M&G Emerging Markets Bond Fund

Transcription

1 M&G Emerging Markets Bond 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 Emerging Markets Bond 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 In the 2016 Budget, the UK government announced that, effective from 6 April 2017, interest distributions from open-ended investment companies (OEICs) may be paid without deducting income tax (currently 20%). As a result, prices for the sterling share classes of M&G s bond funds will be calculated without an accrual for the deduction of income tax. This change, for different funds, has been phased in between October 2016 and March From 1 January 2017 the M&G Emerging Markets Bond Fund s prices for the sterling share classes are now calculated without income tax deducted. 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 objective The Fund aims to maximise total return (the combination of income and growth of capital). Investment policy The Fund invests mainly in debt instruments issued by emerging market borrowers, including government, government agency and corporate debt. There are no restrictions on the currencies to which the Fund may be exposed. Derivatives may be used for investment purposes as well as for efficient portfolio management. The Fund may also invest in collective investment schemes, other transferable securities (including other debt instruments), cash and near cash, deposits, warrants and money market instruments. M&G has the discretion to identify the countries that it considers to qualify as emerging markets although these will typically be those that the IMF or World Bank define as emerging or developing economies. Investment approach The fund's investment approach begins with a top-down assessment of macroeconomic factors such as global risk appetite and structural global growth catalysts. On a regional and country-specific level, factors such as monetary and fiscal policies, capital flows, and political and regulatory environments will be assessed. The result of this analysis will help inform the fund s country and currency allocations and its duration. Individual credit selection is determined by a thorough credit analysis and an assessment of valuations. Both macroeconomic and stock-specific analysis is undertaken in close conjunction with the deputy fund manager and the internal credit analysts. The fund is diversified by investing in a range of assets across global emerging markets and is unconstrained by a benchmark with a flexible strategy. 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

3 Fund information Investment review Risk profile The fund invests mainly in fixed income securities, or bonds, issued by governments and companies in emerging markets. It can also invest in emerging market currencies. It is, therefore, subject to the price volatility of the global bond market and the performance of individual issuers. The fund is also subject to fluctuations in currency exchange rates. The fund s focus is on emerging markets, and hence it may be more volatile compared to a fund that invests mainly in the securities of companies in developed countries. The reasons for this greater volatility include: the financial infrastructure in emerging markets is typically less mature, the regulatory systems and disclosure standards are less developed and adverse market and political circumstances are more likely to occur in these markets. The fund is fully flexible and may use derivatives to achieve the manager s desired exposure to emerging market bonds and currencies. In association with the use of derivatives, including those instruments not traded through an exchange, collateral is deposited, in order to mitigate the risk that a counterparty may default on its obligations or become insolvent. Portfolio diversification is key in managing liquidity and default risks as well as 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. 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 not changed during this period. As at 3 July 2017, for the year ended 30 June 2017 Performance against objective Between 1 July 2016 (the start of the review period) and 3 July 2017, the M&G Emerging Markets Bond Fund produced positive total returns (the combination of income and growth of capital) across all of its different share classes.* The fund s unhedged sterling share classes delivered moderately higher returns than the other share classes, an outcome that largely resulted from the fund s maintenance of a sizeable exposure to the US dollar throughout the review period. Relevantly, the US dollar strengthened in value against the British pound during the period, which provided a tailwind to the performance of the fund s unhedged sterling share classes, although this trend was partially reversed during the first half of In contrast, the US dollar weakened in value against the euro, which contributed to the fund s unhedged euro share classes delivering the lowest returns. Positive returns were generally recorded across the main segments of the emerging bond markets, which helped the fund s overall performance. However, the returns from emerging bond markets notably declined in October and November in 2016, before turning positive again in December and during the first two quarters of The fund s objective is to maximise total returns. 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] 1 October 2002, the launch date of the share class. [d] 19 April 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. 4

