M&G North American Dividend Fund a sub-fund of M&G Investment Funds (1) Annual Short Report August 2018 For the year ended 31 August 2018

Transcription

1 M&G North American Dividend Fund a sub-fund of M&G Investment Funds (1) Annual Short Report August 2018 For the year ended 31 August 2018

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 As a result of the Extraordinary General Meetings of Shareholders held on 4 October 2018, the non-gbp share classes of the M&G North American Dividend Fund will be merged into corresponding share classes of M&G (Lux) Investment Funds 1 sub-funds. For further details on the mergers and the date at which these will occur, please refer to: On 28 September 2018 the Depositary changed from National Westminster Bank Plc to NatWest Trustee & Depositary Services Limited. 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. 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 not changed during this period. As at 3 September 2018, for the year ended 31 August 2018 Distribution summary Over the 12-month review period, the fund distributed income of pence per Sterling Class A (Income) share, compared to pence in the previous financial year. This represents a decline of 14.9% as the income stream was hampered by a higher tax rate on US dividends. Dividends from US shares were taxed at 30% rather than the 15% in the previous financial year. For the same reason, the distribution paid by the US dollar Class A (Income) share fell by 10.4% to cents from cents. (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.) In our reports over the past two years, we highlighted the possibility of a change in the fund s tax status. This did not materialise in the previous financial year, but did become a reality during the 12 months under review. Although the higher tax burden has been a setback, we have reason to believe the fund will revert to the lower tax rate of 15% in the financial year ending 31 August The pace of dividend growth from our underlying holdings continues to be encouraging, however, with the majority reporting increases in the region of 5% to 15%. Methanex, the fund s largest holding, delivered a 10% dividend increase, which was accompanied by a 10% share buyback programme. We are pleased that the methanol producer is stepping up its efforts to return excess cash to enhance shareholder value. (Share buybacks are the action of companies repurchasing their own shares from the marketplace, usually when they believe them to be undervalued.) UnitedHealth Group, the second-largest holding, raised its dividend by a more impressive 20% as the managed care operator (MCO) continued to deliver strong operating performance. The technology sector accounted for some of the fastest dividend growth in the fund. Broadcom, the semiconductor company, led the pack with a 72% increase, while Cognizant Technology Solutions, the IT services provider, followed with a 33% uplift. Banks were another source of strong dividend growth after our holdings passed the Federal Reserve s stress test. JPMorgan Chase and M&T Bank boosted their payments by 43% and 25%, respectively. Dividend growth was also robust among the so-called defensive stocks we own. (Defensive companies tend to have stable earnings and are 3 4

4 Investment review less affected by peaks and troughs in the economy.) Constellation Brands, which owns the leading Mexican beer brand Corona, accelerated its dividend growth to 42%. Mondelēz International, the snacks company behind Cadbury and Oreo, reported an 18% increase. Elsewhere, Union Pacific was one of several holdings which benefited from US tax reform. Its positive influence on corporate profits allowed Union Pacific, the railroads company, to raise the quarterly payment by 10% on three separate occasions, resulting in 32% growth yearon-year. Six Flags Entertainment (theme parks), Anthem (MCO) and Altria Group (tobacco) were also beneficiaries. All three companies raised their dividends twice in 12 months and ended the review period with year-on-year increases of 15% or more. Not all of our holdings delivered growth, however. Gibson Energy held its dividend flat, although we are confident that the midstream company can return to dividend growth over the long term. L Brands similarly failed to increase the dividend as the trading backdrop for retailers remained challenging. The stock is under review. Although dividends were static in these isolated cases, there were no dividend cuts during the past 12 months. Performance against objective Between 1 September 2017 (the start of the review period) and 3 September 2018, the fund delivered a positive total return (the combination of income and growth of capital) across all its share classes.* The fund s returns compared with the S&P 500 Index, a comparative index, were mixed. The S&P 500 Index returned 19.4% in US dollars, 20.3% in sterling and 22.0% in euros during the period under review. The fund met its aim of maximising total return during the past 12 months and has done so since the objective was introduced in April Over a longer period of five years, all share classes have generated a positive total return. However, the fund did not deliver on the objective of growing the distribution because of the higher tax rate on US dividends during the financial year. Growing distributions has been part of the objective since April 2015 and it is therefore not yet possible to assess this aspect of the fund s performance over five years, which we believe is an appropriate timeframe for the objective. * 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). 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. 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 US stockmarket extended its rally during the 12 months under review as corporate earnings continued to beat expectations. Tax cuts played their part but there was more to the narrative. US companies were operating against a favourable environment of a robust economy and positive earnings surprises were rewarded handsomely. Failure to deliver, on the other hand, was punished accordingly. Concerns about rising interest rates and trade wars tested investors mettle in the earlier part of 2018, but the market soon resumed its upward trajectory, culminating in record highs for the S&P 500 Index and the NASDAQ Composite Index. The market s progress, however, was characterised by a narrowness of leadership. Technology and consumer discretionary were the standout performers as Apple and Amazon continued their momentum-driven rise. Energy benefited from a higher oil price, but these three were the only sectors to outperform during the review period. Cyclical areas such as financials and industrials did not keep up with the rising market (cyclicals are companies which tend to be more sensitive to the economic cycle), while defensives 5 6

