M&G European High Yield Bond Fund

Transcription

1 M&G European High Yield Bond Fund a sub-fund of M&G Investment Funds (3) Annual Short Report June 2015 For the year ended 30 June 2015

2 Fund information The Authorised Corporate Director (ACD) of M&G Investment Funds (3) presents its Annual Short Report for M&G European High Yield Bond Fund which contains a review of the sub-funds 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 (formerly the Investment Management Association) and of the Tax Incentivised Savings Association.) Note to shareholders The assets of a sub-fund within an umbrella OEIC may be valued in a currency other than the base currency. This is known as a valuation currency. As a result of changes to accounting rules, we are taking the opportunity to add a euro valuation currency to the M&G European High Yield Bond Fund. It is important to emphasise that this change has no impact on your sub-fund s return profile. The prices of share classes will continue to be published in the currency in which they are currently denominated and Income share distributions will continue to be paid in this currency too. In future, accounting information in these reports will be shown in the valuation currency of the sub-fund. Investment policy The Fund mainly invests in higher yielding debt instruments denominated in any European currency and will normally be managed to give investors exposure to European currencies. The Fund s exposure to higher yielding debt instruments may be gained through the use of derivatives. The Fund may also invest in other assets including collective investment schemes, government and public securities and 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 approach The M&G European High Yield Bond Fund focuses on ongoing proprietary research rather than relying on external credit ratings. 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. The fund s exposure to higher yielding debt instruments may be gained through the use of derivatives. Exposure to European currencies (mainly the euro) is an integral part of the management approach, and fluctuations in the exchange rates of these currencies against sterling are likely to play a significant role in determining total returns for UK-based investors. Investment objective The Fund aims to maximise total return (the combination of income and growth of capital) while generating a high level of income. 1 2

3 Fund information Investment review Risk profile The fund invests mainly in higher yielding fixed income securities 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. 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 with a range of counterparties, 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 risk management policies are set out in note 2 of the Annual Long Report and audited Financial Statements for M&G Investment Funds (3). The following table is the risk and reward indicator table and is based on Sterling Class X shares. Low risk Typically lower rewards This is the risk number associated with the fund. High risk Typically higher rewards The above risk number 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 and may not be a reliable indicator of the future risk profile of the fund. The risk number shown is not guaranteed and may change over time and the lowest risk number does not mean risk free. Please note that during this period the risk number has changed. From 30 June 2014 to 18 March 2015 the risk number was 5. As at 1 July 2015, for the year ended 30 June 2015 Investment performance European high yield bonds delivered modest returns over the review period, although the asset class did experience spells of weakness, especially in the second half of 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. Following solid gains throughout the first half of 2014, European high yield bonds suffered a series of moderate sell-offs in the second half of the year. The first of these reversals took place in late July as escalating geopolitical tensions in Ukraine and the Middle East, along with some negative developments in the Portuguese banking sector, appeared to dampen investor sentiment. There was further weakness in September and early October amid fears of renewed economic slowdown in Europe and uncertainty over the potential impact of the end of the US Federal Reserve s bond-buying programme. However, high yield bonds bounced back strongly in the second half of October as some more positive US economic data helped to restore investor confidence. A notable theme over much of the period was the divergence in performance between the US and the European high yield markets. This was particularly evident towards the end of 2014 as the US market suffered sharp declines, primarily due to its significant exposure to the energy sector as world oil prices plummeted. However, with very little direct exposure to energy companies, European high yield bonds fared reasonably well. European assets also benefited from expectations that the European Central Bank (ECB) was about to embark on a fresh set of stimulus measures in order to boost inflation and revive the region s flagging economy. The second half of the review period proved to be a more supportive environment for both the European and the US high yield bond markets. Helped by a partial recovery in oil prices and a marked improvement in European economic data, high yield bonds delivered steady returns over the first half of

