M&G North American Dividend Fund

Transcription

1 M&G North American Dividend Fund a sub-fund of M&G Investment Funds (1) Annual Short Report August 2017 For the year ended 31 August 2017

2 Fund information The Authorised Corporate Director (ACD) of M&G Investment Funds (1) presents its Annual Short Report for M&G North American Dividend 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 (1), 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.) Investment objective The Fund aims to maximise total return (the combination of capital growth and income) whilst aiming to grow distributions over the long term. Investment policy The Fund will invest mainly in North American equities and may invest across all sectors and market capitalisations. The Fund may also invest in transferable securities issued by companies which are listed, registered or trading within North America and in collective investment schemes. Cash and near cash may be held for ancillary purposes and derivatives, including warrants, may be used for efficient portfolio management and hedging purposes. 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. Investment approach The M&G North American Dividend Fund employs a bottom-up stockpicking approach, driven by the fundamental analysis of individual companies. The fund manager seeks to invest in companies with excellent capital discipline and long-term dividend growth potential. The fund manager believes rising dividends create upward pressure on the value of shares. Dividend yield is not the primary consideration for stock selection. The fund manager aims to create a diversified portfolio with exposure to a broad range of sectors. He selects stocks with different drivers of dividend growth to construct a portfolio that has the potential to cope in a variety of market conditions. The fund will usually hold around 40 to 50 stocks, with a long-term investment view and a typical holding period of three to five years. 1 2

3 Fund information Investment review Risk profile The fund invests in the shares of North American companies and is, therefore, subject to the price volatility of the North American stockmarket and the performance of individual companies. The fund may also be subject to fluctuations in currency exchange rates. The fund s focus is on shares of companies that have the potential to grow their dividends over the long term. Income distributions from the fund s holdings, however, are not guaranteed and may vary. Diversification across industries and market capitalisation is 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 (1). The following table shows the risk number associated with the fund and is based on Sterling Class A shares. 3 Low risk Typically lower rewards The above number: High risk 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 September 2016 to 30 December 2016 the risk number was 6. As at 1 September 2017, for the year ended 31 August 2017 Distribution summary Over the 12-month review period, the fund distributed income of cents per US dollar Class A (Income) share. This represents an increase of 5.9% on the previous year. We are pleased that the distribution has increased, in line with the fund s objective, because this time last year we were concerned about our ability to deliver on our stated aim of growing the income stream. Our fears hinged on a potential change in the fund s tax status which would have provided a severe headwind to our task. In the event, the fund s tax status remained unchanged and we continued to benefit from a favourable tax rate for US dividends. (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.) We focus on companies with the potential to grow dividends over timeframes of three to five years and we are encouraged by the continued progress of our underlying holdings. The majority of our holdings reported dividend increases of 5% to 15% during the year, and it was pleasing to see many of the fund s top holdings represented in this core group. Methanex (chemicals), Microsoft (technology) and Anthem (healthcare) all delivered solid dividend growth. Reynolds American, the fund s largest holding for most of the year, also made a strong contribution. The company was acquired by British American Tobacco (BAT) during the review period, but it did not bow out without offering a parting gift. Reynolds American rewarded shareholders with an 11% dividend increase in February the third increase in a year and a gesture consistent with its past generosity. The dividend is more than 50% higher since we first bought the stock in April It was also pleasing to see a strong showing of companies with growth in excess of 15%. UnitedHealth and MasterCard, both top 10 holdings, raised their dividends by 20% and 16% respectively, but Broadcom delivered the biggest increase after the technology company doubled its payment. Consumer staples and retail are not often associated with fast rates of dividend growth, but Constellation Brands (30%), Home Depot (29%) and Mondelēz (16%) demonstrated what can be achieved with a sound strategy and strong capital discipline. Only a handful of the fund s holdings increased their dividends by less than 5%. Cardinal Health was one of the laggards and the stock has since been sold. There were no dividend cuts during the period under review. 4