5 Investment review underperformed in unison. Utilities, telecoms and real estate suffered as bond yields rose, not helped by their status as so-called bond proxies (stocks with safe, predictable returns and high dividend yields). Consumer staples struggled under the weight of deteriorating fundamentals as growth expectations were revised down. A focus on cost over growth, combined with the increasing prominence of online sales, has materially strengthened the hands of retailers and their private label brands. Unlike the rest of the world, private label has remained limited in its presence in the domestic US market until recently. This pressure on many consumer brands is likely to remain for the foreseeable future and highlights the importance of selectivity when investing in the wider consumer staples space. Against this background, the fund added value through positive stock selection, particularly in materials, healthcare and industrials. Methanex made the biggest positive contribution to performance against the favourable backdrop of a higher methanol price. The stock returned more than 40% during the period under review (returns are in US dollars unless otherwise stated). UnitedHealth Group and Anthem were also among the top 10 positive contributors and bucked the trend in an underperforming healthcare sector. Both stocks returned more than 30% as the MCOs continued to deliver better-than-expected earnings. With an ageing populace, rising healthcare costs are likely to remain a key focus of the US healthcare system and we believe the MCOs are integral to solving this problem longer term. This should be to the benefit of both patients and shareholders. The domestic bias of MCOs also worked to their advantage as they were considered significant beneficiaries of tax reform. Union Pacific was seen in a similarly favourable light in industrials. MasterCard and Microsoft delivered returns of more than 50% in a buoyant technology sector, although their strong performance was offset by not owning Apple and Alphabet (owner of Google) as well as Amazon and Netflix in consumer discretionary. Apple and Alphabet, which account for almost 7% of the S&P 500 Index, returned 41% and 30% respectively, while Amazon and Netflix which account for another 3% of the index, doubled in value. Alphabet, Amazon and Netflix do not pay dividends and are therefore ineligible for our dividend growth approach. Our holding in Broadcom also held back returns after the semiconductor company s acquisition of CA Technologies was treated with scepticism. Investors questioned the strategic logic of buying a software business and the shares were sold off abruptly. We continue to believe that the stock is materially undervalued. 7 Other detractors during the review period included PrairieSky Royalty in the energy sector which drifted lower in the absence of good news. Keyera was another notable underperformer, particularly in the first six months of the review period after the midstream company issued new shares to support its capital growth programme. Both stocks are listed in Canada and suffered the additional headwind of a weaker currency. Defensive stocks were also prominent among the list of detractors as the environment of rising interest rates weighed on sentiment. In consumer staples, Mondelēz International and Constellation Brands underperformed despite their strong growth prospects, while Altria Group could not escape the wider malaise in the tobacco industry. Equinix was penalised for its structure as a real estate investment trust and the associated perception of interest rate sensitivity. Equinix, however, is a data centre business which is a beneficiary of structural trends. We believe these enduring themes will drive the stock price over the long term. Investment activities There were eight new purchases and five complete sales during the past 12 months, a level of turnover consistent with our long-term investment horizon of three to five years. The number of holdings rose to 45. The fund s exposure to technology increased with the addition of three new holdings. We bought shares in Cognizant Technology Solutions in September in the belief that the company s strategic shift from outsourcing to operational consultancy will support long-term profitable growth which is not reflected in the stock s undemanding valuation. We also added Visa in April, to benefit from the structural growth in digital payments, and we bought a stake in Lam Research at the end of the review period after a sell-off in semiconductor stocks provided an attractive entry point. We also added to our holding in Broadcom on weakness given its strong cash generation and compelling valuation. The shares are yielding more than 3% and we expect the dividend to grow quickly. Comcast in consumer discretionary was the biggest purchase during the year. The media group, which covers cable communications and NBCUniversal, operates a highly cash-generative business model which has delivered strong dividend growth and bought back significant amounts of stock with admirable regularity over the past decade. The entry point opportunity was provided as shareholders reacted with scepticism to the company s bid for Sky s media assets 8

