no difference between operating charges and ongoing charges figures, unless disclosed under the specific share class performance table. Portfolio transaction costs Portfolio transaction costs are incurred by funds when buying and selling investments. These costs vary depending on the types of investment, their market capitalisation, country of exchange and method of execution. They are made up of direct and indirect portfolio transaction costs: Direct portfolio transaction costs: Broker execution commission and taxes. Indirect portfolio transaction costs: Dealing spread the difference between the buying and selling prices of the fund s investments; some types of investment, such as fixed interest securities, have no direct transaction costs and only the dealing spread is paid. 20

12 Financial highlights Operating charges and portfolio transaction costs Investments are bought or sold by a fund when changes are made to the investment portfolio and in response to net flows of money into or out of the fund from investors buying and selling shares in the fund. To protect existing investors, portfolio transaction costs incurred as a result of investors buying and selling shares in the fund are recovered from those investors through a dilution adjustment to the price they pay or receive. The table below shows direct portfolio transaction costs paid by the fund before and after that part of the dilution adjustment relating to direct portfolio transaction costs. To give an indication of the indirect portfolio dealing costs the table also shows the average portfolio dealing spread. Further information on this process is in the Prospectus, which is available free of charge on request either from our website at or by calling M&G Customer Relations. Portfolio transaction costs for the year to 30 June Average [a] Direct portfolio transaction costs [b] % % % % Broker commission Taxes Costs before dilution adjustments Dilution adjustments [c] (0.04) (0.03) (0.06) (0.04) Total direct portfolio transaction costs as at 30 June Average [a] Indirect portfolio transaction costs % % % % Average portfolio dealing spread [a] Average of first three columns. [b] As a percentage of average net asset value. [c] In respect of direct portfolio transaction costs. 21

13 Contact Customer Relations* Write to us at:** M&G Securities Limited PO Box 9039 Chelmsford CM99 2XG Our website: us with queries: * 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. ** Please remember to quote your name and M&G client reference and sign any written communication to M&G. Failure to provide this may affect your ability to transact with us. Please note that information contained within an cannot be guaranteed as secure. We advise that you do not include any sensitive information when corresponding with M&G in this way. M&G Securities Limited is authorised and regulated by the Financial Conduct Authority and provides investment products. The company s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England number _SR_310818