4 Investment review Investment performance While the performance of global bond markets ebbed and flowed at times during the 12 months to 30 June 2017, emerging market bonds generally delivered positive returns for the period. (Bonds are loans that are extended by an investor to an issuing entity such as a company or government in exchange for regular interest payments. Bonds issued by companies are referred to as corporate bonds, while those issued by governments are called government bonds ). Throughout most of the review period, the performance of emerging market bonds was helped by factors such as the significant monetary stimulus policies from central banks in Europe and Japan. This activity was largely aimed at maintaining low interest rates in these regions, which kept government bond yields at very low, or even negative, levels. In turn, this backdrop supported the investment appeal of positive-yielding areas of the bond markets, such as could be found in emerging countries. (Bond yields refer to the interest received from a fixed interest security, which is usually expressed annually as a percentage based on the investment s cost, its current market value or its face value.) Also importantly, as the second half of the period progressed, there were encouraging signals that the pace of global economic growth was picking up. At the same time, however, investors had to assess factors such as the US presidential election result, as well as the trend of rising US interest rates. Higher interest rates typically dampen sentiment towards bonds and, given the importance of the US market, the effects of increased US rates can be felt internationally. The presidential vote, meanwhile, focused attention on the potentially adverse implications for emerging markets from a Donald Trump administration, including from possible trade protectionist and anti-immigration measures. The new president was opposed, for example, to joining the newly created Trans-Pacific Partnership (TPP), and the US subsequently withdrew from the regional free-trade bloc. Against this backdrop, the performance of emerging bond markets, and the fund, notably weakened in October and November. However, we sought to limit the effect of these considerations in the fund by avoiding exposure to emerging countries with deep economic ties to the US. In preference, we favoured those with stronger links to other regions, such as in eastern Europe where economic links with the European Union (EU) are important. As 2017 progressed, political considerations in Europe also played a part in influencing investor sentiment globally. For example, much attention stayed focused on the polls for the upcoming French elections, where the prospect remained that a sizeable anti-european Union vote would be registered. However, the eventual victory of Emmanuel Macron, a centrist, strongly pro-eu candidate, was generally well received in financial markets. In turn, emerging market bonds were among those areas that delivered gains following the election result. Throughout the period, we maintained the belief that a key performance contributor when investing in emerging bond markets is the right allocation of a portfolio s assets between corporate bonds and government bonds, denominated in either local currencies or hard currencies such as the US dollar and euro. In turn, the portfolio remained diversified across emerging market regions, with allocations across these different segments of the market. This positioning supported the fund s performance as each area produced positive returns. In addition, we maintained a sizeable exposure to the US dollar. This positioning helped the returns of the fund s unhedged sterling share classes as the US currency increased in value versus the British pound. However, it detracted from the returns of the unhedged euro share classes as the US dollar fell in value against the single currency. Investment activities Our main investment activity in the opening months of the review period included reducing the portfolio s allocation to corporate bonds, mainly where we felt that valuations had risen to levels that offered less upside potential. Sales included bonds from pesticides supplier Agro-K and gaming company CIRSA, which has a large presence in Latin America. Later in 2016, we also became wary towards emerging market economies that have strong links to the US, as we anticipated the possibility remained that Donald Trump could win the presidential election. Within this theme, we sold down the fund s exposure to the Mexican peso, although an allocation to the currency was subsequently re-opened given the size of its decline following the election s result. In other regions, the fund s transaction activity in the aftermath of the US election included the sale of government bonds from Vietnam. We felt the country stood to lose out from any moves towards trade 5 6

5 Investment review protection measures in the US, as well as the president-elect s stated intention to withdraw from the TPP trade agreement. In contrast, we bought bonds from the government of Hungary, believing that the securities had become oversold as its economy is far less exposed to trade with the US. In the second half of the review period, increasing the fund s exposure to local currency-denominated government bonds was among our main investment themes. In our view, the appeal of this segment of the market has been helped by factors such as the weakening performance of the US dollar and the higher yields that could be found in this area. Our transaction activity included topping up an existing local currency sovereign holding in South Africa in March, partly on the view that the market became oversold after the removal of the country s finance minister and a broader cabinet reshuffle. Among larger markets in Asia, we maintained a cautious view towards China, given factors such as its decelerating economy and the uncertain path of US-China relations under the new US administration. Our preferred allocations in the region included to Indonesia, where we added government bonds, as well as India, where we added to our rupee exposure. The latter is an example of an important emerging country that is relatively closed economically and, as such, has relatively low trade and immigration ties with the US. Towards the end of the review period, we added back some corporate bond exposure on a selective basis where we believed attractive valuations could be found. This activity included purchases of bonds from telecommunications group Vimpelcom, Turkish bank Yapi Kredi, and diversified Mexican conglomerate Kuo. Outlook Sentiment towards emerging market bonds has recently been favoured by factors such as strengthening global economic growth and reduced political concerns in developed countries. While we believe that investors were right to weigh up the potentially adverse implications for emerging markets of a Donald Trump presidency, the rhetoric of the new administration towards key issues such as NAFTA (the North American Free Trade Agreement) has softened somewhat since his inauguration in January. In Europe, meanwhile, the result of the French presidential election notably helped to boost investors sentiment globally. Against this backdrop, some of the risks that were weighing on the outlook for emerging markets have diminished. In addition, we think other factors should continue to support the emerging bond markets, including the wide diversity of its sovereign and corporate bond universe. We also believe the creditworthiness, or credit quality, of emerging market bond issuers should stabilise as economic growth forecasts edge upwards across most developed and developing countries. For bond markets globally, higher US interest rates remain a topical theme. In a number of emerging market economies, we believe this higher US rate environment is less challenging than it would have been a few years ago, given considerations such as the improvements they have made to their current account positions and adjustments towards having lower overall levels of US dollar-denominated debt. However, rising US interest rates can cause a headwind for other emerging economies. This is particularly the case for those that are more reliant on US dollar funding, such as in a number of countries in the Sub- Saharan Africa region. In our assessment, countries with lower debt levels or higher reliance on domestic funding, such as Russia, Brazil, and selectively in Eastern Europe, should be able to better navigate this environment. Other factors in the outlook for emerging bond markets that must be monitored closely include fluctuating oil and commodity prices, China s economic deceleration, as well as Brexit and its impact on Europe. While weighing up such relevant themes, we think attractive opportunities can still be found through a flexible and globally diversified approach to emerging market bond investing. As always, we will seek to take advantage of the fund s flexibility that allows us to invest emerging market bonds and currencies that we believe offer the best relative value and avoid countries or industries where the outlook is unfavourable. Claudia Calich 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. 7 8