4 Investment review On the whole, the fund s euro share classes declined slightly over the review period. However, returns for the sterling share classes were significantly affected by a sharp decline in the value of the euro versus the British pound over the 12 months. In addition, the fund has only light exposure to longer dated bonds, which meant it benefited less from the strong performance of these assets throughout much of the period. On the other hand, the fund s modest allocation to the energy and commodity sectors proved beneficial as these areas of the market underperformed. Investment activities Throughout the 12-month period, the fund was defensively positioned, with a focus on economically stronger European countries, such as Germany, France and the UK. The fund has no direct exposure to Greece and only a 13% exposure to the periphery of the eurozone, as at the end of the review period. However, we are comfortable with this modest peripheral exposure, which is based on our positive assessment of the individual companies. While the fund will always be mainly invested in European high yield bonds, we maintain an approximately 10% allocation to the US, given the attractive yields on offer and the region s brighter economic prospects. In the current environment, we favour defensive, asset-heavy businesses, such as cable operators and packaging companies. We added to some of our favoured names in these areas, including bonds issued by broadband providers unitymedia and Telenet, and global packaging businesses such as OI and Crown Holdings. Elsewhere, we sold bonds issued by UK life insurer Friends Life, Spanish auto parts maker Grupo Antolin and German discount fashion retailer Takko Group. Outlook We believe the current environment remains favourable for European high yield bonds. A combination of modest economic growth and accommodative central bank policy should ensure that company default rates remain near current lows, while strong demand for income-producing assets should provide a solid technical support. However, given the possibility of further periods of volatility over the coming months, we generally favour defensive businesses, such as cable operators and packaging companies, while remaining cautious on areas such as real estate and commodity producers. For the time being, we also maintain a modest exposure to energy companies. However, while there will probably be selected defaults in this area, we do not expect widespread ratings downgrades and defaults across the energy sector. James Tomlins Fund manager An employee 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. The fund s exposure to financials was slightly reduced over the review period as we sought to take some profits following the relatively strong performance of the sector. Having significantly built up this allocation in the first half of 2014, we trimmed a number of financial positions in the second half of the year, including bonds issued by European banks UBS, Banco Santander, Credit Agricole and Bank of Ireland. We continue to participate selectively in the primary high yield market (where new bond issues are launched). During the review period, we purchased attractively priced new issues from a number of companies, including frozen-food business Iglo, global chemical company Ineos, and Progroup, a German producer of corrugated sheetboards. 5 6

5 Investment review Financial highlights Fund performance Classification of investments The following sections show performance at share class level. AAA credit rated bonds % of the fund value (net assets attributable to shareholders) 7.70% 8.59% 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. AA credit rated bonds A credit rated bonds BBB credit rated bonds BB credit rated bonds 1.94% 2.64% 3.47% 8.62% 25.19% 38.17% To give an indication of how the results of the investment activities during the year have affected the performance of the fund the following tables show the returns attributable to Sterling Class X. For the specific performance of your share class 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 on B credit rated bonds 33.27% 36.86% Performance since launch CCC credit rated bonds CC credit rated bonds 0.53% 5.05% 5.40% To give an indication of how the fund has performed since launch, the graph below shows total return of Sterling Class X (Accumulation) shares. D credit rated bonds 0.74% 0.49% October 1999 = 100, plotted monthly Chart date 1 July 2015 Bonds with no credit rating 7.16% 10.20% Credit default swaps 0.30% 0.40% Forward currency contracts -0.14% -0.39% AAA rated money market funds [a] 2.68% Forward currency contracts for share class hedging [a] Uncommitted surplus cash is placed into AAA rated money market funds with the aim of reducing counterparty risk Sterling Class X (Accumulation) shares* 30 June 2015 Source: M&G * Net income reinvested 30 June 2014 Source: M&G 7 8

6 Financial highlights Fund performance Long-term performance one year three years five years since launch % % p.a. [a] % p.a. [a] % p.a. [a] Sterling [b] Class X [c] [a] Shows the compound rate of return, per annum, over the period. [b] Bid to bid with net income reinvested. [c] 15 October 1999, the end of the initial offer period of the predecessor unit trust. Yield The estimated gross distribution yield on 1 July 2015 Distribution % Sterling Class X 3.85 Distribution yield: The distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the mid-market price of the fund as at the date shown. It is based on a snapshot of the portfolio on that date. It does not include any preliminary charge and investors may be subject to tax on distributions. Income Interest income per share Calendar Distributed Reinvested year Interims Final Interim Total Sterling (net) p p p p p Class X [a] Ongoing charges Ongoing charges figure [a] Sterling % % Class X [a] The ongoing charges figure is the ratio of the relevant annualised total disclosable costs of each share class from the most recent reporting period to the average net asset value for that share class over the same period. Fund performance Performance of share class Net asset value Net asset value Net asset value per share as at per share as at % change Inc Acc Inc Acc Inc Acc Sterling p p p p % % Class X Prices Calendar Income shares Accumulation shares year Highest Lowest Highest Lowest Sterling (net) p p p p Class X [a] [a] To 1 July [a] Up to final: ex-distribution date 1 July 2015; payment date 31 August

7 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 including depositary, custody and audit. Operating charges do not include 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 amounts may also 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. 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, method of execution and the quality of research provided. They are made up of direct and indirect portfolio transaction costs: Direct portfolio transaction costs: Broker execution commission, taxes, and costs of research from brokers and other research providers. 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. The table below shows direct portfolio transaction costs paid by the fund before and after that part of the dilution adjustment relating to direct portfolio transaction costs. 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 on Direct portfolio transaction costs [a] % % % Broker commission Taxes Costs before dilution adjustment Dilution adjustment [b] Total direct portfolio transaction costs [a] As a % of average net asset value. [b] In respect of direct portfolio transaction costs

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9 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_310816