M&G Global Convertibles Fund

Transcription

1 Fund Questionnaire M&G Global Convertibles Fund Designed to maximise long-term returns by investing mainly in global convertible bonds Seeks to deliver the best possible risk-adjusted returns by taking full advantage of the equity upside characteristics of convertibles, whilst also benefiting from their unique risk-protection features Performance driven by a pure bottom-up, global approach to stockpicking based on company fundamentals, with no pre-set geographical or sector guidelines Designed to behave as a true convertibles fund, delivering the asymmetry of returns characteristic of the asset class, rather than mimicking conventional bonds or equities Fund Manager Léonard Vinville has extensive knowledge and experience of the convertibles market, built up over more than 20 years. Léonard has been with M&G since 2002 and currently runs two convertibles mandates

2 Contents Fund management team Investment objective and strategy Stock selection Portfolio construction Risk management Investment support Technical terms/glossary Key fund facts Additional information Company details Dealing Risk management Compliance Other

3 Fund management team The management team Léonard Vinville is the manager of the M&G Global Convertibles Fund while David Romani and Yannis Karachalios are the deputy managers. Léonard has managed the fund since launch in July Fund manager: Léonard Vinville Léonard Vinville joined M&G in 2002, and since then has been managing the convertibles allocation of the Prudential With Profit Life Fund. He has also been responsible for managing the M&G Global Convertibles Fund since its launch in July Both funds are run with the same investment approach and with an emphasis on generating strong risk-adjusted returns. Prior to joining M&G, Léonard was Head of European Convertibles at AGF Asset Management in Paris, where he managed convertibles and French equity mandates. He has an MBA and is qualified as a chartered accountant. Deputy fund manager: David Romani David Romani was appointed deputy manager of the M&G Global Convertibles Fund in October David joined M&G in 2005, performing a variety of roles in strategic planning, marketing and client communications before becoming a dedicated convertibles analyst in the Global Convertibles team. Prior to joining M&G, he worked for Prudential and as a consultant to the asset management and life insurance industries. David holds an MBA degree from the University of Chicago and is a CFA charterholder. Deputy fund manager: Yannis Karachalios Yannis Karachalios joined M&G in 2011 as a credit analyst dedicated to the convertible bonds team. In September 2013, he became deputy fund manager of the M&G Global Convertibles Fund. He has nine years of experience in high yield, leveraged loans and distressed debt. Yannis previously worked at Alpstar Capital in Geneva. Prior to this, he was a high yield credit analyst at Hermes Fund Managers London. Yannis has an MSc in financial economics.

4 Team structure and responsibilities M&G Global Convertibles team Fund Manager Léonard Vinville is head of M&G s Global Convertibles team. The team is located at M&G s head office in the City of London and manages investments on behalf of institutional, retail and internal clients. Léonard is supported by extensive resources including credit, equity and technical analysts, investment specialists, fund manager assistants, dealers and risk specialists. Team structure Source: M&G, as at 30 April 2017

5 Investment objective and strategy Bottom-up philosophy, based on unconstrained global stockpicking 'At-the-money' approach to provide equity-like performance at an appropriate risk level Maximising convexity through fundamental and technical analysis Investment objective The fund aims to maximise long-term total return (the combination of income and growth of capital) to investors by investing mainly in global convertible assets. Investment philosophy Léonard Vinville actively manages the portfolio by selecting convertible bonds that offer the most appropriate risk/reward profile. Key to the performance of the fund is a bottom-up, global approach to stockpicking based on fundamental analysis of equity and credit characteristics as well as the technical aspects of the convertibles. This fundamentals-based approach to our analysis of the convertibles market allows the manager to identify issues which are mispriced by other investors. The manager takes a long-term investment approach, as it may take time for the fundamental characteristics identified to be recognised in the market price of the convertible. Stock selection is not constrained by any benchmark, and the fund manager is free to source his investment ideas from all regions and industries globally. How is the fund managed? The manager seeks to target performance at an appropriate level of risk and to deliver the maximum return possible relative to the risk involved. He has learnt that the best way to maximise the risk-adjusted returns, is to keep the fund at the money and to identify convertibles with strong convexity characteristics, which is where potential equitydriven upside exceeds the potential downside, known as an asymmetric return profile. So as to benefit from share price gains, the delta of the portfolio, which measures its sensitivity to equity movements, is typically managed to be within a range of 0.30 to Source: M&G. Please refer to the glossary at the end of document for terminology. Targeting asymmetric returns Convertibles share the characteristics of equity and debt. As a form of debt, they generally provide a regular interest payment (coupon) plus potential price appreciation through credit spread tightening. At the same time, convertibles can share in the movement of the underlying equity via the embedded call option. Importantly, this sensitivity to equity movements, known as delta, has an asymmetric nature, with convertibles participating more in upward moves of the underlying share price than in falls. This is known as convexity.