4 Investment review The fund s distributions are shown in the Specific share class performance tables in this report. The distribution is subject to a number of influences, including changes in the market environment and the fund s tax status, and as a result there is no guarantee that the fund will increase the distribution in every financial year. Performance against objective Between 1 September 2016 (the start of the review period) and 1 September 2017, the fund delivered a positive total return (the combination of income and growth of capital) across all its share classes.* The fund s returns in all share classes were ahead of the S&P 500 Index, a comparative index, which returned 16.5% in US dollars, 19.4% in sterling and 9.8% in euros. The fund therefore met its objective of maximising total return during the review period. The fund has achieved this objective since it was introduced in April 2015 and over a longer timeframe of five years. The fund also delivered on its objective of growing the distribution which has been in place since April This was the first year in which we have been able to make a like-for-like comparison by pitting two 12-month distributions calculated on the same basis with fees deducted from capital rather than income. Growing distributions has not been part of the objective for long enough to assess this aspect of the fund s performance over five years. 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] 18 December 1972, the end of the initial offer period of the predecessor unit trust. [d] 3 August 2012, the launch date of the share class. 5 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 activities There were 18 new purchases and 14 complete sales during the review period, as a result of which the number of holdings increased from 38 to 42. It was a relatively busy year in terms of activity as we took advantage of volatility and lower prices in certain areas of the market to initiate new positions. Anthem, the managed care organisation, was the biggest purchase during the year. The investment case is based on the potential for earnings growth which we believe is not reflected in the valuation. This purchase, combined with those of Allergan and Zoetis, resulted in an increase in the fund s healthcare weighting. Cardinal Health was sold after a reassessment of the investment thesis. There were two new purchases in the real estate sector where we had no exposure previously. We started new positions in Crown Castle, the leading US provider of wireless infrastructure, and Equinix, which specialises in data centres. Both companies are well placed to benefit from structural trends which, in our view, will support strong dividend growth for the foreseeable future. The fund s energy exposure increased, helped by the purchase of Gibson Energy, a Canadian company with an attractive pipeline business and a cheap valuation. We also added to our existing holding in Keyera with the sale of Inter Pipeline providing a source of cash. Elsewhere in the sector, we bought Helmerich & Payne and Halliburton in the services industry, which are potential beneficiaries of a recovery in investment. The fund continues to have no exposure to the oil majors which are struggling to grow. We reduced our holding in LyondellBasell, the chemicals company, to manage the fund s broader energy-related exposure and accommodate higher conviction ideas, most notably Methanex. Our weighting in financials was marginally higher with the new additions of American Express, Intercontinental Exchange and First Republic Bank offsetting the sale of Chubb, Invesco and Travelers. We also took profits in M&T Bank, which rallied 25% during the review period. The fund s biggest sales were driven by takeover activity. We exited Reynolds American after it was acquired by BAT in a deal combining cash and shares, while Time Warner was sold soon after the AT&T 6

