Mitigating political uncertainty in the UK · Corporate Bond Strategy from launch in September 2013...

Mitigating political uncertainty in the UK

January 2020

2

M&G UK Inflation Linked Corporate Bond Fund

The main risks that could affect performance are set out below.

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee

that the fund will achieve its objective and you may get back less than you originally invested.

Investments in bonds are effected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these

events can reduce the value of bonds held by the fund.

The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset's value vary in an unexpected way, the fund may lose

as much as or more than the amount invested.

The fund is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates.

For accumulation shares, if inflation is low or zero, there is a risk that the fund’s expenses exceed the income it earns. If this happens, any shortfall will be taken

from the fund’s capital and the fund's capital growth will be reduced.

This fund is subject to effective yield accounting. As a result, part of its capital inflation protection will be distributed to holders of income shares. Income

shareholders will therefore, in effect, be receiving part of the capital protection as income.

In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the

best interest of all investors.

The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund. Further details of the risks

that apply to the fund can be found in the fund's Prospectus.

Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.

It is also important to note that:

The Fund allows 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 UK

government, although this may vary subject only to those listed in the prospectus.

3

Fund facts

Fund name M&G UK Inflation Linked Corporate Bond Fund

Fund manager: Ben Lord

Launch date (manager tenure): September 2010 (since launch)

Fund size: £803.4 million

Investment objective:

The Fund aims to protect the value of capital and income from inflation by generating a

return consistent with or greater than UK inflation over a rolling three to five year

period. There is no guarantee that the Fund will achieve its objective over this, or any

other, period. The income distributions and the value of your investment may rise and

fall and investors may not recoup the original amount they invested.

YTM gross of ongoing charges 1.34%

Benchmark UK Consumer Prices Index

Valuation currency: GBP

Fund structure: UK OEIC – UCITS

Pricing/dealing frequency: Daily

Source: M&G, 31 December 2019


Ratings should not be taken as recommendation

Past performance is not a guide to future performance

Ratings as at 31.12.19. The Morningstar Overall Rating based on the fund’s Sterling Class I shares. Copyright © 2020 Morningstar UK Limited. All Rights Reserved.

Ratings should not be taken as recommendation. FE Crown Fund Ratings based on the fund’s Sterling I Acc shares. FE Crown Fund Ratings do no constitute investment

advice offered by FE and should not be used as the sole basis for making any investment decision. All rights reserved

4

Ben LordBiography

• Joined M&G in 2007 and was appointed fund manager of the M&G Global

Corporate Bond Strategy from launch in September 2013

• Also fund manager of the M&G UK Inflation Linked Corporate Bond Fund and

the M&G Index-Linked Bond Fund as well as being co-fund manager of the

M&G Strategic Corporate Bond Fund and the M&G Corporate Bond Fund

• Ben is the deputy manager of the M&G (Lux) European Inflation Linked

Corporate Bond Fund and the M&G Short Dated Corporate Bond Strategy.

• Previously, Ben worked at Gordian Knot as a credit analyst covering global

financial institutions

• He holds an MA (Hons) from the University of Edinburgh and is a CFA

charterholder


Ben Lord, Fund Manager

January 2020

6

Agenda

2019 review

Outlook

Managing 2020

Fund positioning and performance

7

2019

Source: M&G, Bloomberg, 31 December 2019.

Tighter CDS, stable breakeven and yields close to historical lows

Yield (%) CDS Spread (bps)

30

40

50

60

70

80

90

-4

-3

-2

-1

0

1

2

3

4

Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19

5yr UK breakeven

5yr CDS IG (RHS)

5yr Gilt yield

5yr Gilt real yield

8

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

3.4%

120

121

122

123

124

125

126

127

Dec2018

Jan2019

Feb2019

Mar2019

Apr2019

May2019

Jun2019

Jul2019

Aug2019

Sep2019

Oct2019

Nov2019

Dec2019

Yie

ld

NA

V in

GB

P

M&G UK Inflation Linked Corporate Bond Fund UK 5 year breakeven index

Playing Brexit defence has worked

Source: M&G, Bloomberg, 13 January 2020, sterling I class shares. Returns are calculated on a price-to-price basis with income reinvested

Fund vs UK 5Y breakeven performance

Past performance is not a guide to future performance.

9

Playing defence has worked

96

97

98

99

100

101

0%

5%

10%

15%

20%

25%

30%

35%

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

UKTI 2022 exposure UKTI 2020 exposure UKTI 2022 bond UKTI 2020 bond

Source: M&G, Bloomberg, 31 December 2019.

Fu

nd

exp

osu

re

Pric

e

UK Treasury Inflation-Linked (UKTI) 2020 and 2022 bonds

10

Finding relative value in non-domestic inflationUS TIPS

Source: M&G, Bloomberg, 31 December 2019. TIPS= US Treasury inflation-linked bonds.