6 In order to maximise convexity, it is important to monitor several important convertible features such as the bond floor, delta and potential equity upside. The bond floor represents what the convertible is worth as a straight bond and is the present value of the interest payments plus repayment at maturity. In normal circumstances, the convertible should not fall below its bond floor, even in the event of share price weakness, which is how a convertible can outperform a falling share price. For the bond floor to provide downside protection and hence to support convexity, the company s credit quality must be analysed and understood. If credit quality deteriorates, the level of the bond floor will fall, and convexity will decrease. The fund manager conducts in-depth fundamental analysis to ensure only credits that provide a strong bond floor are selected. Fundamental analysis of the underlying equity is key to the realisation of upside within the convertibles portfolio. As the underlying share price increases, the parity, or intrinsic value, of the convertible bond which is equal to the value of the shares the bond can be converted into will increase. A convertible s delta will increase as its parity rises and, if the underlying share price continues to increase, the convertible will eventually move in line with the equity. Extensive technical analysis is required to understand the dynamics of option valuation and the distance to the bond floor. Léonard looks at the distance between the price of the convertible bond and its bond floor, as an indication of the potential downside participation in share price falls. To enhance the asymmetric return profile of the portfolio and increase convexity, this measure is kept relatively low. Evolution of convexity and distance to bond floor Source: M&G, as 30 April Please refer to the glossary at the end of the document for terminology.

7 Stock selection Clear stock selection process Comprehensive screening through a series of filters Fundamental and technical analysis to identify investment ideas Describe the stock selection process Léonard selects investments on a bottom-up basis from the universe of the global convertibles market, picking stocks purely on their merits without any geographical or sector guidelines. Quantitative screening The global convertibles universe, which consists of approximately 1,200 issues, is condensed to an investible selection of 600 to 700 bonds, based on liquidity and market capitalisation considerations (by, for example, filtering for issues with over US$150 million outstanding). It is then further reduced by focusing on convertible bonds that have the right technical characteristics in terms of delta, convexity and implied volatility, amongst others. The manager can also expand the range of investment opportunities available by considering convertibles not at the money, but which can be restructured, using equities or derivatives, to achieve at the money status. The manager then filters convertibles using a quantitative screen on the characteristics of the underlying business. A credit quality filter is applied by looking at the probability of default, the ability to cover interest payments and the asset coverage of the issuers. In looking at those metrics, the fund manager wants to ensure that, in the event of the equity investment case not developing as expected, value is retained in the bond component of the convertible. The screen also identifies undervalued firms on a value-to-cost basis, (the Credit Suisse HOLT equivalent of the price-tobook). The manager follows a value-driven approach, looking primarily for companies for which the market has low expectations, although he can also invest in growing companies that are valued cheaply by the market. The screen highlights companies whose business quality, measured mainly by cashflow return on investment (CFROI), has historically been at high levels and those with good corporate government characteristics. Together, these quantitative filters generate a number of ideas deemed worthy of further analysis. Narrowing down the universe Source: M&G and Bloomberg, as at 16 November 2016

8 Qualitative analysis Stocks that pass the screening process are subject to further analysis. In analysing credit, the manager considers the leverage of the company and its ability to repay debt, as well as its capital structure and off-balance sheet liabilities. Liquidity sources and requirements are identified, together with the schedule of debt maturities. The manager assesses the quality of assets and generates an estimate of the recovery value of the firm to its bondholders if it were unable to meet its debt obligations. The manager uses a proprietary normalised cashflow conversion model, which highlights the firm s capacity to convert earnings into cash, when the effects of the economic cycle are taken into account. The aim of this model is to get a view of the revenue growth, margins and capital expenditures needed over an average business cycle, rather than at the peak or trough. For each company held, Léonard seeks a relevant discount of around 20% to his estimate of fair value. When investing, he would also look for a potential catalyst, or driver, to a re-rating of the stock, such as a restructuring plan, disposal of unprofitable assets or changes in business strategy. In addition, the manager undertakes a detailed technical analysis of each convertible considered for inclusion in the fund. In this, he identifies the fair value of the convertible bond given the result of the fundamental analyses undertaken and pays attention to a wide range of features, such as conversion ratio adjustments, call and put provisions, protection against event risk (including takeover protection), dividend clauses and sensitivity to equity movements. All analysis is conducted on an ongoing basis once a stock is added to the portfolio. The manager continuously monitors individual positions to understand how they affect the risk-reward characteristics of the total portfolio and to identify potential changes in the business structure.

