M&G European Corporate Bond Fund

Transcription

1 M&G European Corporate 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 European Corporate 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 European Corporate 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. 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 The AMC for Sterling Class X shares was effectively reduced from 1.25% to 1.00% from 28 April

3 Fund information Investment objective up to 24 May 2017 The Fund aims to maximise total return (the combination of income and growth of capital) while generating a higher level of income than that from European government bonds of similar maturities. Investment policy up to 24 May 2017 The Fund invests mainly in investment grade corporate bonds denominated in any European currency. The Fund may also invest in high yield corporate bonds, government and public securities denominated in any European currency. The Fund s exposure to bonds, government and other public securities may be gained through the use of derivatives. The Fund may also invest in other assets, including collective investment schemes, other transferable securities, cash and near cash, deposits, warrants, money market instruments and other derivative instruments which may be denominated in any major global currency. Any non-european currency exposures within the Fund may be managed by currency hedges in European currencies. Investment objective from 25 May 2017 The Fund aims to provide income and capital growth. Investment policy from 25 May 2017 At least 70% of the Fund is invested in investment grade corporate bonds denominated in any European currency. The Fund may also invest in high yield corporate bonds, government and public securities denominated in any European currency. The Fund s exposure to bonds, government and other public securities may be gained through the use of derivatives. Derivatives may also be used for efficient portfolio management. The Fund may also invest in collective investment schemes, other transferable securities, cash, near cash, other money market instruments, warrants and other derivative instruments which may be denominated in any major global currency. More than 70% of the Fund will be in euro or hedged back to euro. Investment approach The fund manager believes that bond returns are driven by a combination of macroeconomic, asset, sector, geography and stocklevel factors. A dynamic investment approach is followed, allowing the fund manager to change the blend of duration and credit exposure based on the outlook. A high level of diversification, across individual issuers, sectors and geographies is an essential part of the investment process. Risk profile A minimum of 70% of the fund is invested in investment grade corporate bonds denominated in any European currency. It is primarily subject to the price volatility of the European bond market as well as the performance of individual issuers. It is also influenced by developments in the broader global bond market. In addition, the fund is subject to fluctuations in currency exchange rates. Up to 30% of the fund may be invested in high yield corporate bonds, government and public securities denominated in any European currency. Some of these securities may be higher risk assets that could potentially experience a degree of illiquidity in times of market distress. The fund s exposure to debt securities may be gained through the use of derivatives. 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. 3 4

4 Fund information Investment review Please note that the risk management policies are set out in full in the financial statements and notes sections of the Annual Long Report and audited Financial Statements of M&G Investment Funds (3). The following table shows the risk number associated with the fund and is based on Sterling Class A shares. Low risk 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 European Corporate Bond Fund produced positive total returns (the combination of income and growth of capital) across its different share classes.* Global corporate bond markets gained in aggregate over the 12 months, which helped the performance of all of the fund s share classes. Accordingly, over the review period, the fund has met its objective of providing income** and capital growth. 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 n/a +6.5 [d] [a] Absolute basis. [c] 13 January 2003, the launch date of the fund. [b] Price to price with income reinvested. [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 On the whole, the 12 months under review was a positive period for corporate bonds in what was a game of two halves for the global economy. (Bonds are loans in the form of a security, usually issued by a government (government bonds) or company (corporate bonds), which normally pay a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid.) Considerable economic and political turbulence occurred during the first half of the period that gave way to a steady pick-up in activity in

