M&G Global High Yield Bond Fund a sub-fund of M&G Investment Funds (2) Interim Short Report November 2017 For the six months ended 30 November 2017
Fund information The Authorised Corporate Director (ACD) of M&G Investment Funds (2) presents its Interim Short Report for M&G Global High Yield Bond Fund which contains a review of the fund s investment activities and investment performance during the period. The ACD s Interim Long Report and unaudited Financial Statements for M&G Investment Funds (2), incorporating all the sub-funds and a Glossary of terms is available free of charge either from our website at www.mandg.co.uk/reports or by calling M&G Customer Relations on 0800 390 390. ACD M&G Securities Limited, Laurence Pountney Hill, London EC4R 0HH Telephone: 0800 390 390 (Authorised and regulated by the Financial Conduct Authority. M&G Securities Limited is a member of the Investment Association and of the Tax Incentivised Savings Association.) Investment objective The fund aims to provide income and capital growth. Investment policy At least 80% of the fund is invested in higher yielding corporate debt instruments which may be denominated in sterling, European currencies and other major global currencies, should the investment managers deem them to be appropriate investments. The fund s exposure to higher yielding corporate debt instruments may be gained through the use of derivatives and any currency exposures within the fund may be managed by currency hedges into sterling. Derivatives may also be used for efficient portfolio management. The fund may also invest in collective investment schemes, government and public securities and other transferable securities, cash, near cash, other money market instruments, warrants and other derivative instruments. More than 80% of the fund will be in sterling or hedged back to sterling. Investment approach The fund manager concentrates on bottom-up analysis of individual bond issues while remaining aware of macroeconomic developments. Emphasis is placed upon investigating the ability of a company or government to meet its interest payments, especially during unfavourable economic conditions. Credit risk is constantly monitored and typically spread across a variety of countries and industrial sectors. 1 2
Fund information Investment review Risk profile The fund invests mainly in higher yielding fixed income securities, which may be denominated in sterling, European currencies and other major global currencies. It is, therefore, subject to the price volatility of the global bond market as well as the performance of individual issuers. In addition, the fund is subject to fluctuations in currency exchange rates. The fund s focus on higher yielding debt securities implies that it may experience greater volatility than a fund that invests primarily in investment grade debt securities as higher risk assets 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. 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 1 2 3 4 5 6 7 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 1 December 2017, for the six months ended 30 November 2017 Performance against objective Between 1 June 2017 (the start of the review period) and 1 December 2017, the M&G Global High Yield Bond Fund produced a positive total return (the combination of income and growth of capital) across all share classes*, thus meeting its objective of providing income** and capital growth. * 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 Interim Long Report and unaudited Financial Statements for M&G Investment Funds (2). ** The fund s distribution and distribution yield are as shown in the Specific share class performance tables in the Fund performance section of the Interim Long Report and unaudited Financial Statements for M&G Investment Funds (2). This fund provides a variable level of income. 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 Six Three Five Since months years years launch 01.06.17 01.12.14 03.12.12 % [a] % p.a. % p.a. % p.a. Sterling [b] Class A +1.2 +4.0 +4.7 +6.0 [c] Class I +1.5 +4.5 +5.2 +6.2 [d] [a] Absolute basis. [b] Price to price with income reinvested. [c] 1 October 2002, the launch date of the share class. [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. 3 4
Investment review Investment performance The six months under review was a generally positive period for high yield bonds, with sentiment supported by a gradually improving economic backdrop and supportive actions from the world s central banks. Indeed, for the first time in many years, there was evidence of a synchronised upswing in global growth, with much of the improvement in economic data coming from outside the US. (High yield bonds are fixed income securities issued by companies with a low credit rating. They therefore pay a higher rate of interest than their more highly rated counterparts to compensate investors for the greater possibility that the issuer might be unable to meet its obligations, or in other words, default.) The relatively steady returns produced by high yield bonds were in contrast to the more mixed performance across