9 Portfolio construction Diversified portfolio Defined buy and sell disciplines Flexibility to structure convertibles Describe the structure of the portfolio The fund manager aims to run a diversified portfolio, with investment ideas from all regions and industries globally. The typical weight of a position in the fund is around 1-2%. High conviction investments can reach a weighting of % of the fund. Cash is held only to manage liquidity, not as a tactical source of performance. Describe the buy discipline After extensive analysis has been conducted on the convertible and its underlying equity, the manager decides whether to invest. Liquidity considerations are an integral part of the investment decision. The fund manager generally prefers to buy in the secondary market rather than participate in new issues; his investment approach necessitates a rigorous analysis, which is often incompatible with buying on the first day of trading. However, he may participate in new issues if he is familiar with the issuer and/or comfortable with the credit quality and terms of the convertible. Describe the sell discipline Convertibles are held until they reach the manager s view of their fair value and they are normally sold rather than converted. Léonard takes a long-term view, as an extended period of time may be necessary for a stock s investment rationale to be realised. The primary drivers of sales will be the underlying equity valuation together with the credit quality, which determine the validity of the investment case. However, there is no mechanical formula that forces sales from the portfolio. Corporate events may also act as selling triggers, for example, if the convertible is called before maturity or the issuer is taken over. A convertible may also be sold if its technical features become unsuitable for the portfolio. Describe the use of structured convertibles The portfolio will always have a minimum 70% exposure to convertible securities and Léonard prefers to hold traditional convertibles in the fund, as they often incorporate attractive technical characteristics such as takeover protection clauses. He does not favour the use of bank-issued pre-packaged synthetic convertible bonds, because of their limited tradability, link to the credit quality of the issuing bank and generally less attractive terms. If, however, a convertible moves out of the money, but the equity potential remains valid, the convertible may be restructured back to at the money status through the use of call options or equities and retained in the portfolio. The manager tends to use equities in this process since they are more liquid, can pay a dividend and do not suffer from time decay, which can be an important consideration when investing for the longer term. Similarly, if the convertible moves into the money, the position could be restructured to bring it back at the money by using put options or purchasing a straight bond from the same issuer. In addition, if an attractive equity or credit investment opportunity is identified for which no convertible is available, Léonard may choose to structure a convertible created via a bond and an appropriate equity or option position. Positions are structured using a proprietary model and are monitored and re-geared as necessary to account for market movements and to reflect the strategy of the position.

10 Risk management An integral part of the investment process Extensive risk monitoring undertaken by the Risk Management team Liquidity risk analysis and global diversification How important is risk management? Risk management plays an integral role in the fund. The focus on convexity acts as a natural discipline to ensure that the portfolio is built to deliver the best risk-adjusted returns. The fund manager will look for technical features of individual convertibles that enhance convexity, for instance, put options that allow the holder to sell the convertible back to the issuer at a pre-specified price. In addition, the manager selects convertibles where the distance to the bond floor is low, in order to limit the potential downside. These measures are constantly monitored at fund level and kept within the desired ranges. What support is available with regards to risk management? Portfolio construction is supported by extensive risk monitoring undertaken by the Risk Management team. The output from this process is used to identify risks, both intended and, critically, unintended. This seeks to ensure that the manager is fully informed of the impact of his decision-making at the aggregate portfolio level. The risk team provides exposure monitoring, Value at Risk (VaR) analysis and scenario/stress testing. Risk factors that are analysed include equity shifts, changes in volatility, credit spreads, the time decay of options and changes to foreign exchange rates. Do you assess liquidity? Liquidity is an important characteristic of a convertible as it expresses the ability to easily initiate or exit the investment. Therefore, we quantify and monitor the level of liquidity for the issues held by the fund, and those currently under consideration. We assess liquidity in a variety of ways, quantitatively and qualitatively. On the qualitative side, our dealing desk considers, for instance, market conditions, risk appetite or risk aversion, popular and unpopular names and sectors. On the quantitative side, we estimate liquidity based on a number of parameters, such as the market capitalisation of the issuer, credit spreads, the expected life and outstanding size of the convertible, and concentration/dispersion of holders. Do you diversify across currencies? Léonard believes that for a global fund such as the M&G Global Convertibles Fund, it is appropriate to diversify exposure across geographies and industries and, in particular, across currencies. In order to diversify currency risk he holds in the portfolio a basket of investments denominated in different currencies. The support of the Risk Management team is crucial in identifying the correlations between currencies and the sensitivity of the portfolio to shifts in exchange rates. As the portfolio is constructed on a bottom-up basis, the aim of this work is to ensure that stock positions do not lead to excessive concentrations in particular currencies.

11 Currency breakdown M&G, as at 30 April Breakdown by bond-holding currency. Do you offer hedged currency share classes? We offer currency-hedged share classes to mitigate the effect of currency movements on investment performance. We achieve this via the look-through method of share class hedging which seeks to minimise the impact of currency movements on those holdings of the fund that are denominated in currencies other the reference currency. It involves a line-by-line approach, where each currency is hedged individually. The hedging is outsourced to State Street, which charges up to six basis points on the currency-hedged share classes for this service.

