M&G Optimal Income FundSterling Class I – Accumulation sharesMonthly Fund Review as at 29 February 2020For investment professionals only

Highlights• Demand for risky assets fell as investors fretted about the impact of the coronavirus outbreak on global growth prospects.• Wider credit spreads and lower interest rates resulted in a negative performance for the fund – our holdings of USinvestment grade bonds and equity exposure to banks detracted the most.• We added risk back into the portfolio as valuations became increasingly cheap towards the end of the month.• Interest rate duration remains low and we are reducing our duration mainly thorough some long-dated futures and swaps.

The main risks associated with this fundFor any past performance shown, please note that past performance is not a guide to future performance.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 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. 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 will incur a loss. The fund’s use of derivatives may be extensive and exceed the value of its assets (leverage). This has the effect of magnifying the size of losses and gains, resulting in greater fluctuations in the value of the fund. 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. Further risk factors that apply to the fund can be found in the fund's Key Investor Information Document (KIID).

Single year performance (5 years)

2019 2018 2017 2016 2015 Sterling I Accumulation 9.0% -3.3% 5.8% 8.1% -0.9% IA £ Strategic Bond 9.2% -2.5% 5.2% 7.0% -0.3%

Performance over 5 years

90.0

95.0

100.0

105.0

110.0

115.0

120.0

Inde

xed

to 1

00

Feb 15 Dec 15 Dec 16 Dec 17 Dec 18 Feb 20

Sterling I Accumulation (116.8) IA £ Strategic Bond (120.9)

Fund performance

1 month (%) 3 months (%) YTD (%) 1 year (%) 3 years (%)p.a.

5 years (%)p.a.

Sterling I Accumulation -2.0% -1.2% -2.3% 3.4% 2.5% 2.9% IA £ Strategic Bond -0.3% 1.6% 1.1% 7.9% 3.7% 3.5%

Past performance is not a guide to future performance.Performance comparison: The fund is actively managed. The benchmark is a comparator against which the fund’s performance can be measured. The sector hasbeen chosen as the fund’s comparator benchmark as the fund is a constituent of the sector. The comparator benchmark does not constrain the fund's portfolioconstruction.

Source: Morningstar, Inc and M&G, as at 29 February 2020. Returns are calculated on a price to price basis with income reinvested.Benchmark returns stated in GBP terms.

Performance charts © 2020 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 anydamages or losses arising from any use of this information.

Key informationFund manager Richard WoolnoughFund manager tenure from 08 December 2006Deputy fund manager Stefan IsaacsISIN GB00B1H05718Launch date of fund 08 December 2006Launch of share class 08 December 2006Fund size (millions) £ 3,153.89Benchmark IA Sterling Strategic Bond SectorBenchmark type ComparatorSector IA Sterling Strategic BondNumber of issuers 289Distribution yield 1.49%Underlying yield 1.49%Average credit rating A-Modified duration (years) 1.29VaR 2.38%Average coupon 2.99Spread duration (years) 6.2Payment dates May, NovEx-dividend dates Apr, Oct

ChargesMaximum entry charge 0.00%Ongoing charge 0.84%

Duration by currency and asset classFund Futures Swaps Net

Euro 1.6 -1.0 0.0 0.5British pound 2.1 -0.8 -1.0 0.4US dollar 3.1 -3.0 0.0 0.1Other 0.3 0.0 0.0 0.3Total 7.1 -4.8 -1.0 1.3

Things you should knowThe fund allows for the extensive use of derivatives.

Fund ratingsMorningstar Analyst rating

Overall Morningstar rating QQQQThe Adviser Centre rating EstablishedDefaqto Rating 5 DiamondsFinancial Express Crown Rating

Fund Calibre Rating YesFundhouse Rating Tier 2RSM rating YesSquaremile rating AASource of Morningstar ratings: Morningstar, as at 29 February 2020Source: Adviser CentreSource: Defaqto, as at 29 February 2020Source: Financial ExpressSource: FundCalibreSource: Fund HouseSource: RSMSource: Squaremile

Ratings should not be taken as a recommendation.