0

5

10

15

20

25

30

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

UST Inflation linked 5yr US 5yr breakeven Fund exposure to US inflation linked

Yie

ld %

Fu

nd

exp

osu

re %

real yield bonds (RHS)

11

Close to highest ever real yield into TIPS out of the UK

Source: M&G, Bloomberg, 14 January 2020. TIPS= US Treasury inflation-linked bonds.

Real yield on 5 year TIPS and 5 year UKTI

0

50

100

150

200

250

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

5yr TIPS FX-adjusted real yield 5yr TIPS unhedged real yield

Yie

ld

Sp

rea

d (b

ps)

5yr TIPS FX-adjusted minus 5yr UKTI

12

Agenda

2019 review

Outlook

Managing 2020


13

Bank of England inflation expectations remain subdued

Source: Bank of England, January 2020

-1

0

1

2

3

4

5

6

7

8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

CPI YoY (%) 1990-2021 exp

Forecast

14

Proposed reform of the Retail Price IndexLetter from ONS to chancellor

Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/829170/20190304_SirDavidNorgrove_to_Chancellor__RPI_.pdf, M&G

Plan to turn RPI into CPI-H and changes to be phased at the earliest 2025, at the latest 2030

Consultation currently delayed to March 2020

Bullish for front-end breaks and real yields. Long-dated linkers at riskof significant capital loss

Very low linker issuance until 3Q 2020

In our opinion RPI will be CPI H in 2030 with no

compensation paid to holders

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/829170/20190304_SirDavidNorgrove_to_Chancellor__RPI_.pdf

15

Source: M&G, January 2020

GBP

Breakevens

Gilt Yields

GBP credit

Weakens

What happens now?Possible scenarios

Up

Down

Widen

(uncertainty)

Strengthens

Down

Up

Rally

(on relief)

Strengthens

Down

?

?

Which could end in no agreement

by 31 Dec. 2020

Tense negotiations

Across goods and services

Full trade agreement

Due to tense negotiations, more time

needed than the transition period agreed

Extension

16

Agenda

2019 review

Outlook

Managing 2020


17

Managing interest rate riskM&G UK Inflation Linked Corporate Bond Fund: Duration and duration contributions

Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review

Low interest rate duration: 1.2 years…

-1

0

1

2

3

4

5

6

7

2012 2013 2014 2015 2016 2017 2018 2019

Ye

ars

Fund duration Fund credit spread duration

Interest rate duration and spread duration 2012-2019 Duration contribution 2012-2019

-1

0

1

2

3

Ye

ars

GBP EUR USD

GBP 0.64yrs

USD 0.47yrs

EUR 0.07yrs

GBP being the highest contributor

18

Managing credit risk

Source: Bloomberg, M&G, 31 December 2019

CDS are trading very tight versus historical levels

40

50

60

70

80

90

100

110

120

130

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Bp

s

CDX IG Itraxx main

CDS Indices

19

Agenda

2019 review

Outlook

Managing 2020


2019 review

Outlook

Managing 2020


20

24.5%

0%

10%

20%

30%

Fund positioning summary

Source: Bloomberg, December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund

Review


Rank Issuer %

1 United Kingdom inflation linked Gilts 53.96%

2 United States Treasury Inflation Index 4.98%

3 Anglian Water 2.86%

4 Tesco 2.43%

5 RY 2.26%

6 LA 1.82%

7 Lloyds 1.61%

8 BAT International Finance 1.55%

9 Nationwide 1.45%

10 Permanent Master Issuer Plc 1.40%

Top 10 physical net positions

Top 10 CDS positions

‘Risk-free’ exposure

Rank Issuer %

1 CDX USD IG 17.72%

2 ITRX EUR IG 5.92%

3 America Movil 2.90%

4 Anheuser-Busch 2.44%

5 Bayer US Finance 2.37%

6 General Electric 1.63%

7 CVS 1.41%

8 Koninklijke KPN 0.94%

9 Anglo American 0.53%

10 GE 0.48%

21

Performance in Sterling

Source: Morningstar Inc, and M&G, UK database, 31 December 2019, sterling I class shares. Returns are calculated on a price-to-price basis with income reinvested.

Benchmark returns stated in GBP terms. * CPI is current month value is estimated applying the current rate 12 months ago.


Past performance is not a guide to future performance.

95

100

105

110

115

120

125

130

Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 Jul 16 May 17 Mar 18 Jan 19 Nov 19Reb

ase

d to

10

0 (

16

.10

.20

10

)

M&G UK Inflation Linked Corporate Bond Fund CPI (GBP)

1

2 4

3

Performance charts © 2019 Morningstar Inc., All Rights Reserved. The information contained within: (1) is proprietary to Morningstar and/or its content providers; (2) may

not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or

losses arising from any use of this information.

