M&G Global Floating Rate High Yield Fund. Nicolo Carpaneda, Investment Director January 2016

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1 M&G Global Floating Rate High Yield Fund Nicolo Carpaneda, Investment Director January 2016

2 Agenda Views on the global high yield market Focus on high yield floating rate bonds Portfolio positioning 2

3 Learning objectives Learn about Floating Rate Notes and how they can help investors manage interest rate risk in fixed income portfolios Understand the size of the High Yield and Floating Rate Market Identify the risks of investing in the High Yield and Floating Rate Notes instruments Explain why sector selection remains key within both the High Yield and Floating Rate Note markets 3

4 Total return (rebased to 100) Comparing fixed income asset classes Performance of global IG, global HY and global HY FRN Volatility caused by taper tantrum US HY sell-off as oil prices plunge, then rallies harder Government bond sell-off in Q Global HY FRN Global HY Global IG High yield FRN has delivered lower volatility while generating income 4 Source: M&G, Bloomberg, BofA Merrill Lynch indices, 31 December Rebased to 100 at 31 December 2012

5 Valuations US and European high yield market yields 14% 12% 10% 8% 6% 4% 9.1% 5.5% 2% USD high yield, non financials - yield to worst Euro high yield, non financials (constrained) - yield to worst 5 Source: M&G, Bloomberg, 31 December 2015

6 Sector credit spread (bps) US HY credit spread US high yield sector spreads Sector selection remains key Spreads trading wider Average credit Portfolio weightings versus neutral position Spreads trading Media (overweight) Capital Goods (overweight) Banking (overweight) tighter Real Estate (underweight) Metals & Mining (underweight) Energy (underweight) Credit spreads in energy and metals & mining are still at the mercy of commodity prices 6 Source: M&G, BofA Merrill Lynch indices, 31 December 2015

7 LTM issuer default rate (%) Historic high yield default rates by region Issuer default rates by region US HY EU HY EM HY current global HY default rate 7 Source: M&G, BofA Merrill Lynch Global Research, 31. August 2015

8 M&G Global High Yield Bond Fund Fund positioning By country (top 10) By sector By financial tier NETHERLANDS IRELAND 35% 30% Underweights Overweights 18.5% 27.7% SPAIN ITALY CANADA FRANCE GERMANY LUXEMBOURG UNITED 25% 20% 15% 10% 5% 51.0% CCC & below B BB BBB Senior secured Senior unsecured By rating UNITED STATES 0% A & above 0% 20% 40% 60% Neutral position Fund 0% 20% 40% 60% Neutral position Fund 8 Source: M&G, Bloomberg, Bank of America Merrill Lynch Index, 31 December 2015

9 We have lift-off! Fed increases interest rates for the first time since June Fed Funds target rate (%) 1 Fed funds rate range increased by 0.25% to 0.25% / 0.50% 6 5 % Key takeaways from FOMC meeting Further rate hikes will be very gradual Fed will continue to reinvest principal and coupons on balance sheet assets FOMC rate projections revised slightly lower 9 Source: M&G, Bloomberg, 16 December 2015

10 What are floating rate high yield bonds? Definition FRNs are debt instruments with a variable interest rate Coupon is made up of a variable component (resetting every three months) plus a fixed spread FRNs issued by high yield issuers will pay a higher credit spread FRNs have minimal interest rate duration 10

11 Investment universe Global high yield FRN index (data by market weight) Currency distribution USD 30.9% GBP 7.3% Geographical distribution UK 17.5% EM 13.8% Euro periphery 23.3% EUR 61.8% Mainly EUR as US firms can use loans US 14.4% Euro core 30.8% Financial tier Sector Junior 19.9% Senior unsec. 26.0% Senior secured 54.2% Automotive (0.9%) Banking (21.7%) Basic industry (13.1%) Capital goods (6.1%) Consumer goods (2.3%) Energy (14.7%) Financial services (6.0%) Healthcare (6.7%) Insurance (1.1%) Leisure (2.0%) Media (1.7%) Retail (9.3%) Services (4.4%) Telecommunications (7.9%) M&G credit analysis team covers 97% of the global HY FRN market 11 Source: M&G, Bloomberg, Bank of America Merrill Lynch indices, 31 December 2015 (HFLT)

