Fi presentation mr citywire switzerland september 12

A truly global approach to bond investing

Citywire Gstaad, September 2012

2

Annuity, €49.2bn

Institutional, €37.5bn

Life, €29.9bn

Retail, €25.8bn

High yield, €6.0bn

Index-linked, €9.9bn

Overseas bonds, €9.8bn

Corporate bonds*, €82.6bn

UK gilts, €14.0bn

Leveraged finance, €8.2bn

Infrastructure, €2.3bn

Private placements, €3.9bn

Real estate, €5.7bn

Fixed Income funds under management €142bn

Source: M&G, 31 March 2012.

Breakdown of assets

* Investment Grade only,

By client type By asset class

3

M&G Retail Fixed Interest Team 7 fund managers and 7 other investment professionals

Jim Leaviss

(20 years experience)

Head of Retail Fixed Interest

Richard Woolnough – (26)

Stefan Isaacs – (11)

Anthony Doyle – (10) Gordon Harding – (9)

Ben Lord – (10)

James Tomlins – (10)

Nicolo Carpaneda – (7)

Matt Russell – (8)

Stuart Liddle – (5)

James Thompson – (2)

Mike Riddell – (10)

Fund Manager Fund Manager Fund Manager

Fund Manager Fund Manager

Deputy Fund Manager Investment Director

Associate Investment Specialist

Investment Specialist

FMA

FMA

Markus Peters – (2)

Investment Specialist Ana Gil – (4)

Associate Investment Specialist

4 Source: M&G, as at 31 July 2012

Private placement

Leveraged finance

Asset Backed Securities

Real estate finance

Industrials

Financials and sovereigns

Project & infrastructure finance

Quantitative analysis

149 fixed interest investment

professionals including 86 credit analysts

Market leading credit analyst teams Analysing global companies and sovereigns

5

16

9

13

10

7

5

1

Alternative credit 4

Infracapital 16

5

Biography

• Mike Riddell joined M&G’s fixed interest team in 2003,

originally as an investment specialist

• In March 2010, he was promoted to fund manager of the

M&G Emerging Markets Bond Fund, the M&G

International Sovereign Bond Fund and the M&G Index

Linked Bond Fund

• Prior to joining M&G, Mike worked as an assistant portfolio

manager at Premier Asset Management within the private

client department, covering both equities and fixed income

• Mike graduated from Birmingham University in 2001 with a

BSc honours in money banking & finance, and is a CFA

charterholder

Mike Riddell

6

M&G Global Macro Bond Fund

• Fund manager: Jim Leaviss

• Deputy fund manager: Mike Riddell

• Launch date: October 1999

• Fund structure: UCITS III

• Size: €261 million

• Sector: Morningstar Global Bond sector

Fund facts

Source: M&G as at 31 August 2012. Ratings as at 31 July 2012 and should not be taken as recommendations.

7

0

2

4

6

8

10

12

14

16

18

20

5 6 7 8 9 10 11

Annualised volatility of returns p.a. (%)

M&G Global Macro Bond Fund Risk-adjusted performance vs. sector over 1y, 3y and 5y

Strong absolute, relative, and risk-adjusted returns

1 year

3 years

5 years

1 year

3 years

5 years


Morningstar Global Bond sector average

Source: Morningstar, Inc., Pan-European database, Global Bond sector, as at 31 August 2012. M&G Global Macro Bond Fund returns are for the euro A share class,

gross income reinvested, price to price.

Annualis

ed r

etu

rns p

.a. (%

)

A truly global approach to bond investing

September 2012

Mike Riddell, Fund Manager

9

Beware of the misleading emerging

market narrative

10 Source : JP Morgan, September 2012.

Where are valuations?

Emerging market (EM) fund flows close to record this year

Inflows into EM fixed interest ($bn) Cumulative flows per asset class (% of AUM)

11 Source: M&G, as at 30 December 2011. Source: Bloomberg, as at September 2012.

EM local currency sovereign debt Correlation with equities

3500

4000

4500

5000

5500

6000

6500

7000

7500

160

180

200

220

240

260

280

300

320

Dax

in

de

x le

ve

l

EM

lo

ca

l c

urr

en

cy s

ove

reig

n d

eb

t in

dex

le

ve

l

JPM GBI-EM Global Diversified Composite Index (lhs) Dax (rhs)

12 Source: M&G, as at 30 December 2011. Source: Bloomberg, as at September 2012. The composite EM external debt index consists of the ML BoA USD BBB Rated Emerging Markets Sovereigns Index and

ML BOA USD BB Rated Emerging Markets Sovereigns Index in equal weights. Rebased to 100 at 6 June 2008

