Introducing the. M&G Absolute Return

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1 Introducing the M&G Absolute Return Bond Fund

2 2 M&G Absolute Return Bond Fund Introducing the M&G Absolute Return Bond Fund M&G has launched a new fund designed to chart a steady, positive course for its investors even during challenging market conditions. It s called the M&G Absolute Return Bond Fund. Co-managed by Jim Leaviss, Head of M&G Retail Fixed Interest, and Wolfgang Bauer, a specialist in global credit markets, the fund draws on the collective expertise of M&G s Retail Fixed Interest team. The M&G Absolute Return Bond Fund has access to the team s best investment ideas from across the breadth of global fixed income markets encompassing government bonds as well as investment grade and high yield corporate bonds. The fund looks to build on M&G s experience in successfully using flexible bond strategies which, unlike more traditional bond funds, allow investment across the full range of fixed income assets to navigate difficult markets. Why consider an absolute return fund? For investors seeking reasonable returns, but who do not want to be exposed to large fluctuations in the value of their investment, the current market environment is uniquely challenging. Many of the assets that have traditionally generated low-risk returns such as cash or the government bonds (loans to governments) of major developed economies such as the UK and US today offer extremely low returns. Interest rates on cash savings are close to zero and yields on government bonds annual investment returns as a percentage of the price paid initially are even negative in some cases, meaning buyers would be guaranteed a loss if they held the bonds until they mature (when the loan is repaid). Please note that an investment in bonds carries a higher risk than cash on deposit, where up to 85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, and will fluctuate in value. We believe that bonds continue to offer investment opportunities, but picking the right assets is especially important right now. With a wealth of experience and expertise to draw upon, we are confident that M&G s latest fixed income fund can offer one solution to help meet investors needs. The value of investments and the income from them will fluctuate. This will cause the fund price to fall as well as rise. There is no guarantee the fund objective will be achieved and you may not get back the original amount you invested. Please refer to the glossary for an explanation of the words highlighted in bold throughout this brochure.

3 A talent for Fixed Income 3 How does M&G define absolute returns? The notion of absolute returns can mean different things to different people. Above all, it s important to know that the returns you might receive from funds that target an absolute return as with any investment are neither fixed nor guaranteed. To make this absolutely clear, we think it makes sense to consider these funds as target absolute return funds. At M&G, we define target absolute return funds as those that target (but do not guarantee) positive returns over a stated investment horizon up to a maximum of three years. In our view, they have two key features: Returns will generally have a low connection with the performance of funds that adopt a long investing approach, holding a particular asset class (such as bonds or company shares). This is because absolute return funds can take short positions, which allow them to benefit if an asset s price falls Returns will typically rise and fall less than returns from most other types of investment, so they are viewed as more stable or less changeable What does the fund aim to deliver? The M&G Absolute Return Bond Fund aims to achieve steady positive returns, while limiting monthly losses during difficult market conditions. Specifically, it targets total returns (combined income and capital growth) of the cash rate plus 2.5% a year over any three-year period, before charges. The cash rate is based on the three-month GBP LIBOR (London Interbank Borrowing Rate), the rate at which banks borrow money from each other (in UK pounds) for a three-month period. There is also a specific focus on managing volatility the degree to which the value of a fund swings up and down over a given period. Volatility can be especially uncomfortable for investors who might rely on consistent returns or who need to draw on their investments in the near future (for whom volatile markets could spell a financial shortfall). Managing the fund in this way reduces its ability to achieve returns significantly above three-month GBP LIBOR plus 2.5%. While the fund aims to achieve its objective in any market condition, there is no guarantee that the fund will achieve a positive return over three years, or any other period. Investors may not get back the amount they originally invested.

4 4 M&G Absolute Return Bond Fund Why M&G? When it comes to managing money, you re in experienced hands with M&G. From launching the UK s first unit trust for private investors in 1931, M&G has grown to become one of the largest investment managers in Europe, with over billion of funds under management (as at 31 December 2017). We retain our belief that an active approach to investing can deliver strong performance over the long term. Our experienced and talented investment experts can follow their own original thinking and convictions, rather than the crowd. M&G is an active asset manager who can offer expertise across a range of asset classes, including equities (company shares), fixed income (bonds) and property. We also offer a range of multi-asset funds which invest across different types of assets. Please remember that the value of investments and the income from them will fluctuate, which will cause fund prices to fall, as well as rise, and you may not get back the original amount you invested. Meet the managers of the M&G Absolute Return Bond Fund Jim Leaviss joined M&G in 1997 and is Head of the M&G Retail Fixed Interest team. He has over 25 years of experience in fixed income markets and is also manager of the M&G Global Macro Bond Fund. Wolfgang Bauer joined M&G in He is also manager of the M&G European Inflation Linked Corporate Bond Fund and deputy manager of the M&G Global Corporate Bond Fund, M&G European Corporate Bond Fund and M&G UK Inflation Linked Corporate Bond Fund.