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Asset breakdown (%)

PhysicalShort

(via CDS)Long

(via CDS) NetGovernment bonds 34.0 -5.3 0.0 28.7Investment grade corporate bonds 47.6 -1.1 0.0 46.4Fixed rate 38.5 -0.1 0.0 38.4Floating rate 9.0 0.0 0.0 9.0Index linked 0.1 0.0 0.0 0.1Credit default swap indices 0.0 -1.1 0.0 -1.1High yield corporate bonds 9.3 0.0 2.3 11.6Fixed rate 8.1 0.0 0.0 8.1Floating rate 1.2 0.0 0.0 1.2Index linked 0.0 0.0 0.0 0.0Credit default swap indices 0.0 0.0 2.3 2.3Securitised 4.2 0.0 0.0 4.2Equities 5.3 0.0 0.0 5.3Other 0.0 0.0 0.0 0.0Cash -0.4 0.0 0.0 -0.4

Credit rating breakdown (%)

PhysicalShort

(via CDS)Long

(via CDS) NetAAA 31.6 0.0 0.0 31.6AA 9.2 0.0 0.0 9.2A 8.0 0.0 0.0 8.0BBB 36.6 -1.6 0.0 35.0BB 7.5 -4.8 0.0 2.7B 1.9 0.0 2.3 4.2CCC 0.2 0.0 0.0 0.2CC 0.1 0.0 0.0 0.1C 0.0 0.0 0.0 0.0D 0.0 0.0 0.0 0.0No rating 5.3 0.0 0.0 5.3Cash -0.4 0.0 0.0 -0.4

Country breakdown (%)

PhysicalShort

(via CDS)Long

(via CDS) NetGermany 29.4 0.0 0.0 29.4US 26.6 0.0 0.0 26.6UK 19.1 -0.1 0.0 19.0France 9.5 0.0 0.0 9.5Japan 3.1 0.0 0.0 3.1Italy 2.7 0.0 0.0 2.7Belgium 1.6 0.0 0.0 1.6Netherlands 1.5 0.0 0.0 1.5Other 6.9 -1.7 0.0 5.2High Yield indices 0.0 0.0 2.3 2.3Investment Grade indices 0.0 -1.1 0.0 -1.1Cash -0.4 0.0 0.0 -0.4Other 0.0 -3.5 0.0 -3.5

Largest issuers (excl. government bonds andCDS indices, %)

FundMicrosoft 3.1Altria Group 2.2AT&T 1.9Anheuser Busch 1.6Lloyds Banking Group 1.5Bayer AG 1.1Legal & General 1.1Aviva 1.0Apple 1.0General Motors 1.0

Maturity breakdown (%)Physical

0 - 1 years 3.41 - 3 years 19.43 - 5 years 14.65 - 7 years 10.17 - 10 years 15.010 - 15 years 8.615+ years 29.4Cash -0.4

Currency breakdown (%)Pre-hedge Post-hedge

British pound 28.2 100.1Japanese yen 3.1 0.0Singapore dollar 0.0 0.0South African rand 0.0 0.0Swiss franc 0.2 0.0Euro 41.9 0.0US dollar 26.6 -0.1

Industry breakdown (%)