12 Investment support Dedicated analysts within the M&G Convertibles team Access to a wide variety of resources within M&G Equities Analytical support from M&G Retail Fixed Interest Describe the support available to the team The fund manager and the team have wide access to a variety of in-house resources in terms of skills, experience and in-depth knowledge of industries and geographies across the globe. Discussion and debate between analysts and fund managers about investment ideas is encouraged at all levels. However, ultimate responsibility for every decision made in each fund rests with its fund manager. Convertibles Léonard is supported by two deputy fund managers, David Romani and Yannis Karachalios, who are also dedicated convertible analysts. Their expertise is used in the selection and analysis of convertibles for the fund. In addition, a fund managers assistant, provides support in the screening of the convertibles universe and the monitoring of the fund, while investment specialists provide further analysis of the market and the portfolio, as well as marketing support. Equities The fund manager interacts regularly with M&G s equity fund managers and analysts. He has access to the specific expertise of the teams, and regularly attends equity investment meetings and consults with analysts for views on specific companies and sectors. M&G Equities specialises in active bottom-up stock selection, seeking to identify those companies that will deliver superior returns for shareholders over the long term. The equity analysts within M&G are specialised by sector and are able to provide in-depth views on the market and on individual investments. Fixed interest The Global Convertibles team also has full access to M&G s Retail Fixed Interest team and to the credit analysts output, which covers both reports on specific credits and views on the wider markets and sectors. In addition, the manager can share opinions and discuss individual fund holdings and potential investments with the fixed interest team. The public credit team s analysis covers the full range of credits from AAA right through to high yield issues, in euros as well as sterling. They assign proprietary credit ratings to individual stocks, as well as assessing event risk, such as the potential for a management buyout, which might change our view of a credit. They also examine the legal structure of corporate bond issues to ensure they provide adequate protection for investors.

13 Technical terms/glossary The terminology used to describe some of the characteristics of convertibles can be very specific to the asset class. Some of the most frequently used terms are defined below: Bond floor: The value of the bond component of the convertible. It is the present value of the coupon payments and redemption amount and can change according to moves in credit spreads and interest rates. If the convertible reaches final maturity, the bond floor will be par. Conversion price: The strike price, at which the convertible is converted into shares. It is calculated from the conversion ratio (eg, if a 1,000 convertible converts into 500 shares, the conversion price will be 2). When a convertible is issued, the conversion price is generally around 25-40% above the prevailing equity price, with the difference being known as the conversion premium. Conversion ratio: The number of shares the holder will receive when a convertible is converted. The rate is set at issue but can increase if the convertible has dividend protection or takeover protection features. Convertible bond: A form of debt issued by a company. A convertible bond offers the investor the opportunity to convert into a predetermined number of shares. Convexity: A measure of the asymmetry of returns of a convertible. A convertible is convex if its price moves more on the upside than on the downside given an equal percentage move in the share price. Par: The nominal value of the convertible, or the amount that the issuer will repay at maturity. This is usually 1,000, whether in sterling, dollars or whichever currency the convertible is denominated in. Convertible prices are generally quoted as a percentage of par, meaning that par is 100%. In the event of a default, a holder may receive less than par. Parity: The conversion value or the amount that the shares received would be worth if the convertible was converted today. It is calculated as the current share price multiplied by the conversion ratio. Distance to the bond floor: The value of the option embedded in the convertible. This should be the maximum amount that can be lost if the equity price falls and the convertible trades at its bond floor, assuming credit spreads remain stable. Delta: The sensitivity of the convertible to movements in the underlying equity price. For example, if a convertible has a delta of 50% then, for every 1% movement in the share price, the convertible price will move 0.5%.