EM external sovereign debt Very close correlation with US BBB non-financial corporates

70

80

90

100

110

120

130

140

150

160

To

tal re

turn

, in

de

xe

d t

o 1

00

Composite EM external debt index BBB US corporates, non-financials

13 Source: M&G, as at 30 December 2011. Source: Bloomberg, as at September 2012. Rebased to 100 at 6 June 2008

EM external corporate debt Very close correlation to US BB non-financial corporates

70

80

90

100

110

120

130

140

150

To

tal re

turn

, in

de

xe

d t

o 1

00

JPM CEMBI Broad Diversified Index BB US Non-Financial High Yield Index

14 Source : IMF Global Financial Stability Report, April 2012

The question is not if, but when China’s bubble will burst

China – the world’s biggest credit bubble since 2009 Annual change in private credit, 2009-11

% of GDP projection - World Economic Outlook 2012

Hu

ng

ary

Eg

yp

t

Uk

rain

e

Ro

ma

nia

Me

xic

o

Kaza

kh

sta

n

Ph

ilip

pin

es

Cro

ati

a

Ve

ne

zu

ela

So

uth

Afr

ica

Pe

ru

Ind

on

es

ia

Ko

rea

Co

lom

bia

Nig

eri

a

Po

lan

d

Ru

ss

ia

Ch

ile

Ind

ia

Tu

rke

y

Th

ail

an

d

Ma

lays

ia

Bra

zil

Le

ba

no

n

Ch

ina

-5

5

15

25

35

45

55 2011

2010

2009

15 Source : World Bank, IMF, HSBC, January 2012. *China and Korea data have been adjusted by HSBC.

The Chinese government has a lot of policy firepower

– but the days of 10%+ growth are behind us

Ireland UK Spain

HK

Korea*

China*

Portugal

Japan

US

250

Cre

dit

to

GD

P (

%)

20

10

200

150

100

50

0

61000 51000 41000 31000 21000 11000 1000 Per capita income (USD)

China’s extraordinarily growth is now held up by credit Chinese GDP growth rate should be nearer to 5% than 10%

Credit to GDP in % (2010) relative to per capita income in USD

16

The eurozone crisis as competitiveness

problem

17 Source: M&G, as at 30 December 2011.

Eurozone debt crisis – another current account problem Current account balance as % of GDP, 2002-2011

Source : Bloomberg, June 2012.

-15

-10

-5

0

5

10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Netherlands

Germany

Ireland

France

Italy

Spain

Portugal

Greece

%

18 Source : Bloomberg, 31 August 2012.

A weaker EUR probably needs more negative bund yields

Interest rate differentials driving EUR/USD Germany-US yield differential vs EUR/USD exchange rate

Short dated Germany-US yield differential versus EUR/USD exchange rate

Yield (%)

-0.5

0

0.5

1

1.5

2

2yr US treasury bond 2yr German government bond

1.2

1.25

1.3

1.35

1.4

1.45

1.5

-0.4-0.2

00.20.40.60.8

11.2

2yr German-US treasury yield differential (lhs) EUR/USD exchange rate (rhs)

19


20 Source: M&G, as at 13 January 2012.

Aims to outperform the average fund in its peer group as well as the fund’s composite benchmark over the medium term

Aims to deliver steady returns with lower volatility than the

average fund in its peer group throughout the economic

cycle

Aims to construct a diversified portfolio by investing in a range of liquid fixed income assets across geographies

Aims to take high conviction views. Not benchmark-

constrained

M&G Global Macro

Bond Fund

Fund manager objectives

Total return focus

21

A fully flexible global bond fund

Credit risk

AAA AA A BBB BB B

Du

rati

on

(in

tere

st

rate

ris

k)

0 years

4 years

10 years

2 years

6 years

8 years

CCC

-4 years

-2 years

Historical credit risk and duration positioning

1

2

Feb 2009

Jul 2011

Source: M&G, as at 31 August 2012.

4 Aug 2012

22

Fund positioning summary

Source: M&G, as at 31 August 2012.

Key portfolio themes Currency breakdown

%


Added European currencies on

weakness over the summer

We like Mexico – but have short positions

in Brazil, Turkey, Poland and Russia

Quality dominates – we own US and

German government bonds

Still overcompensates for default

Central banks no longer care about

inflation, so we have 22% in linkers

Low interest rate duration

We prefer corporate issuers – although

covered bonds + RMBS are good value

Currencies

Emerging

markets

Government

bonds

High yield

Inflation

Duration

Investment

grade

0

10

20

30

40

50

60

USD EUR JPY MXN CHF SEK NOK GBP DKK

Fund Benchmark

23

M&G Global Macro Bond Fund check-list

Source: M&G, as at 13 January 2012.