other fixed income assets as the prospect of rising global interest rates and an end to current stimulus measures weighed on sentiment. In this respect, high yield bonds benefited from their relatively low sensitivity to movements in interest rates. The final month of the period under review, however, was a more challenging time for high yield markets as the asset class sold off sharply in the early part of November. The sell-off appeared to be driven by company-specific factors, such as the failed merger between Sprint and T-Mobile in the telecommunications sector and a series of weaker-than-expected financial reports from companies in the cable industry and healthcare. However, the downturn proved to be relatively short-lived, with high yield bonds reversing some of these losses by the end of the month and delivering positive investment returns over the period as a whole. Fund performance was positive across all of the fund s share classes, although the sterling share classes underperformed other funds in its comparative sector, the IA High Yield. While careful selection of individual bond issues generally proved beneficial, this was offset by the fund s cautious sector positioning in an environment where investors generally favoured risker assets. From a sector perspective, the fund benefited from having only a small exposure to the UK retail sector which is facing headwinds from the recent fall in sterling and a slowdown in consumer spending. However, the fund s cautious allocation to the energy sector meant that it was unable to fully benefit from the positive performance seen there. Investment activities There were no significant changes to fund positioning and we maintain our preference for defensive companies offering resilient cashflows irrespective of the economic environment, such as healthcare and cable businesses. During the period, we added to our positions in some of our favoured names in these sectors, including Italian mobile operator Wind, Valeant Pharmaceuticals and Tenet Healthcare. We remain cautiously positioned in the energy and commodity sectors, maintaining only a modest exposure. Following very strong gains over the past couple of years, we think many of the bond issues in these sectors no longer provide sufficient compensation for the risks. However, we found value on a selective basis and added to our position in Petrobras, the Brazilian state-owned oil company. In regional allocation terms, we have continued to reduce the fund s US exposure as we believe the recent outperformance of the US market versus its European counterpart justifies a more balanced outlook towards these two regions. On this basis we reduced the fund s exposure to a number of US dollar-denominated bonds which we believed were starting to look expensive following strong performance, including a number of banking, manufacturing and energy assets, such as Bank of America, JPMorgan, Lamar and Nobel Energy. As a result of these changes, the fund s US exposure at the end of the period was around 42%, which compares with 46% at the beginning of June. We also maintain a relatively modest exposure to emerging markets, where we believe valuations generally look expensive after strong performance over the past couple of years. We continue to find attractive opportunities in the primary market and we purchased newly issued bonds from a variety of companies, including Sainsbury s bank, Canadian aerospace company Bombardier, Mexican cement producer Cemex and Swiss telecom operator Matterhorn. In terms of sales, we reduced the holdings in bonds from cable operators Virgin Media and ZIGGO. Portfolio duration (or sensitivity to movements in interest rates) was unchanged at around 2.9 years as at the end of November. With the prospect of a further rise in US interest rates and a pick-up in global inflation, we believe a cautious stance is warranted. 5 6
Investment review Outlook In the current environment where interest rates are low and many assets are generating a low prospective return, or yield, we think high yield bonds continue to offer an attractive source of income. Despite recent market strength, we believe these assets remain fairly priced in the context of the current low default environment and against a backdrop of gradual economic expansion. However, it is at this stage of the market cycle where we believe a cautious approach is warranted and we maintain our preference for companies with stable cashflows and strong balance sheets which should be able to perform in a variety of economic conditions. With valuations in parts of the high yield market at heightened levels, we also believe that careful individual bond selection and in-depth company analysis will become increasingly important. In our view, high yield investing is as much about avoiding the losers as picking the winners. On this basis we remain cautiously positioned on the retail sector. UK fashion retailers in particular have been experiencing higher input costs as a result of the depreciation in sterling, coupled with a sharp slowdown in consumer spending. The sector is also facing longer