14 Key fund facts Fund name M&G Global Convertibles Fund Fund legal structure OEIC Inception date 13 July 2007 Investment policy/strategy The Fund seeks to maximise the risk-reward profile through investment in convertible assets whose issuers may be in any country, including emerging markets. Global convertible assets include all assets that either directly or via a combination of instruments achieve exposure of a convertible bond nature. Such exposure can be achieved by investing directly or through the use of derivative instruments. Additionally, derivative instruments may be used to manage the risk characteristics of the Fund. The remainder of the Fund may be invested in securities in support of the fund objective, such as, equities, bonds, collective investment schemes, derivative instruments, money market instruments, cash and near cash. Fund currency Sterling Compliance regulation UCITS NAV calculation frequency Daily NAV redemption frequency Daily Jurisdictions where the fund is UK registered Financial services regulator Financial Conduct Authority (FCA) Name of manager Léonard Vinville Manager s status Fund manager Manager's location London, UK Custodian State Street Administrator IFDS Group Dealing point Noon, UK time Dealing frequency Daily, each business day Pricing frequency Daily, each business day, at 12pm UK time Countries where registered for sale UK, Germany, Austria, Spain, France, Italy, Luxembourg, Switzerland, Netherlands, Denmark, Finland, Norway, Sweden, Ireland, Belgium, Portugal, Chile, Singapore. (Please note that the same share classes are not necessarily registered for sale in all countries) Share class Share type Management fees (% pa) Ongoing charge (%) Sedol number ISIN Mex ID Bloomberg ticker code Sterling A Acc B1Z6816 GB00B1Z68163 MGGCFS MGGLCON LN Sterling A Inc B1Z6827 GB00B1Z68270 MGGCFI MGGLCAI LN Sterling A-H Acc B8J73Y2 GB00B8J73Y29 MGDENT MGCVAHG Sterling R Acc B7L56P9 GB00B7L56P93 MGJAAJ MGGCVRA Sterling R Inc B6T8JQ5 GB00B6T8JQ52 MGJAAK MGGCVRI Sterling R-H Acc B8J72X4 GB00B8J72X47 MGDENV MGCVRHG Sterling I Acc B1Z6838 GB00B1Z68387 MGGCIA MGGLCIA LN Sterling I Inc B758PJ1 GB00B758PJ12 MGJAAI MGGCVII LN Sterling I-H Acc B8J7375 GB00B8J73758 MGDENU MGCVIHG LN Euro A Acc B1Z6849 GB00B1Z68494 MGGCAA MGGLCOE LN Euro A Inc B929RL7 GB00B929RL77 MGRUEL MGCEUAI LN Euro A-H Acc B4X3NX7 GB00B4X3NX75 MGAAAA MGGCAHE LN Euro A-H Inc B933KJ7 GB00B933KJ72 MGRUEM MGCEAHI LN Euro B Acc B95HC79 GB00B95HC793 MGRUEN MGCEBAC LN Euro B Inc BYQRBR6 GB00BYQRBR68 H5XXI MGGCBIN LN Euro B-H Acc B92WYV5 GB00B92WYV59 MGRUEO MGCEBHA LN Euro B-H Inc BYQRBS7 GB00BYQRBS75 H5XXJ MGGCBHI LN Euro C Acc B1Z6850 GB00B1Z68502 MGGCCA MGGLCEC LN Euro C Inc BK6MC47 GB00BK6MC479 MGAADI MGCEECI LN Euro C-H Acc B4WZ0J9 GB00B4WZ0J97 MGAAAB MGGCCHE LN Euro C-H Inc BK6MC58 GB00BK6MC586 MGAADJ MGCECHI LN USD A-H Acc B7XWNM4 GB00B7XWNM45 MGDENR MGCVAHU USD A-H Inc BK6MC69 GB00BK6MC693 MGAADK MGCEUAH LN USD C-H Acc B8J73C0 GB00B8J73C09 MGDENS MGCVCHU USD C-H Inc BK6MC70 GB00BK6MC701 MGAADL MGCEUCH LN CHF A-H Acc B7FHT07 GB00B7FHT077 MGDENP MGCVAHC CHF C-H Acc B64PQT3 GB00B64PQT31 MGDENQ MGCVCHC Source: M&G, as at 26 May 2017; ongoing charge as at 31 January 2017

15 Additional information Support available to the fund management team The fund manager is ultimately responsible for all investment decisions. However, he has access to extensive investment resources, including dedicated equity and bond analysts on the team. He is supported by the following specialist teams within M&G: Equity and Credit Analyst teams Investment Specialists Portfolio Construction & Risk and Risk teams Dealers Equities and Retail Fixed Interest teams In addition, support is provided by front, middle and back office departments including the following: Performance Analytics Investment Marketing Marketing Legal & Compliance Business Management This structure is intended to ensure that the management team is focused entirely on fund management. This comprehensive support infrastructure allows the manager to focus on his principal responsibility: generating investment returns for clients. External research analysis We estimate that 90% of the research utilised in the investment process for our funds is generated internally. We believe strongly that the best decisions are made based on proprietary research. Our research process is applied consistently across the team, enabling fund managers to compare stocks from different sectors or countries. The team is prepared, however, to outsource part of the research process to other experts. Our managers receive reports from brokers and other information providers in order to obtain a fully rounded view of a company. Industry experts such as trade journalists and scientists, as well as suppliers and customers, might also be consulted. Fund manager responsibilities and focus The fund manager is fully committed to and focused on fund management. He has full responsibility for the investment performance of the funds under his management. As members of the M&G Global Convertibles team, he and the deputy fund managers are also actively involved in the generation and discussion of investment ideas. Other activities include communication with clients invested in our funds and occasional meetings with external consultants and rating agencies, where the fund manager has the full support of an investment specialist with responsibility for the convertible bond strategy. All other activities not directly related to fund management are undertaken by the support teams at M&G. Fund manager succession plan Our succession plan relies on the strength of the investment teams and the common elements of our investment processes. The fund manager works closely with the deputy fund managers on a daily basis to ensure that they are fully aware of the way the portfolio is managed and its key positions and are fully qualified to take over management. Company remuneration policy Internally, M&G has a strong and integrated set of compensation practices designed to reflect people s contribution as well as their output.