5 A talent for Fixed Income 5 Investment resources We believe the competitive advantage of the M&G Absolute Return Bond Fund lays within the depth and breadth of M&G s expertise in fixed income investing. The co-managers of the M&G Absolute Return Bond Fund look to leverage the M&G Retail Fixed Interest team s talented fund managers, who have over 160 years of combined experience in the market. The team has expertise across all major areas of global bond markets, including government bonds, investment grade corporate bonds (loans to companies considered to be better quality by ratings agencies), and high yield corporate bonds (loans to companies considered to be lower quality, and therefore higher risk). Research and Analysis Investment Grade Fund Managers M&G Absolute Return Bond Fund Co-fund managers Jim Leaviss Wolfgang Bauer Fund Managers High Yield Sovereign/Emerging Markets Fund Managers Source: M&G, 1 November The fund s co-managers can also draw on the rich resource of an expert team of over 90 credit analysts, whose evaluation of how likely it is that a borrower will repay its bondholders can inform investment decisions. The M&G Retail Fixed Interest team s ability to manage risk during periods of heightened market volatility, such as during the global financial crisis and the eurozone debt crisis, has been demonstrated time and time again. Past performance is not a guide to future performance.

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7 A talent for Fixed Income 7 How does the fund work? The co-managers of the M&G Absolute Return Bond Fund take a flexible approach in building a portfolio that employs different investment strategies, giving investors access to a range of corporate bond, government bond and currency markets. The co-managers also have the ability to use derivatives to gain exposure to investments exceeding the value of the fund this is called leverage. This could cause greater changes in the fund s price and increase the risk of loss. Most of the fund at least 70% is invested in bonds, currencies, and cash or assets that can be turned into cash quickly, such as debt due to be repaid within a year. These assets may be from anywhere in the world and denominated in any currency. There are three key pillars of the fund s investment approach: 1 Having diverse sources of investment returns 2 Generating income from the corporate bond market with reduced fluctuations in returns 3 Picking well-considered assets with an experienced team of fund managers and analysts The fund follows a dynamic investment process, combining analysis of global economic trends, with careful asset selection and robust risk management. The fund allows for the extensive use of derivatives. Investment process 1. Define the macroeconomic outlook Assessment of the global picture the economic growth cycle, inflation, and interest rates; political risks; thematic trends and regulatory changes 4. Monitor and rebalance the portfolio Asset allocation within the portfolio is adjusted as required, with new investment ideas introduced as the environment changes, and existing strategies revised as more compelling opportunities emerge Establish investment strategies Combining this outlook with market views and asset valuations, in order to identify attractive strategies 3. Construct a diversified portfolio Selecting attractive individual assets that are suitable for the fund s objective, taking into account the risks and returns of investment strategies

8 8 M&G Absolute Return Bond Fund How can the fund potentially perform in any market condition? While the co-managers of the M&G Absolute Return Bond Fund aim to invest in assets such as corporate bonds that stand to perform well in favourable market conditions, they will also invest in other types of assets which would be expected to hold up well when markets are falling, such as government bonds or certain currencies. The co-fund managers are also able to put hedges in place these are risk management tools that are intended to limit the impact of assets falling in value on the portfolio. Some protection from a falling investment market can, in effect, be obtained through the use of derivatives financial contracts whose value is derived from other assets. The co-fund managers may use derivatives to take short positions, allowing the fund to profit from a fall in the price of an asset (for example, a company s bonds). However, if the asset s price increases, the short position will cause the fund to incur a loss. In the case of the M&G Absolute Return Bond Fund, there are clearly defined checks and balances in place to limit the extent to which the fund s value might decline in challenging market conditions. Even with robust risk controls, however, there can be no guarantee that the fund s value will not fall.

9 A talent for Fixed Income 9 What will the fund invest in? Risk-on assets that are deemed to carry higher degrees of investment risk, and tend to perform better when the economic outlook is more optimistic (and underperform more when it s pessimistic) High yield corporate bonds Investment grade corporate bonds Emerging market debt and currencies Derivatives to increase exposure Risk-off assets that are deemed to carry lower degrees of investment risk, and tend to underperform less or possibly even perform well when the economic outlook is more pessimistic Government bonds Safe-haven currencies Derivatives to reduce risk The co-fund managers will always aim to ensure that they have the right balance of risk-on and risk-off assets in the fund at any one time, according to the macroeconomic outlook and market opportunities. The fund may invest more than 35% in securities issued by any one or more of the governments listed in the fund prospectus. Such exposure may be combined with the use of derivatives in pursuit of the fund objective. It is currently envisaged that the fund s exposure to such securities may exceed 35% in the governments of Germany, Japan, UK, USA although these may vary subject only to those listed in the prospectus. Is the M&G Absolute Return Bond Fund right for me? Absolute return funds are typically suited for investors who are willing to sacrifice some potential upside, in the form of investment returns, in favour of limited potential downside, in the form of investment losses. Depending on how the wider market fares, targeting lower volatility might come at the expense of investment returns. It s also important to note, however, that absolute return investing might not be a suitable strategy for investors looking to achieve consistently positive returns over shorter timeframes. It is possible that returns may not be positive. The suitability of any investment will always depend on your circumstances and attitude towards risk and return. If you re at all unsure, please speak to a financial adviser. When you re deciding how to invest, it s important to remember that the value of investments goes up and down. So how much your investments are worth will change over time, and you may not get back the amount you originally invested.