12 Investment universe Global high yield FRN index together with CDS (data by number of issuers) Currency distribution Investable universe Region Issuers USD 43.9% GBP 3.6% EUR 52.5% Europe 75 itraxx Xover Index US 100 CDX NA HY Index Global HY FRN 105 Bonds in HY FRN Index Total adding CDS 280 Global HY fixed rate - other 3,653 Bonds in HY fixed Index Grand total 3,933 Geographical distribution UK 14.4% EM 2.9% US 41.4% Sector Issuance by industrials is increasing Utilities 2.5% Financials 20.0% Europe 41.4% Industrials 77.5% 12 Source: M&G, Bloomberg, Bank of America Merrill Lynch, 31 December 2015 (HFLT and HW00)

13 Price (EUR) Salt, formerly Orange (Switzerland) Secured bond prices since issue date % Euribor +375bps floating rate note bond* 3.875% fixed rate bond ** The floating rate bond has broadly been immune to the move in the bund market 13 Source: M&G, Bloomberg, 31 August *MATTER (Salt) Float 05/01/2022 **MATTER (Salt) 3.875% 05/01/2022

14 Price (Rebased to 100 as at 11 August 2014) Stock selection in action Smurfit Kappa vs Wind vs Quicksilver Resources Smurfit Kappa (SKGID 0 10/15/2020) Wind (WINDIM 0 07/15/2020) 14 Source: M&G, Bloomberg, 31 December 2015

15 End of year report card Global HY FRN Market* M&G Global Floating Rate HY Fund Score: Overall Return -0.5% +0.5% USD A share class Relative performance +1% Sector Positioning Defaults Energy 14.0% Telco 6.8% 3 (Towergate, HAA, Quicksilver Resources) Energy 2.9% Telco 11.4% Defensive positioning helped Performance 1 (Towergate, loss to fund = 0) Security analysis is working Liquidity Manageable (for now) Kept liquidity higher than market Keeping conservative stance 15 Source: Performance - Morningstar Inc., 14 September 2015, Pan European database USD A share class, gross income reinvested, price to price. Positioning liquidity and default data - M&G, 30 September *Bank of America Merrill Lynch Global Floating Rate High Yield Index.

16 Fund positioning M&G Global Floating Rate High Yield Fund Asset allocation YTM (gross of fees): 5.5% 7.2% 8.0% Spread duration: Duration: 2.8 years 0.1 years 13.0% Top 10 holdings net of CDS collateral Ticker 1 CDX NA HY index Wind Ardagh Packaging Cemex New Look Salt % Government bonds + cash Physical FRNs CDS Interest rate swaps 7 Iglo Foods Tenet Healthcare Telenet Cabot Financial Source: M&G, 31 December 2015

17 Fund positioning M&G Global Floating Rate High Yield Fund US Core Europe & Nordics UK Periphery By region 35% 30% 25% 20% 15% 10% By sector Underweights Overweights 30.6% NA/NR CCC & below By financial tier 2.3% Senior secured Senior unsecured By rating 67.1% EM 0% 10% 20% 30% 40% Neutral position Fund 5% 0% B BB BBB A & above 0% 30% 60% 90% 17 Source: M&G, 31 December 2015

18 Total return (11/09/2014 = 100) Performance since launch M&G Global Floating Rate High Yield Fund M&G Global Floating Rate High Yield Fund BoA ML Global Floating Rate High Yield (GBP Hedged) Index 18 Source: Morningstar Inc., UK database, 31 December 2015, sterling A-H share class, net income reinvested, price to price

19 Conclusions High yield spreads now more attractive Sector positioning key Energy/Commodities High yield floating rate bonds are a possible tool for next stage of monetary policy cycle 19 Source: M&G, October 2015

20 The funds allow for the extensive use of derivatives. The fund may invest more than 35% in securities issued by any one or more of the governments listed in the fund prospectus. Such exposure may be combined with the use of derivatives in pursuit of the fund objective. It is currently envisaged that the fund s exposure to such securities may exceed 35% in the governments of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Singapore, Sweden, Switzerland, UK, USA although these may vary subject only to those listed in the prospectus. 20 The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No