6 Investment review Financial highlights Fund performance Classification of investments Debt securities AAA credit rated bonds AA credit rated bonds A credit rated bonds BBB credit rated bonds BB credit rated bonds B credit rated bonds CCC credit rated bonds D credit rated bonds Bonds with no credit rating -0.05% Forward currency contracts AAA rated money market funds [a] Forward currency contracts for share class hedging -0.01% [a] 30 June June 2016 % of the fund value (net assets attributable to shareholders) 2.15% 0.00% 1.02% 4.01% 8.20% 7.38% 1.40% 1.49% 0.00% 0.13% 0.19% 0.05% 3.98% 0.51% 14.34% 17.00% Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. Source: M&G 23.48% 21.45% 23.49% 22.76% 26.04% 21.00% 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 (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 $ 000 $ 000 $ 000 Fund net asset value (NAV) 523, , ,

7 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 October 1999 = 100, plotted monthly Chart date 3 July 2017 Sterling Class A (Accumulation) shares* Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* Sterling Class I (Accumulation) shares* Morningstar IA Global Emerging Markets Bond sector average* * Income reinvested Source: Morningstar, Inc. and M&G The fund s Sterling Class I (Accumulation) shares were launched on 19 April 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 1 October 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 Operating charges (3.13) (2.41) (2.33) Return after operating charges Distributions (9.95) (8.58) (7.20) Retained distributions Closing NAV Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] Total direct portfolio transaction costs Performance and charges % % % Direct portfolio transaction costs [b] Operating charges Return after operating charges Distribution yield Effect on yield of charges offset against capital Other information Closing NAV ($ 000) 3,387 2,342 4,946 Closing NAV percentage of total fund NAV (%) Number of shares 1,175, ,630 1,979,716 Highest share price (UK p) Lowest share price (UK p)

8 Financial highlights Fund performance Financial highlights Operating charges and portfolio transaction costs Sterling Class I Accumulation share performance The share class was launched on 19 April 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 Operating charges (1.29) (1.16) (1.12) Return after operating charges Distributions (8.26) (6.89) (5.79) Retained distributions Closing NAV Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments Dilution adjustments [a] Total direct portfolio transaction costs Performance and charges % % % Direct portfolio transaction costs [b] Operating charges 0.81* Return after operating charges Distribution yield Effect on yield of charges offset against capital Other information Closing NAV ($ 000) 133,202 41,633 23,478 Closing NAV percentage of total fund NAV (%) Number of shares 63,063,127 21,719,701 12,942,916 Highest share price (UK p) Lowest share price (UK p) * As the annual management charge has been discounted during the period, 0.79% is a more reliable estimate of the period to ongoing charges. [a] In respect of direct portfolio transaction costs. 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. [b] As a percentage of average net asset value

9 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. 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. As the fund invests mainly in fixed interest securities, the direct transaction costs paid on other investments are too small to be reflected in the table below. To give an indication of the indirect portfolio dealing costs the table below 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] Indirect portfolio transaction costs % % % % Average portfolio dealing spread [a] Average of first three columns. 15

10 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