16 The objective of M&G s approach to remuneration is to facilitate the achievement of business objectives. Central to this is the need to ensure that M&G can attract, retain and motivate the necessary calibre of talent required to deliver the business objectives. This in turn requires that the remuneration philosophy is flexible enough to respond to market changes, enhances the team-based culture, supports M&G values and delivers fair reward commensurate with the performance achieved. The remuneration structures and policies are designed to reward employees through the investment cycle. For the majority of retail fund managers, bonuses are primarily linked to three-year investment performance of funds within their remit. The final bonus figure will be determined on a discretionary basis by management taking into account other factors such as net inflows over the year, contribution to the investment floor and wider business, client servicing, risk and compliance (both investment and business related). For a small number of senior retail fund managers there is also a link to the profitability of their franchise. An amount of the annual bonus will be delivered in cash. Processes then apply to ensure an appropriate proportion of their annual award is delivered in long-term form or deferred. This approach ensures alignment with market and good business practice and is consistent with the direction of remuneration regulation. Sound risk management, appropriate alignment with business objectives and good governance are all critical in the ongoing management of these elements. These are achieved by appropriate oversight and review processes. M&G aims to provide individuals with the potential to earn at the upper quartile of market practice at a total compensation level for exceptional performance. Fund manager stake in the investment management company As M&G is wholly owned by Prudential plc, our fund managers do not have a direct shareholding in the management company. They do, however, have a stake in the ownership of the company through M&G s long-term incentive plan, which combines phantom equity and options over phantom equity in M&G. The scheme is designed to provide a meaningful stake in the future growth of the value of the company to those who have a significant role to play in its development.

17 Company Questionnaire M&G Company details M&G history M&G was founded under its original name of Municipal and General Securities in 1901 as the financial arm of a British engineering company. M&G revolutionised British finance in 1931 when it launched the first mutual fund for the general public. Since that time, the firm has concentrated on the management of investment funds. In 1999, M&G merged with Prudential plc, a leading international financial services group with more than 26 million customers worldwide. Based in London, M&G manages investment funds for its individual and institutional clients, and also acts as European investment manager for Prudential plc. M&G has funds under management with a total value of billion ( billion, US$327.2 billion) as at 31 December 2016, (including Prudential s long-term business funds), making it one of Europe s leading fund providers. Ownership structure M&G is wholly owned by Prudential plc, a UK-listed international financial services company. Source: M&G, 7 June 2016

18 Assets under management As at 31 December 2016, the total assets under management by M&G were billion. These are managed on behalf of retail, institutional and internal clients. Types of assets are shown in the following tables in sterling, euro and US dollar. Total assets under management as at 31 December 2016 Asset class million million US$ million Equity 57,675 67,567 71,267 Fixed Income 168, , ,592 Property 24,231 28,368 29,941 Cash 14,917 17,476 18,249 Total 264, , ,232 Source: M&G as at 31 December 2016 Total assets under management as at 31 December 2015 Asset class million million US$ million Equity 53,712 72,876 79,166 Fixed Income 156, , ,823 Property 23,370 31,708 34,445 Cash 12,381 16,799 18,249 Total 246, , ,683 Source: M&G as at 31 December 2015 Total assets under management as at 31 December 2014 Asset class million million US$ million Equity 64,009 82,479 99,806 Fixed Income 163, , ,784 Property 21,400 27,575 33,368 Cash 14,566 18,769 22,712 Other Total 263, , ,637 Source: M&G as at 31 December 2014

19 Organisational structure Source: M&G, 29 March 2017 Anne Richards was appointed Chief Executive of M&G Investments and executive director of Prudential plc in June Prior to this, Anne was Global Chief Investment Officer and Head of the EMEA region for Aberdeen Asset Management, a U.K. FTSE 100 listed company. Before joining Aberdeen in 2003 Anne was joint Managing Director and Chief Investment Officer of Edinburgh Fund Managers, a boutique investment company also listed on the UK stock exchange. Her investment career as a fund manager and analyst has spanned 24 years and included time with Mercury Asset Management, later MLIM, J P Morgan Investment Management and Alliance Capital. Before moving into investment management, Anne spent six years working as an engineer, including a spell as a research scientist at CERN. Anne has a degree in Electronics and Electrical Engineering from the University of Edinburgh and an MBA from INSEAD. Anne is also on the Board of Leaders of 2020 Women on Boards, a US organisation which aims to increase the proportion of women on corporate boards. From 2012 until February 2016, Anne was a non-executive director of Esure Group plc. Regulation The company is registered in the United Kingdom and registered as necessary in the other jurisdictions in which it operates. M&G Securties Limited (MGSL) and M&G Investment Management Limited are authorised and regulated by the Financial Conduct Authority (FCA). M&G, as part of its commitment to the FCA s principle of open and co-operative dealing with the regulator, holds regular meetings with the FCA to discuss all relevant matters. Investment ethos At M&G we are totally committed to increasing the real value of our customers wealth through active investment management based on consistent adherence to sound investment principles. M&G offers a wide range of investment solutions for retail and institutional clients, including fixed income, equity, multi-asset, property and other alternative strategies. Our culture is based on a shared set of values focusing on investment leadership, innovation and transparency. We believe that talented fund managers should be free to express their views with conviction, supported by a robust framework of portfolio construction and risk management. We are an investment-led business dedicated to the provision of excellent client service.