5 Investment review transaction was announced. Reynolds American was the fund s biggest holding at the time of the takeover approach and the dominant part of the consumer staples exposure. The weighting in the sector has declined following Reynolds American s departure, but we reallocated some of the proceeds into a new holding in Constellation Brands and topped up our position in Mondelēz. Both companies are delivering strong growth in a defensive sector where growth tends to be more pedestrian. We also took advantage of the post-trump sell-off in defensive stocks to buy more shares in Altria on weakness, although we trimmed our remaining tobacco holding once the shares recovered from their lows. Technology saw the biggest reduction in sector exposure after Sabre and Apple were sold in their entirety. ADP was sold after its brief sojourn in the fund which saw the shares rise 20% in less than three months. We also took profits in Broadcom after a strong run to manage the position size. Analog Devices was the only new purchase in the sector, although the manufacturer of analogue semiconductors is more exposed to industrial end markets. Other new purchases included Starbucks, which is growing quickly with potential to expand internationally. Although this is not the cheapest stock in the fund, there is potential for upside given the long runway of expansion opportunities, especially in China. Outlook The surprise result of Donald Trump s victory has already made its mark on financial markets, but we believe volatility is likely to persist in certain areas of the US stockmarket as the new president pursues the most wide-ranging government agenda in decades. We are looking to take advantage of these opportunities, when they arise, to invest in long-term winners. Pharmaceuticals, for example, is an area we have been monitoring closely in the healthcare sector given the cross-party support for lower drug prices. We also believe that fiscal policies may surprise on the upside with tax cuts potentially enhancing earnings growth in a meaningful way. In the meantime, dividend growth remains robust across the portfolio which reflects well on the financial strength and growth potential of the underlying holdings. Although the outperformance of value as a style has taken a step back this year, we continue to believe that a valuation discipline is crucial to generate excellent returns over the long term. At one end of the spectrum, investors are chasing certain areas of the market for their dependable growth, with the result that multiples are high in those particular segments and ultimately difficult to justify. This 7 extreme is now most apparent in technology, but we observe with interest that the past excesses in defensive stocks, most notably in consumer staples, have started to unwind. Stocks such as General Mills, Kraft Heinz, Kellogg Company and Campbell Soup have all underperformed this year in response to disappointing results. It seems that fundamentals are no longer being ignored in what was until recently a fashionable sector. At the other end of the spectrum, we continue to see a wide disparity between the fundamentals of many of our holdings and their valuations in the market, and we are hopeful that these gaps will close and drive performance in the future. We believe the valuation of the fund s underlying holdings, their cash generative nature and their ability to grow dividends over time stand us in good stead to generate competitive returns over the long term. We are also encouraged by the favourable valuation of the overall fund which offers a higher yield than the S&P 500 Index and faster dividend growth than the market. That said, these metrics are calculated gross of tax and the dividends paid by companies are not handed down to the fund s investors in their entirety. With this in mind, we face a challenge to meet the fund s objective of growing the distribution in the financial year ahead. This may be reminiscent of last year s guidance, but we have reason to be more nervous on this occasion. Our caution is not based on the dividend growth of our underlying holdings, which remains solid, but rather a potential change in the fund s tax status which seems more likely this year compared to the past 12 months. If our fears come to fruition, dividends received from US-domiciled companies will be taxed at 30% rather than the 15% we have been paying. We will endeavour to preserve the lower tax rate for the benefit of our investors, but there is no guarantee that this will be achieved. While a higher tax rate would be a clear setback in the short term, we are confident that the consistent application of our approach will allow us to increase the distribution over a longer timeframe of five years. If we can deliver on the objective over this longer time period, we believe that the growth in the income stream will be matched by capital growth, and that the combination of the two will lead to compelling total returns. John Weavers 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 (1). 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. 8

6 Investment review Portfolio statement as at 31 August Holding $ 000 % % Oil & gas producers [a] 9 Oil equipment, services & distribution 93, [a] 679,245 Gibson Energy 9, ,127 Halliburton 8, ,710 Helmerich & Payne 8, ,324 Keyera 18, ,566 Pembina Pipeline 26, ,007,538 PrairieSky Royalty 22, Chemicals 58, ,935 LyondellBasell 2, ,125,056 Methanex 55, Electronic & electrical equipment 10, ,173 Emerson Electric 10, Industrial engineering 3, ,043 Rockwell Automation 3, Industrial transportation 12, ,894 Union Pacific 12, Beverages 19, ,786 Constellation Brands 19, Food producers 22, ,113 Mondelēz International 22, Personal goods 8, ,981 Nike 8, Tobacco 11, ,975 Altria Group 11, Healthcare equipment & services 103, ,860 Anthem 23, ,896 Becton Dickinson 8, ,694 Medtronic 24, ,776 UnitedHealth Group 47, Pharmaceuticals & biotechnology 40, ,328 Allergan 16, ,529 Johnson & Johnson 14, ,642 Zoetis 9, Food & drug retailers General retailers 20, ,222 Home Depot 15, ,204 L Brands 4, Media Travel & leisure 47, ,993 Las Vegas Sands 26, ,886 Six Flags Entertainment 10, ,037 Starbucks 11, Portfolio statement (continued) as at 31 August Holding $ 000 % % Banks 60, ,173 First Republic Bank San Francisco 9, ,237 JPMorgan Chase 11, ,532 M&T Bank 16, ,285 Wells Fargo 23, Non-life insurance 7, ,793 Arthur J. Gallagher & Co. 7, Real estate investment trusts 31, ,536 Crown Castle International 20, ,195 Equinix 11, Financial services 42, ,390 American Express 16, ,496 Blackrock 8, ,573 Intercontinental Exchange 16, Software & computer services 90, ,467 FIS 28, ,886 MasterCard 27, ,367 Microsoft 35, Technology hardware & equipment 37, ,027 Analog Devices 11, ,222 Broadcom 25, Portfolio of investments 722, AAA rated money market funds [b] 27, ,867,000 Northern Trust Global Fund - US dollar 27, Forward currency contracts for share class hedging (0.05) 23,859,226 Bought for CAD4,026,700 (expires ) ,697,524 Bought for $27,987,504 (expires ) (133,331) Sold for $156,856 (expires ) (1) 0.00 Total portfolio 750, Net other assets / (liabilities) (2,506) (0.33) 0.07 Net assets attributable to shareholders 748, All securities are on an official stock exchange listing except where referenced. [a] The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. [b] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. 10