term structural headwinds as shoppers move increasingly towards online spending and away from traditional bricks-and-mortar stores. While some of these businesses will be able to adapt, we continue to be very selective in this space. While there is less scope for a repeat of the strong gains seen in recent years, we do not believe high yield valuations are unjustified given the benign economic environment. With company default rates expected to remain at low levels, we think investors are still being overcompensated for lending to high yield businesses. Stefan Isaacs & James Tomlins Co-fund managers Employees of M&G Limited which is an associate of M&G Securities Limited. Please note that the views expressed in this Report should not be taken as a recommendation or advice on how the fund or any holding mentioned in the Report is likely to perform. If you wish to obtain financial advice as to whether an investment is suitable for your needs, you should consult a Financial Adviser. Classification of investments Equities Debt securities AA credit rated bonds A credit rated bonds BBB credit rated bonds BB credit rated bonds B credit rated bonds CCC credit rated bonds CC credit rated bonds Bonds with no credit rating Credit default swaps Forward currency contracts -0.32% Interest rate futures contracts -0.04% Interest rate swaps AAA rated money market funds [a] Forward currency contracts for share class hedging [a] -0.09% 30 November 2017 31 May 2017 % of the fund value (net assets attributable to shareholders) 0.63% 0.18% 6.15% 6.10% 2.79% 2.07% 10.66% 11.96% 2.81% 3.18% 0.15% 0.30% 2.27% 1.12% 0.57% 0.44% 1.51% 0.00% 0.01% 0.00% 4.19% 4.05% 0.05% 24.37% 23.74% 42.63% 46.45% Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk. Source: M&G Portfolio transactions for the six months to 30 November 2017 2016 Portfolio transactions 000 000 Total purchases 231,085 211,842 Total sales 261,755 320,703 7 Purchases and sales exclude the cost and proceeds of AAA rated money market funds. 8
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 charts and tables show the performance for two of the fund s share classes Sterling Class A (Accumulation) shares and Sterling Class I (Accumulation) shares. We show performance for these two share classes because: The performance of the Sterling Class A (Accumulation) share is what most individuals investing directly with M&G have received. It has the highest ongoing charge of all the sterling share classes. Performance is shown after deduction of this charge. All UK investors in the fund therefore received this performance or better. The performance of the Sterling Class I (Accumulation) share is the most appropriate to compare with the average performance of the fund s comparative sector. It is the share class used by the Investment Association in the calculation of the comparative sector s average performance. This share class is available for direct investment with M&G subject to minimum investment criteria, or via third parties who may charge additional fees. The performance shown takes the deduction of the ongoing charge for this share class into account but it does not take account of charges applied by any other party through which you may have invested. 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 (2), which is available free of charge either from our website at www.mandg.co.uk/prospectuses or by calling M&G Customer Relations. For the specific performance tables of all share classes, please refer to the Interim Long Report and unaudited Financial Statements for M&G Investment Funds (2), which is available free of charge either from our website at www.mandg.co.uk/reports or by calling M&G Customer Relations. 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. 300 250 210 180 150 130 110 100 95 October 1998 = 100, plotted monthly Chart date 1 December 2017 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Sterling Class A (Accumulation) shares* Sterling Class I (Accumulation) shares* Morningstar (IA) High Yield sector average* * Income reinvested Source: Morningstar, Inc. and M&G The fund s Sterling Class I (Accumulation) shares were launched on 3 August 2012. Performance data shown prior to this date is that of the fund s Sterling Class A (Accumulation) shares. Fund level performance Fund net asset value 30.11.17 31.05.17 31.05.16 as at 000 000 000 Fund net asset value (NAV) 1,165,896 1,185,263 1,133,409 9 10