6 Investment review in the UK. Investors were nervous about the company stepping outside of its core domestic market, whilst also wary about the extra debt the deal would bring. As a company with a strong focus on returns as well as a robust history of dividend growth, we believed the chance to invest in the premier cable franchise in the US at a significant discount to the market was an attractive opportunity and built a position accordingly. We also bought Lowe s, the home improvement retailer, which has the potential to expand margins which its peer Home Depot lacks. We have faith in the new management team at Lowe s, who were part of the successful margin expansion at Home Depot, to deliver on the strategy. Home Depot, which returned more than 90% since its initial purchase in April 2015, provided the source of cash. Both Comcast and Lowe s were added to the fund in August. In June, we took advantage of a wide-scale selling of China-exposed stocks, driven by tariff-induced fears, to initiate a position in Yum China Holdings, one of the largest restaurant chains in the country. Expanding quickly with the rollout of KFC and with a long runway of opportunity, Yum China looks well positioned to generate shareholder returns. Elsewhere, we initiated positions in Marsh & McLennan, an insurance brokerage which is taking share in a fragmented market, and Sensient Technologies, a leading provider of flavours & fragrances and colours for the food & beverage industry. We also added to our existing holdings in Equinix and Mondelēz which came under pressure amid fears over rising interest rates. We believe both companies have significant longterm growth opportunities Equinix from the secular demand for data and Mondelēz from realising the potential of its strong brands. Turning to sales, Rockwell Automation (industrials), Nike (consumer discretionary) and Zoetis (healthcare) were sold on valuation grounds. All three stocks were successful investments for the fund. Rockwell returned 80% since its initial purchase in April 2015, more than double the return of the S&P 500 Index. Nike and Zoetis also added value, returning 30% and 65% respectively during their time in the fund. We also took profits in strong performers including MasterCard and M&T Bank which returned 63% and 22% respectively over the past year. Another source of cash during the review period was Methanex where we have been reducing the holding to manage the position size. We decreased the number of shares we own in the company by 25% during the year, but continue to believe the stock is meaningfully undervalued. 9 We also sold the holding in LyondellBasell, the chemicals business, in its entirety and reduced Helmerich & Payne in energy services to manage the fund s energy-related exposure. Outlook The story in the US has moved on. The initial excitement fuelled by Donald Trump s plans to boost the economy has been quickly overshadowed by concerns about the aftermath the consequences of economic growth. Rising interest rates and higher bond yields have already made their mark on the stockmarket with bond proxies being sold off indiscriminately. The spectre of a trade war has added a new dimension to the uncertainty with investors being similarly indiscriminate towards companies exposed to China, regardless of whether the underlying businesses are affected by tariffs or not. We are of the strong belief that periods of uncertainty can present excellent opportunities for the long term. Conscious of the market s propensity to be swayed by sentiment, we have been active in our pursuit of long-term winners whose shares have been punished for no fundamental reason especially in defensive sectors where the downturn has been most acute. We are particularly interested in consumer staples. We are looking for companies with genuine growth prospects in a sector where growth is slowing for many due to historic underinvestment and competitive pressures. Not all consumer staples companies are the same. We are keen to take advantage of opportunities which may arise because of the market s inability to distinguish between winners and losers. The importance of being selective cannot be emphasised enough. We are also starting to see some savage share price reactions among China-exposed names, which may offer attractive entry points for companies with exciting long-term potential. Semiconductors and consumer-facing businesses are areas we are monitoring from this perspective. Tax reform has been a cornerstone of Trump s economic stimulus programme and is already having a tangible effect on US corporate profits, but the positive impact of this one-off event is now priced in. We believe it is important to identify the companies which can keep the benefits for the long term because those that can will sustain premium dividend growth. We continue to be encouraged by the dividend growth from our holdings, many of which have provided positive surprises in an environment where dividends have not always been reliable. As the 10