20 Competitive advantages M&G is a genuinely independent fund manager with no allied distribution network in the various markets in which it operates. We believe the main distinguishing feature that differentiates M&G from its competitors is its specialisation in an active bottom-up process, identifying those investments that will deliver superior returns for shareholders over the long term. In our view, M&G has several competitive advantages over its peers: M&G is specialised in the selection of securities and manages many funds with excellent profitability. Its active management is backed by a long track record in innovation and safety; M&G provides investors with a transparent and robust architecture of research, portfolio construction and risk processes; M&G enhances the freedom of its fund managers, investing in their talent and providing the necessary support to allow them to concentrate on their best investment ideas; Portfolio construction is assisted by specialised in-house research and a dedicated risk management and portfolio strategy team; M&G managers form a closely-knit team: based in a single location, the company s corporate culture stimulates debate and discussion to identify the most promising investment opportunities; M&G s size and presence across multiple markets enables the company to maintain excellent relationships with the management teams of the companies in which it invests. Corporate governance and stewardship M&G has clearly formulated ESG (environment, social, governance) policies and the approach stems directly from our founding values of integrity, security and prudence. These values remain as strong today as ever and drive our commitment to the well-being of our customers, employees, agents and the communities in which we operate. We have five corporate responsibility themes: Fair and transparent products meeting customer needs Best people for the best-performing business Protecting the environment Supporting local communities Accountability and governance At M&G we believe the long-term success of companies is supported by high standards of corporate governance, and that social and environmental factors can also have a meaningful impact on company performance. We expect well-managed businesses as a matter of course to embrace wider social and environmental issues in taking their businesses forward and find it helpful if they publish the guidelines they adopt in dealing with them. We look for a well-reasoned and practical approach and recognise that this can vary according to each company's circumstances. Responsible investment As environmental, social and governance factors are incorporated into our investment processes, everyone at M&G who is involved in investing shares in this responsibility. We also have individuals with specific responsibility for coordinating activity within each asset class. Finally, the M&G Responsible Investment Advisory Committee (RIAC) oversees the governance and management of responsible investment activities. The committee s members include representatives from each business unit involved in investment management as well as from the distribution teams. We produce an annual report 1 which outlines our stewardship activities over the year. In publicly listed companies responsibility for stewardship is shared. The primary responsibility rests with the board of the company, which oversees the actions of its management. Investors in the company also play an important role in holding the board to account for the fulfilment of its responsibilities. Voting policy At M&G, an active voting policy is an integral part of our investment policy. By exercising our votes we seek to both add value and to protect our interests as shareholders. We have a long history of activism and we have a dedicated

21 Corporate Finance department that maintains an ongoing dialogue with the companies in which M&G invests. You can find our voting record on our website here. 2 We look to work with the management of companies we hold, and where we have a differing opinion, we will hold management accountable and/or work with them to understand our view point. Investee companies are monitored closely, both in terms of their performance for creating shareholder value and issues arising from how companies are directed and controlled. United Nations Principles for Responsible Investment (UNPRI) M&G is a signatory to the United Nations-backed Principles for Responsible Investment (UNPRI) and has long been an active advocate of responsible share ownership. We have a dedicated Corporate Finance and Stewardship team to oversee our stewardship of investee companies. As professional investors, our overriding obligation is to act in the best interests of our clients. Many factors affect the investment decisions we make in this regard, and we believe that it is our duty to consider all of them. Ensuring the proper governance of investee companies is always central to our thinking, and we believe that environmental and social issues should also be taken fully into account. The UNPRI initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. Further reading Both our voting record and the overall principles we adopt contained within our document, Issues Arising from Share Ownership 3 are available on our public website Please refer to the following link for further information on our approach to responsible investment: M&G Responsible Investment