5 Investment review At the start of the review period, the UK was experiencing considerable political turmoil following the unexpected leave result of the June 2016 referendum regarding its membership of the European Union (EU), which most economists expected would weaken the economic outlook, not only in the UK but also in the EU. In October, a few months after the momentous Brexit vote, the Bank of England began a new programme of buying selected corporate bonds, with the aim of keeping interest rates low and promoting lending activity. Brexit-related uncertainty over the timing and exact form that the country s departure from the EU might take was a significant driver of market movements for the remainder of The final months of 2016 delivered further political surprises, the most significant of which was Donald Trump s US presidential election victory in November. The result caused US government bonds (also known as US Treasuries) to suffer their worst month in seven years. Politics continued to dominate financial markets into 2017, with Dutch parliamentary elections, the UK s formal triggering of Article 50, and the hotly contested presidential elections in France, among the main events. This took place against a backdrop of broadly positive economic data releases, indicating that the global economy is in good health. However, bond prices experienced a drop at the end of the period after hints from central bankers that interest rates were to rise. The current environment of low interest rates and steady economic growth proved generally supportive for corporate bond markets. The fund delivered a positive return over the review period, helped by its allocation to bonds from the financial sector. The fund s exposure to US assets also helped its performance as US corporate bonds generally performed better than their euro counterparts. Investment activities During the 12-month period, we added bonds issued by companies operating in sectors we believe are likely to benefit from the gradually growing global economy. For example, we increased the allocation to banks and insurance firms. Notable purchases over the year included euro-denominated bonds from J.P.Morgan, Goldman Sachs, Citi and Morgan Stanley. However, the reduced premium now offered by financials over the industrial sector (following sharp rallies in the former) means that we have had to become more selective when buying financial issues. For this reason, we added asset-backed securities (financial securities backed by financial assets such as loans or mortgages) to the portfolio, as their floating rate nature (whereby the interest payments are adjusted in line with interest rates) protects their value in an environment where interest rates are edging up. As an extension of the financial theme, towards the end of the period, we also bought bank bonds further down the capital structure (those that are lower priority for repayment should the issuer get into financial difficulty). We believe these bonds provide a good trade-off in terms of the potential risk and reward offered. We also assessed that value could be found in some newly issued, euro-denominated bonds from US companies. These assets are also known as reverse yankee bonds, whereby US companies look to raise money in this way to benefit from the cheaper borrowing costs currently available in Europe compared to their domestic market. Reverse yankee issues held by the fund include bonds from US multinational conglomerate Honeywell and US medical equipment manufacturers Thermo Fisher Scientific and Zimmer Biomet. Elsewhere, we switched from bonds with lower credit ratings to those with higher ratings on a selective basis. For some time, we had favoured having a relatively high exposure to lower rated bonds based on our assessment of the attractive relative value they offered. However, we began to believe that the valuation of these assets was less compelling after they had delivered decent performance in the market. Given this view, we sought to take profits on some holdings of lower rated bonds and reinvest in higher quality securities. Within this theme, for example, we added bonds from technology group Apple, while issues from telecommunications company Sprint were sold. Other purchases included bonds from Verizon, the global wireless communications group, and Balder, a Swedish real estate firm. We reduced the fund s overall allocation to the industrial sector as we believe it is possible that companies within this sector could be taking on too much debt to maintain their financial stability. Outlook We believe we are entering a period of normalisation: growth and inflation are picking up and central banks are adjusting their policies accordingly. In our opinion, US and UK politics will remain key throughout 2017, while there is also a busy political calendar in Europe this year that is exerting further influence on markets. President Trump s policies of reducing taxation and encouraging companies to 7 8

6 Investment review repatriate funds currently held offshore should prove supportive for US corporate bond markets. However, the biggest danger to markets is Trump s unpredictability something that markets and investors will have to get used to. Yet while President Trump may be able to stop the march of globalisation partially, from a US perspective, we expect that this theme will remain intact, albeit less aggressively. Meanwhile, with UK politics in uncertain territory following a hung parliament and imminent Brexit negotiations, it will be several years until any deal is concluded. Notwithstanding this, the UK s economy seems to be making steady progress. In our opinion, the global economy remains in reasonable health, and company default rates are staying low. As a result, we are still positive on corporate bonds, especially investment grade issues. By contrast, we retain a cautious view on government bonds. We believe that further interest rate rises in the US are likely this year, as the US Federal Reserve looks to contain inflation. Stefan Isaacs 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). For the fund s distribution and distribution yield, please refer to the Specific share class performance tables in the Fund performance section of the Annual Long Report and audited Financial Statements for M&G Investment Funds (3). This fund provides a variable level of income. 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. 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 Bonds with no credit rating Credit default swaps Forward currency contracts Interest rate futures contracts -0.37% Forward currency contracts for -0.01% share class hedging 30 June June 2016 % of the fund value (net assets attributable to shareholders) 0.34% 0.84% 0.06% 0.15% 0.07% 0.29% 0.09% 0.02% 12.04% 15.13% 10.56% 8.64% 6.01% 6.75% 7.26% 8.83% 25.47% 20.44% Source: M&G 34.37% 35.50% 9 10

7 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 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 Fund net asset value (NAV) 1,947,876 2,613,614 3,289,650 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 January 2003 = 100, plotted monthly Chart date 3 July 2017 Sterling Class I (Accumulation) shares* Sterling Class A (Accumulation) shares* Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* Morningstar EUR Corporate Bond sector average* * 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

8 Financial highlights Fund performance 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 13 January for the year to 30 June Change in NAV per share UK p UK p UK p Opening NAV Return before operating charges and after direct portfolio transaction costs (8.80) Operating charges (1.24) (1.04) (1.07) Return after operating charges (9.87) Distributions (1.30) (1.45) (1.48) 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) 51,566 81, ,135 Closing NAV percentage of total fund NAV (%) Number of shares 41,102,044 66,514, ,245,925 Highest share price (UK p) Lowest share price (UK p) Sterling Class I Accumulation share performance The share class was launched on 3 August for the year to 30 June Change in NAV per share UK p UK p UK p Opening NAV 1, , , Return before operating charges and after direct portfolio transaction costs (107.26) Operating charges (8.68) (7.27) (7.38) Return after operating charges (114.64) Distributions (22.51) (23.40) (23.49) Retained distributions Closing NAV 1, , , 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) 16,011 14,297 8,368 Closing NAV percentage of total fund NAV (%) Number of shares 1,038, , ,983 Highest share price (UK p) 1, , , Lowest share price (UK p) 1, , , [a] In respect of direct portfolio transaction costs. [b] As a percentage of average net asset value

9 Financial highlights Operating charges and 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. 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 as at 30 June Average [a] Indirect portfolio transaction costs % % % % Average portfolio dealing spread [a] Average of first three columns

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