10 10 M&G Absolute Return Bond Fund Glossary Asset: Anything having commercial or exchange value that is owned by a business, institution or individual. Asset class: Category of assets, such as cash, company shares, fixed income securities and their sub-categories, as well as tangible assets such as real estate. Bond: A loan 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. Capital: Refers to the financial assets, or resources, that a company has to fund its business operations. Corporate bonds: Fixed income securities issued by a company. They are also known as bonds and can offer higher interest payments than bonds issued by governments as they are often considered more risky. Credit: The borrowing capacity of an individual, company or government. More narrowly, the term is often used as a synonym for fixed income securities issued by companies. Derivatives: Financial instruments whose value, and price, are dependent on one or more underlying assets. Derivatives can be used to gain exposure to, or to help protect against, expected changes in the value of the underlying investments. Derivatives may be traded on a regulated exchange or traded over the counter. Diversification: The practice of investing in a variety of assets. This is a risk management technique where, in a well-diversified portfolio, any loss from an individual holding should be offset by gains in other holdings, thereby lessening the impact on the overall portfolio. Emerging market: Economies in the process of rapid growth and increasing industrialisation. Investments in emerging markets are generally considered to be riskier than those in developed markets. Government bonds: Fixed income securities issued by governments, that normally pay a fixed rate of interest over a given time period, at the end of which the initial investment is repaid. Hedging: A method of reducing unnecessary or unintended risk. High yield bonds: Fixed income securities issued by companies with a low credit rating from a recognised credit rating agency. Theyare considered to be at higher risk of default than better quality, ie higher-rated fixed income securities but have the potential for higher rewards. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of a security s life. Index: An index represents a particular market or a portion of it, serving as a performance indicator for that market. Inflation: The rate of increase in the cost of living. Inflation is usually quoted as an annual percentage, comparing the average price this month with the same month a year earlier. Investment grade bonds: Fixed income securities issued by a company with a medium or high credit rating from a recognised credit rating agency. They are considered to be at lower risk from default than those issued by companies with lower credit ratings. Default means that a company or government is unable to meet interest payments or repay the initial investment amount at the end of a security s life. Long position: Refers to ownership of a security held in the expectation that the security will rise in value. Maturity: The length of time until the initial investment amount of a fixed income security is due to be repaid to the holder of the security. Risk: The chance that an investment s return will be different to what is expected. Risk includes the possibility of losing some or all of the original investment. Safe-haven assets: Refers to assets that investors perceive to be relatively safe from suffering a loss in times of market turmoil. Short position: A way for a fund manager to express his or her view that the market might fall in value. Total return: The term for the gain or loss derived from an investment over a particular period. Total return includes income (in the form of interest or dividend payments) and capital gains. Volatility: The degree to which a given security, fund, or index rapidly changes. It is calculated as the degree of deviation from the norm for that type of investment over a given time period. The higher the volatility, the riskier the security tends to be. Yield: This refers to either the interest received from a fixed income security or to the dividends received from a share. It is usually expressed as a percentage based on the investment s costs, its current market value or its face value. Dividends represent a share in the profits of a company and are paid out to the company s shareholders at set times of the year.

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12 Contact Call us* Customer Relations If you have a query regarding your M&G investment, our Customer Relations team can be contacted from 8.00am to 6.00pm, Monday to Friday, and from 9.00am to 1.00pm on Saturday. Investment Helpline If you would like to make an investment, request further information on a new or additional investment, or want to read more about our products and services, call our Investment Helpline from 8.00am to 6.00pm, Monday to Friday, and from 9.00am to 1.00pm on Saturday. Minicom textphone If you have hearing difficulties, you can contact us on minicom from 9.00am to 5.00pm, Monday to Friday. Before investing, you should read an up-todate version of the Prospectus and Key Investor Information Documents (KIIDs) for the fund(s) in which you wish to invest. There you will find more information about the investment, including details about the fund s different share classes: be sure to choose the appropriate one for you. It also explains fund charges, including the ongoing charge, a deduction from your fund which M&G makes to cover the costs of investment management and administration. You should also read the Important Information for Investors document, which includes M&G s Terms and Conditions. We are unable to give you financial advice. If you are unsure about the suitability of your investment, please speak to your financial adviser. us** info@mandg.co.uk For information. Write to us at: M&G Customer Relations PO Box 9039 Chelmsford CM99 2XG * For security purposes and to improve the quality of our service, we may record and monitor telephone calls. ** 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. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No JUN 18 /