22 Dealing Equities dealing Equity trades are executed on behalf of all fund managers by a central dealing desk, consisting of five dealers. The fund manager enters trade instructions on M&G s order management system. The instruction is checked for validity against any pre-trade compliance rules (including a restricted dealing list). If the trade is deemed acceptable then it will be sent to the dealing team. Deals are conducted in such a way as to maintain equality of treatment between all client funds. All funds for which a particular deal is being conducted will have their orders completely filled or will receive the same proportion of the stock available if it is not possible to satisfy the overall demand for the stock immediately. This is particularly important when a transaction is completed over a period of time and involves a number of differently priced deals. In these circumstances, stock will be allocated at the same average price to all client funds. Once the broker has confirmed the deal with the dealer the trade is sent electronically from the order management system to M&G s back office. The Quasar accounting system is connected to the trading system (OMS) by a real time interface. Trades are fed straight through to the accounting system as they are dealt and confirmed. Settlement of trades is also carried out using the Quasar system. All accounting records are maintained on Quasar in real time and the system supports production of daily asset valuations and unit prices as well as periodic accounting statements. M&G s dealing team may only deal with approved brokers (where both the risk and legal departments have approved the broker s terms of business and deemed them to be creditworthy). M&G does not use prime brokers. Fixed income dealing M&G s long-standing presence within fixed income markets has helped to establish value-adding relationships and forge a reputation in conduct of putting our clients interests first. The Fixed Income business has a central dealing team of five FCA approved dealers who coordinate trades across M&G s fund management teams to minimise transaction costs and ensure all clients are treated fairly. The dealers have a dedicated support team who liaise with M&G front and back office functions and externally with market counterparties to ensure all issues within the trade lifecycle are resolved in an efficient manner. The team is responsible for transacting a wide array of instruments including but not limited to, government bonds, investment grade and high yield corporates, ABS, emerging market debt as well as exchange-traded and OTC derivatives. Trade instruction and execution is via the front office order management system which includes an integrated compliance module to ensure instructions are within IA (Investment Association) restrictions. Counterparty credit limits are also in place and monitored by the dealers on an intra-day basis. The dealers use a benchmark of seeking three quotes per trade. If the dealer does not deem it appropriate to approach three counterparties due to the characteristics of an order, a rationale will be provided; responses are reviewed by the head of the desk as well as (in due course) Compliance and Internal Audit. Best execution M&G will take all reasonable steps to obtain, when executing orders, the best possible result for our clients, taking into account the following execution factors: price, cost, speed, assurance of execution/settlement, size, nature or any other consideration relevant to the execution of the order. In most cases, price (and size) will be the main factor(s) determining whether or not we will execute an order. The dealing desk executes orders with a variety of counterparties who are each under obligation to provide us with best execution too. The dealers will decide on the counterparty and/or the venue according to the requirements of each and every order. We take all reasonable steps to ensure that our order execution policy is properly applied. Consequently, our dealing processes are overseen by senior management who evaluate, on a periodic basis, the range of all the execution channels used to determine whether the best result has been achieved on a consistent basis or whether changes to our execution arrangements are needed. This oversight is monitored by our Compliance department. In addition, our order execution policy is reviewed annually.

23 Risk management Operational risk The board of MGSL is responsible for ensuring it has robust risk governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility. The board delegates responsibility for oversight of the investment management and operational activities carried out for the funds to two senior committees, namely the Retail Investment Committee (RIC) and the Retail Investment Operations Committee (RIOC). RIC maintains oversight of fund investment risks and RIOC maintains oversight of fund operational risks. The MGSL Board includes the following key representatives: MGSL Chief Executive Officer (Chair) MGSL Legal Director MGSL Compliance Director M&G Chief Operating Officer M&G Risk Director MAGIM Business Management Director MGSL delegates investment management responsibilities to MAGIM. The MAGIM Board is responsible for overall risk control and receives quarterly reports from all business units. The MAGIM Board delegates to the MAGIM Risk Committee responsibility for ensuring that all MAGIM business units establish and maintain appropriate systems for monitoring and controlling investment exposures. These business units are supported by several centralised functions: Compliance, Risk, Operations, Human Resources, Finance and Audit. On an annual basis each business unit presents its investment risk controls to the MAGIM Risk Committee for review and challenge, with specific reference to changes in process and control over the previous 12 months. Additionally, the committee, which meets on a monthly basis, is ultimately responsible for the fair value and new markets process. Fund level risk At the individual fund level, risk management is the responsibility of the relevant fund management team, supported by risk teams applicable to each asset class. M&G has two primary independent risk teams: the Portfolio Construction & Risk team (PCR) and the Risk Analysis team. The PCR team is devoted to monitoring equity strategies, whilst the Risk Analysis team focuses on fixed income, convertibles and multi-asset funds. The risk teams are independent of fund management and have different reporting lines. Their roles are consultative and they therefore do not impose decisions on the fund managers. Each quarter, risk results from all funds are reviewed by M&G s Investment Oversight Committee, which ensures each fund is managed in line with its investment objectives. The committee also provides senior management insight into how each fund is being managed in terms of the drivers of investment risk and performance, as well as acting in a supportive role to help fund managers in delivering performance. The oversight committee considers relevant risk metrics, fund positioning, performance attribution, trading activity and liquidity analysis, with any issues raised discussed with the relevant fund managers as required. They will then decide whether or not they are comfortable with the analysis and subsequent fund manager comments and hence, whether any further investigation and possible action are required. Business continuity Full disaster recovery procedures are in place at M&G and disaster recovery tests are carried out annually. The disaster recovery site is situated at Chelmsford with a separate site designated for file storage and systems back-up. We define a disaster recovery event as a situation that prevents access to our normal offices and requires the relocation of staff and/or systems. We define business continuity disruption as an event that causes a temporary interruption to our business processes. This disruption can be of varying scale and duration. The objectives of the M&G disaster recovery plans are to: Establish an effective organisational structure to manage a disaster affecting any M&G offices Ensure the safety and welfare of M&G staff affected by an incident