7 Investment review Financial highlights Fund performance Top ten portfolio transactions for the year to 31 August 2017 Largest purchases $ 000 Anthem 19,703 Mondelēz International 18,477 Crown Castle International 17,783 Allergan 15,975 Constellation Brands 15,801 American Express 15,536 Intercontinental Exchange 15,152 Helmerich & Payne 13,482 Starbucks 11,837 Altria Group 11,515 Other purchases 193,480 Total purchases 348,741 Largest sales $ 000 Reynolds American 25,482 Sabre 21,386 Time Warner 21,350 Broadcom 19,771 British American Tobacco 16,857 LyondellBasell 15,744 Inter Pipeline 15,015 Cardinal Health 15,000 Automatic Data Processing 11,687 M&T Bank 10,844 Other sales 160,394 Total sales 333,530 Purchases and sales exclude the cost and proceeds of AAA rated money market funds. 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 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. 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 (1), 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 (1), 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 31 August $ 000 $ 000 $ 000 Fund net asset value (NAV) 748, , ,

8 Financial highlights Fund performance 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. 20,000 12,000 7,000 4,000 2,000 1, December 1972 = 100, plotted monthly Chart date 1 September Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* S&P 500 Index Sterling Class I (Accumulation) shares* Morningstar (IA) North American 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 3 August 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 18 December for the year to 31 August Change in NAV per share UK p UK p UK p Opening NAV 1, , , Return before operating charges and after direct portfolio transaction costs Operating charges (37.71) (27.83) (26.93) Return after operating charges Distributions (12.94) (42.63) (8.23) Retained distributions Closing NAV 2, , , Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.64) (0.35) (0.93) 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) 110, , ,821 Closing NAV percentage of total fund NAV (%) Number of shares 3,587,428 4,671,379 9,339,789 Highest share price (UK p) 2, , , Lowest share price (UK p) 1, , ,

9 Financial highlights Fund performance Financial highlights Operating charges and portfolio transaction costs Sterling Class I Accumulation share performance The share class was launched on 3 August for the year to 31 August Change in NAV per share UK p UK p UK p Opening NAV 1, , , Return before operating charges and after direct portfolio transaction costs Operating charges (19.65) (14.48) (13.84) Return after operating charges Distributions (28.34) (39.95) (16.25) Retained distributions Closing NAV 2, , , Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.61) (0.33) (0.87) 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) 169, , ,821 Closing NAV percentage of total fund NAV (%) Number of shares 5,775,827 6,089,177 4,891,465 Highest share price (UK p) 2, , , Lowest share price (UK p) 1, , , [a] In respect of direct portfolio transaction costs. [b] As a percentage of average net asset value. 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. Share class hedging: Charge paid to M&G for currency hedging services to minimise exchange rate risk for the share class. 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

10 Financial highlights Operating charges and portfolio transaction costs 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. 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. Portfolio transaction costs for the year to 31 August Average [a] Direct portfolio transaction costs [b] % % % % Broker commission Taxes Costs before dilution adjustments Dilution adjustments [c] (0.03) (0.02) (0.06) (0.04) Total direct portfolio transaction costs as at 31 August 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. Please see the section above this table for an explanation of dilution adjustments. 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

11 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_311018