PhysicalShort

(via CDS)Long

(via CDS) NetSovereign 32.2 0.0 0.0 32.2Telecommunications 8.1 0.0 0.0 8.1Consumer goods 6.7 0.0 0.0 6.7Banking 6.0 -1.8 0.0 4.2Technology & electronics 4.7 0.0 0.0 4.7Automotive 4.0 0.0 0.0 4.0Asset backed 3.7 0.0 0.0 3.7Insurance 3.2 0.0 0.0 3.2Covered Bonds 3.1 0.0 0.0 3.1Basic industry 3.1 0.0 0.0 3.1Healthcare 3.0 0.0 0.0 3.0Utility 2.2 0.0 0.0 2.2Media 2.0 0.0 0.0 2.0Energy 1.8 0.0 0.0 1.8Foreign Sovereign 1.8 0.0 0.0 1.8Commercial Mortgage Backed 1.5 0.0 0.0 1.5Retail 1.5 0.0 0.0 1.5Real Estate 1.4 0.0 0.0 1.4Mortgage backed 1.3 0.0 0.0 1.3Services 0.6 0.0 0.0 0.6Agency 0.6 0.0 0.0 0.6Financial services 0.5 0.0 0.0 0.5Capital goods 0.5 0.0 0.0 0.5Transportation 0.5 0.0 0.0 0.5Leisure 0.5 0.0 0.0 0.5Supranational 0.4 0.0 0.0 0.4Government Guaranteed 0.1 0.0 0.0 0.1Quasi & foreign government 0.0 -3.5 0.0 -3.5Investment Grade indices 0.0 -1.1 0.0 -1.1Other 5.3 0.0 0.0 5.3High Yield indices 0.0 0.0 2.3 2.3Cash -0.4 0.0 0.0 -0.4

CommentaryFebruary began on a modestly positive note, as credit spreads tightened and the primary market remained fairly active. But as coronaviruscases spread across Europe, risk-off sentiment returned to markets with a vengeance. With a significant widening in credit spreads, the lastweek of February was the worst for many markets since the global financial crisis.Any hopes at the start of the month that coronavirus would be a temporary issue were short-lived: at the beginning of February, there were132 cases identified outside of China, and those mainly in Asia; there were more than 4,600 by February 28.Equity and credit markets suffered, with the S&P 500 experiencing its largest weekly decline since October 2008. European markets – Greece’sAthex lost a fifth of its value in the month – also lagged as eurozone GDP data covering the final quarter 2019 showed a mere 0.1%improvement.Certain safe-haven assets rallied. The Japanese yen was one of the top performers in February, up 3.2% versus the US dollar. In governmentbonds, US Treasuries gained 2.7% (with 10-year yields closing at record lows on Friday February 28), UK gilts 1.2% and German bunds 1.4%.Italian BTPs lost 1.2%, with Italy at the centre of the European outbreak. Surprisingly, gold’s lure dulled as the month progressed, as did oil’s,with Brent crude down sharply in February. One of the weakest performers this month was sterling, down 2.9% versus the US dollar.Wider credit spreads and lower interest rates resulted in a negative performance for the fund – our holdings of US investment grade bondsand equity exposure to banks detracted the most.Our short credit default swap (CDS) exposure to European subordinated financials was a minor boost. Having plenty of risk-free assets andparticularly being underweight high yield was also helpful in a challenging month for risk-taking. Duration helped performance in absoluteterms but detracted in relative terms, as we remain very underweight here.

Key changesWe added some credit risk back into the portfolio towards the end of the month – about 5% in aggregate. Although we believe valuationshave yet to become very cheap, we decided it was a good time to use our cash holdings to boost high yield and some equity holdings, givenwe have been de-risking for the last nine months. We also closed some of the short positions in European subordinated financials CDS indices.Within investment grade we have been relatively quiet as this asset class held up relatively well compared to high yield. However, on thederivatives side we closed around 60% of our buy protection on the European subordinated financials CDS index. The index came very muchunder pressure and given we were shorting it, we decided to take some profit as valuations aren't as rich as they used to be.While we maintain a large underweight exposure to high yield, on the basis that it had strongly underperformed investment grade in theperiod we boosted exposure through derivatives exposure and some physical bonds.Equities as an asset class suffered the most in month, so we topped up on a few names in order to maintain our exposure close to 5%. We alsoadded two new companies which seemed relatively attractive after the sharp reprice - Siemens and Repsol.We maintain a very underweight duration of around 1.3 years. In this context, we continue to think that core government bond unattractivefrom a risk-reward standpoint.One of the key strengths of the Optimal income strategy is its unconstrained investment approach. Another is its wider investment toolkit:being highly flexible, we can take short or long positions in a wide range of fixed assets – investment grade credit, government bonds, andhigh yield – where we see attractive valuations. We can also invest in equities (these make up about 5% of assets at the moment, but can goas high as 20%) should we believe income streams are better coming from a company’s equity and not its debt.We believe this approach and strategy type has the potential to perform in any economic cycle (as shown in its relative performance during2008, for instance). Equally, we assert the economic fundamentals remain solid – growth, jobs, spending – although we are aware of keydisruptors to this, including the coronavirus and its unknown direction in the coming months.