7 Investment review dividend cuts from General Electric and PG&E demonstrated late last year, there are pitfalls to be avoided. Dividends are the ultimate sign of management confidence and the dividend increases we are seeing from the companies we are invested in reflect well on their long-term potential and financial health. We believe that the combination of strong dividend growth and attractive valuation stands us in good stead to generate competitive returns over the long term. John Weavers Fund manager An employee of M&G Limited which is an associate of M&G Securities Limited. 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. Portfolio statement as at 31 August [a] Holding $ 000 % % EQUITIES 822, Energy equipment & services 14, ,364 Halliburton 9, ,378 Helmerich & Payne 5, Oil, gas & consumable fuels 63, ,935 Gibson Energy 9, ,767 Keyera 13, ,372 Pembina Pipeline 24, ,895 PrairieSky Royalty 15, Chemicals 71, ,278 Methanex 61, ,922 Sensient Technologies 9, Electrical equipment 11, ,414 Emerson Electric 11, Road & rail 25, ,891 Union Pacific 25, Textiles, apparel & luxury goods Hotels, restaurants & leisure 52, ,335 Las Vegas Sands 14, ,175 Six Flags Entertainment 12, ,839 Starbucks 14, ,791 Yum China Holdings 11, Portfolio statement (continued) as at 31 August [a] Holding $ 000 % % Media 23, ,158 Comcast 23, Specialty retail 10, ,356 L Brands 1, ,339 Lowe s 8, Beverages 21, ,984 Constellation Brands 21, Food products 30, ,213 Mondeléz International 30, Tobacco 12, ,938 Altria Group 12, Health care equipment & supplies 22, ,383 Becton Dickinson 8, ,835 Medtronic 13, Health care providers & services 83, ,774 Anthem 32, ,683 UnitedHealth Group 51, Pharmaceuticals 21, ,180 Allergan 8, ,958 Johnson & Johnson 13, Banks 60, ,234 First Republic Bank San Francisco 15, ,796 JPMorgan Chase 15, ,906 M&T Bank 4, ,398 Wells Fargo 24, Consumer finance 20, ,518 American Express 20, Capital markets 34, ,671 Blackrock 12, ,780 Intercontinental Exchange 22, Insurance 16, ,774 Arthur J. Gallagher & Co. 4, ,796 Marsh & McLennan 12, IT services 87, ,436 Cognizant Technology Solutions 19, ,344 FIS 29, ,558 MasterCard 29, ,930 Visa 9,