2019 2018 2017 2016 2015

% % % % %

M&G UK Inflation Linked Corporate Bond Fund 3.8 -1.0 2.3 5.8 -1.7

(IA) £ Strategic Bond Sector Average 9.2 -2.5 5.7 7.1 0.1

UK Consumer Price Index - Estimated 1.5 2.1 2.9 1.6 0.2

22

Summary

Source: M&G, January 2020

Duration

Breakevens

Tactical opportunities from steepening at front-end

However long-term Gilt valuations are not justified

Cheaper than they have been for some time

Politically, there’s good reason to keep them

CreditBeing patient and waiting for better opportunities

At these levels, we are more concerned about the risk of spreads widening

23

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 ISAs and other investment products. The company’s registered office

is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.

24

www.bondvigilantes.com

www.twitter.com/bondvigilantes

25

Investment limits

• VaR limits*

– Upper limit: 10.0%

– Lower limit: 0.0%

• Restrictions by issuer rating*

– AAA - BBB 5%

– BB & below 3%

– Structured credit (inv grade) 2.5%

– Structured credit (high yield) 1.5%

Sector - Sterling Strategic Bond Sector

– Minimum 80% Sterling (or hedged back to Sterling)

– Minimum 70% exposure to investment grade credit (including derivatives)

– Minimum 50% in index-linked bonds

Duration range* -2 years to +5 years

Source: M&G. *Please note, these investment limits have been defined by the fund investment team and are subject to change


26


Source: Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly

Fund Review


UK breakeven curve exposureUK linker exposure

53.9

38.5

0%

10%

20%

30%

40%

50%

60%

Total

Dec-19

Dec-18

31.3

22.6

0.0

32.6

5.9

0.00%

10%

20%

30%

40%

1-3 year 4-6 year 7+ year

Dec-19

Dec-18

27


Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review.

*Includes derivative positions


BBBs remain good value but moving up in quality

Credit rating breakdown*. December 2017 versus December 2019

4.9%

14.6%

18.5%

24.6%

20.8%

11.1%

45.4%

47.9%

4.0%

1.2%

0.0%

0.0%

0.0%

0.8%

AAA

AA

A

BBB

BB

B

CCC & below

Cash

December 2017 December 2019

28

Appendix

- M&G Corporate Bond Fund & M&G Strategic Corporate Bond Fund

29

M&G Corporate Bond Fund

The main risks that could affect performance are set out below:

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no

guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset's value vary in an unexpected way, the

fund may lose as much as or more than the amount invested.

Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital.

All of these events can reduce the value of bonds held by the fund.

High yield bonds usually carry greater risk that the bond issuers may not be able to pay interest or return the capital.

In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the

fund in the best interest of all investors.

The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.

Further details of the risks that apply to the fund can be found in the fund's Prospectus.




30

M&G Strategic Corporate Bond Fund

The main risks that could affect performance are set out below:

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as

rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset's value vary in an

unexpected way, the fund may lose as much as or more than the amount invested.

Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or

return the capital. All of these events can reduce the value of bonds held by the fund.

High yield bonds usually carry greater risk that the bond issuers may not be able to pay interest or return the capital.

In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may

temporarily suspend the fund in the best interest of all investors.

The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.

Further details of the risks that apply to the fund can be found in the fund's Prospectus.




31

Modified duration vs iBoxx Sterling Corporate Index

Source: M&G, Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the

Monthly Fund Review

M&G Corporate Bond Fund

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Du

ratio

n (

ye

ars

)

M&G Corporate Bond Fund iBoxx Sterling Corporate Index

32

Modified duration vs iBoxx Sterling Corporate Index

Source: M&G, Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the

Monthly Fund Review

M&G Strategic Corporate Bond Fund

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Dec-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Sep-16 Sep-17 Sep-18 Sep-19

Du

ratio

n (

ye

ars

)

M&G Strategic Corporate Bond Fund iBoxx Sterling Corporate Index

33

Asset allocation over time

Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review

M&G Corporate Bond Fund vs M&G Strategic Corporate Bond Fund

Government bonds (and cash) IG corporate

HY corporate Financials

5%

7%

9%

11%

13%

2014 2015 2016 2017 2018 2019

M&G Strategic Corp Bond Fund M&G Corp Bond Fund

55%

60%

65%

70%

2014 2015 2016 2017 2018 2019


2%

4%

6%

8%

2014 2015 2016 2017 2018 2019


15%

20%

25%

30%

2014 2015 2016 2017 2018 2019


34

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 ISAs and other investment products. The company’s registered office

is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.

Mitigating political uncertainty in the UK · Corporate Bond Strategy from launch in September 2013...

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Transcript of Mitigating political uncertainty in the UK · Corporate Bond Strategy from launch in September 2013...