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Fund codes and charges

Share class ISIN Bloomberg CurrencyLaunch date of

fundOngoing

chargeDistribution

yieldUnderlying

yield

Minimuminitial

investment

Minimumtop up

investmentSterling A Acc GB00B1H05155 MGOIANA LN GBP 08/12/2006 1.34%* 0.98% 0.98% £500 £100Sterling A Inc GB00B1H05049 MGOIANI LN GBP 08/12/2006 1.34%* 2.36% 0.98% £500 £100Sterling I Acc GB00B1H05718 MGOIINA LN GBP 08/12/2006 0.84%* 1.49% 1.49% £500,000 £10,000Sterling I Inc GB00B1H05601 MGOIINI LN GBP 08/12/2006 0.84%* 2.36% 1.49% £500,000 £10,000Sterling R Acc GB00B7FM9R94 MGOPIRA LN GBP 03/08/2012 1.09%* 1.24% 1.24% £500 £100Sterling R Inc GB00B76FNM05 MGOPIRI LN GBP 03/08/2012 1.09%* 2.36% 1.24% £500 £100Sterling X Acc GB00B1H05486 MGOIXAC LN GBP 08/12/2006 1.34%* 0.98% 0.98% £500 £100Sterling X Inc GB00B1H05379 MGOIXNI LN GBP 08/12/2006 1.34%* 2.36% 0.98% £500 £100

Any ongoing charge figure with * indicates an estimate. The ongoing charge figure may vary from year to year and excludes portfolio transaction costs. The charges are mostly, if not exclusively, the Annual Charge which may be discounted depending on the size of the fund. For furtherdetails, please see the fund’s Key Investor Information Document (KIID). The fund's annual report for each financial year will include details on the exact charges made.Please go to www.mandg.co.uk/literature to view the Costs and charges illustration which contains information on the costs and charges applicable to your chosen fund and share class.Please see the Important Information for Investors document and the relevant Key Investor Information Document for more information on the risks associated with this fund and which share classes are available for which product and which investor type.

Important informationCash may be held on deposit and/or in the Northern Trust Cash Funds, a range of collective investment schemes.

The M&G Optimal Income Fund is a stand alone OEIC.

Sector: Morningstar category averages represent the average return of funds within their category over time. The category averages are created by using the average daily total return index series, or TRI, as well as monthly, quarterly, and annual averages of return and non-return data.Morningstar applies a fractional weighting methodology whereby, on the last day of each month, the funds are equally weighted and the share classes within each fund are equally weighted. Fractional weighting ensures that funds with multiple share classes do not dominate and skewthe returns of the average, thus presenting the peer group performance in a fair and consistent manner.

The Morningstar Analyst Rating™. © 2020 Morningstar. All Rights Reserved. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Ratings should not be taken as recommendation.

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.

Where a security has not been rated by Standard & Poor’s, Fitch or Moody’s, we may use M&G’s internal credit rating. Based on a comparison of all available ratings for each security, the most conservative rating (S&P, Fitch, Moody’s or M&G’s internal rating) is taken into consideration.The ratings so identified are then expressed or converted into M&G’s ratings format to obtain uniform information for all securities in the portfolio.

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 ISAsand other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England No. 90776

Contact M&GPrivate Investorswww.mandg.co.uk/investor0800 390 390Charitieswww.mandg.co.uk/charities

Intermediary & Wealthwww.mandg.co.uk/adviserInstitutionalwww.mandg.co.uk/institutions

For your protection calls may be recorded or monitored. 3 / 32003

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