8 Investment review Portfolio statement (continued) as at 31 August [a] Holding $ 000 % % Software 48, ,696 Microsoft 48, Semiconductors & semiconductor equipment 51, ,582 Analog Devices 11, ,732 Broadcom 31, ,215 Lam Research 8, Equity real estate investment trusts (REITs) 38, ,418 Crown Castle International 17, ,218 Equinix 20, Portfolio of investments 822, CASH EQUIVALENTS 12, AAA rated money market funds [b] 12, ,480,000 Northern Trust Global Fund - US dollar 12, SHARE CLASS HEDGING Forward currency contracts for share class hedging CAD148,874 Bought for 98,902 (expires ) (1) ,818,579 Bought for CAD2,701,212 (expires ) ,533,963 Bought for $24,463,580 (expires ) (650,852) Sold for $738,603 (expires ) (22) 0.00 Total portfolio 836, Net other assets / (liabilities) (8,466) (1.02) (0.33) Net assets attributable to shareholders 827, Top ten portfolio transactions for the year to 31 August 2018 Largest purchases $ 000 Comcast 22,575 Cognizant Technology Solutions 19,625 Marsh & McLennan 11,842 Yum China Holdings 11,423 Equinix 10,791 Sensient Technologies 10,137 Mondeléz International 9,675 Union Pacific 8,909 Lowe s 8,736 Lam Research 8,218 Other purchases 71,444 Total purchases 193,375 Largest sales $ 000 Home Depot 20,805 Methanex 18,303 Las Vegas Sands 17,182 M&T Bank 16,054 Medtronic 15,765 UnitedHealth Group 13,339 MasterCard 13,033 Zoetis 12,074 Nike 10,969 Helmerich & Payne 7,764 Other sales 88,918 Total sales 234,206 Purchases and sales exclude the cost and proceeds of AAA rated money market funds. All securities are on an official stock exchange listing except where referenced. [a] The portfolio has been reclassified to more appropriately reflect how the fund is managed comparatives have been restated to reflect this. [b] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk

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 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 sterling share classes. Performance is shown after deduction of this charge. All UK 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. 20,000 12,000 7,000 4,000 2,000 1, December 1972 = 100, plotted monthly Chart date 3 September 2018 Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* The fund changed its objective on 28 April The past performance shown here before this change was therefore achieved under circumstances that no longer apply Sterling Class A (Accumulation) shares* Sterling Class I (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 (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) 827, , ,

10 Financial highlights Fund performance Ten-year performance Ten years, 1 September 2008 = 100, plotted monthly Chart date 3 September Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* The fund changed its objective on 28 April The past performance shown here before this change was therefore achieved under circumstances that no longer apply. Morningstar (IA) North America sector average* S&P 500 Index * 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. Historic yields for the current year are calculated as at 14 September 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 2, , , Return before operating charges and after direct portfolio transaction costs Operating charges (42.43) (37.71) (27.83) Return after operating charges Distributions (1.13) (12.94) (42.63) Retained distributions Closing NAV 2, , , Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.50) (0.64) (0.35) 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) 109, , ,867 Closing NAV percentage of total fund NAV (%) Number of shares 2,963,566 3,587,428 4,671,379 Highest share price (UK p) 2, , , Lowest share price (UK p) 2, , ,

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 3 August for the year to 31 August Change in NAV per share UK p UK p UK p Opening NAV 2, , , Return before operating charges and after direct portfolio transaction costs Operating charges (22.24) (19.65) (14.48) Return after operating charges Distributions (19.49) (28.34) (39.95) Retained distributions Closing NAV 2, , , Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] (0.48) (0.61) (0.33) 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) 206, , ,540 Closing NAV percentage of total fund NAV (%) Number of shares 5,850,298 5,775,827 6,089,177 Highest share price (UK p) 2, , , Lowest share price (UK p) 2, , , [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, comprising 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. Ongoing charges from underlying funds: Ongoing charges on holdings in underlying funds that are not rebated. 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: 19 20

12 Financial highlights Operating charges and 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. 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 31 August Average [a] Direct portfolio transaction costs [b] % % % % Broker commission Taxes Costs before dilution adjustments Dilution adjustments [c] (0.02) (0.03) (0.02) (0.02) 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. 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_311019