Financial highlights Fund performance Distribution since launch The charts below show the annual distribution of Sterling Class A (Income) shares and Sterling Class I (Income) shares since launch. 3.0 Annual distributions over ten years Chart date 1 June 2017 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. Distribution (pence per share) 2.5 2.0 1.5 1.0 0.5 Sterling Class A Accumulation share performance The share class was launched on 1 October 2002. Six months to Year to Year to 30.11.17 31.05.17 31.05.16 Change in NAV per share UK p UK p UK p Opening NAV 129.44 117.38 118.83 Return before operating charges and after direct portfolio transaction costs 3.34 14.58 1.20 Operating charges (0.93) (1.75) (1.62) 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year ending May Sterling Class A (Income) shares Source: M&G Return after operating charges 2.41 12.83 (0.42) Distributions (2.18) (5.00) (5.14) Retained distributions 2.18 4.23 4.11 Closing NAV 131.85 129.44 117.38 Direct portfolio transaction costs UK p UK p UK p Annual distributions since launch of the share class Chart date 1 June 2017 Costs before dilution adjustments 0.00 0.00 0.00 Dilution adjustments [a] 0.00 0.00 0.00 60.0 Total direct portfolio transaction costs 0.00 0.00 0.00 Distribution (pence per share) 50.0 40.0 30.0 20.0 10.0 0.0 2013* 2014 2015 2016 2017 Year ending May Performance and charges % % % Direct portfolio transaction costs [b] 0.00 0.00 0.00 Operating charges 1.41 1.41 1.41 Return after operating charges +1.86 +10.93-0.36 Distribution yield 3.47 3.28 4.24 Effect on yield of charges offset against capital 0.00 0.00 0.00 Other information Closing NAV ( 000) 225,364 247,752 203,053 Closing NAV percentage of total fund NAV (%) 19.33 20.90 17.92 Number of shares 170,926,619 191,398,631 172,983,940 Highest share price (UK p) 133.16 130.28 119.78 Lowest share price (UK p) 129.08 115.91 106.95 Sterling Class I (Income) shares * Partial fund financial year distributions Source: M&G 11 12
Financial highlights Fund performance Financial highlights Operating charges and portfolio transaction costs Sterling Class I Accumulation share performance The share class was launched on 3 August 2012. Six months to Year to Year to 30.11.17 31.05.17 31.05.16 Change in NAV per share UK p UK p UK p Opening NAV 1,351.18 1,219.04 1,228.23 Return before operating charges and after direct portfolio transaction costs 34.85 151.83 12.56 Operating charges (5.60) (10.48) (9.68) Return after operating charges 29.25 141.35 2.88 Distributions (26.85) (59.83) (60.35) Retained distributions 26.85 50.62 48.28 Closing NAV 1,380.43 1,351.18 1,219.04 Direct portfolio transaction costs UK p UK p UK p Costs before dilution adjustments 0.01 0.00 0.00 Dilution adjustments [a] 0.00 0.00 0.00 Total direct portfolio transaction costs 0.01 0.00 0.00 Performance and charges % % % Direct portfolio transaction costs [b] 0.00 0.00 0.00 Operating charges 0.81 0.81 0.81 Return after operating charges +2.16 +11.60 +0.23 Distribution yield 4.07 3.88 4.83 Effect on yield of charges offset against capital 0.00 0.00 0.00 Other information Closing NAV ( 000) 119,624 102,614 82,839 Closing NAV percentage of total fund NAV (%) 10.26 8.66 7.31 Number of shares 8,665,734 7,594,372 6,795,435 Highest share price (UK p) 1,393.45 1,359.96 1,237.98 Lowest share price (UK p) 1,348.33 1,204.20 1,109.12 [a] In respect of direct portfolio transaction costs. [b] As a percentage of average net asset value. We explain below the payments made to meet the ongoing costs of investing and managing the fund, comprising operating charges and portfolio transaction costs. Operating charges Operating charges include payments made to M&G and to providers independent of M&G: Investment management: Charge paid to M&G for investment management of the fund (also known as Annual Management Charge). Administration: Charge paid to M&G for administration services in addition to investment management any surplus from this charge will be retained by M&G. Share class hedging: Charge paid to M&G for currency hedging services to minimise exchange rate risk for the share class. Oversight and other independent services: Charges paid to providers independent of M&G for services which include depositary, custody and audit. Ongoing charges from underlying funds: Ongoing charges on holdings in underlying funds that are not rebated. Operating charges do not include portfolio transaction costs or any entry and exit charges (also known as initial and redemption charges). The charging structures of share classes may differ, and therefore the operating charges may differ. Operating charges are the same as the ongoing charges shown in the Key Investor Information Document, other than where an estimate has been used for the ongoing charge because a material change has made the operating charges unreliable as an estimate of future charges. For this fund there is no difference between operating charges and ongoing charges figures, unless disclosed under the specific share class performance table. 13 14
Financial highlights Operating charges and portfolio transaction costs Notes 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 www.mandg.co.uk/prospectuses or by calling M&G Customer Relations. Portfolio transaction costs Six months to Year to Year to Average [a] 30.11.17 31.05.17 31.05.16 Indirect portfolio transaction costs % % % % Average portfolio dealing spread 0.65 0.65 0.94 0.75 [a] Average of first three columns. 15 16
Notes 17
Contact Customer Relations* 0800 390 390 Write to us at:** M&G Securities Limited PO Box 9039 Chelmsford CM99 2XG Our website: www.mandg.co.uk Email us with queries: info@mandg.co.uk * 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 email 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 90776. 56586_SR_310718