Provides access to all fixed income asset classes and global currencies

Aims to deliver attractive risk-adjusted returns throughout the economic cycle

Has additional performance levers to pull, such as negative duration as well as negative positions in credit and currencies

Managed by an experienced fund manager who has worked for more than two decades in the bond markets

24

www.bondvigilantes.com

www.twitter.com/bondvigilantes

Appendix

26

Global sovereigns,

33.0

Global IG corporates,

33.0

Global HY, 17.0

Global EM, 17.0

Overview of the fund’s comparable index – defining a

‘neutral’ position

Source: M&G, February, 2012

0

5

10

15

20

25

30

35

40

0

10

20

30

40

50

60

USD EUR JPY GBP CAD Other

AAA, 20.1

AA, 16.7

A, 22.2

BBB, 18.4

BB, 11.4

B, 8.5

Other, 2.8

Currency exposure (%) Country exposure (%)

Credit exposure (%) Asset class exposure (%)

27


Source: M&G, as at 13 January 2012.

Can go negative duration

Won’t invest in equities

Truly global bond fund

Ability to express unconstrained currency views

Key differences from the M&G Optimal Income Fund

Same M&G resources, different opportunities

28

Central Bank Regime Change: the 4 regimes 1880-2012

Source: International Monetary Fund (1880-2010), M&G (2008-2012). Real interest rates refer to the UK.

0.6

0.5

0.4

0.3

0.2

0.1

0.0 -4 -2 0 2 4 6 8

Post WWII debt reduction

and financial repression

1945-1980

The Volker years and inflation

fighting Central Banks

1981-2010

-5

The credit crisis and

sovereign debt crisis

2008-2012

The Gold Standard.

Monetary stability and

fixed exchange rates

1880-1939

Real interest rate (deposit rate less RPI)

Fre

qu

en

cy d

istr

ibu

tio

n

29

-2

-1

0

1

2

3

4

5

1y 5y 10y 15y 20y 25y 30y 50y

Italy

Australia

France

Canada

US

Sweden

Japan

UK

Germany

Source : Bloomberg, as at 31 August 2012.

Global inflation-linked bond yield curves

Financial repression means that real yields can become

much more negative

Real yield across maturities

Many inflation-linked bonds

have negative real yields

%

30

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

US 10y

UK 10y (RPI)

Germany 10y

UK 10y (CPI)

Source: Bloomberg, as at 31 August 2012, based on the assumption of a differential of 1.0% between UK RPI and UK CPI

Market prices in inflation below the Central Bank targets

Inflation expectations 10 year breakeven rates for US, UK and Germany

%

31 Source: Deutsche Bank, 2012 Default study as at 16 April 2012. * Bps

5-year implied default rates, European non-financials Implied vs. actual default experience

5-YR spread * 0% recovery 20% recovery. 40% recovery. Worst Average

Implied cumulative default rate Actual cumulative default rate

AA 113 5.1% 6.2% 7.8% 1.8% 0.4%

A 159 7.5% 9.1% 11.5% 2.5% 0.8%

BBB 280 13.1% 15.9% 20.2% 5.8% 1.9%

IG non-fin 212 9.9% 12.0% 15.3% 2.4% 1.0%

Default risk premiums are very high vs. experience since

1920s

32

0

5

10

15

20

25

0

500

1000

1500

2000

2500

S&P Euro HY Default Rate (future forecast in red) ML Euro HY Constrained Index

Source: M&G, Bloomberg , S&P, JP Morgan as at 31 August 2012

European high yield spreads and default rates

High yield valuations

Defa

ult R

ate

%

Spre

ads (

bps)

A benign default environment with limited refinancing risk

33

Team of 5 fixed interest risk analysts

• Consistency of

investment strategy

against fund objectives

• Understand positioning

for different market

environments

• Seek to identify

unintended risks

• Rigorous challenge &

debate

• Focus on key risks to

performance – not just

‘box ticking’

• Ensure appropriate

oversight and control

functions are in place

• Valuable insight into

investments

• Opportunity to provide

rigorous external

challenge

• In depth analysis of

portfolio construction,

risk and performance

drivers

Sustainable portfolio construction

Transparency for our clients

Meaningful investment oversight

Objective and independent assessment of investment risk

34

• Does the fund have a ‘hard’ credit leverage limit?

The fund does not have a hard credit leverage limit per se, however any substantial level

of leverage is subject to close scrutiny and challenge through our investment oversight

framework.

• How does credit leverage affect the fund’s overall risk profile?

Credit leverage is primarily judged on the basis of credit default risk as well as price

(spread) volatility through the use of VaR limits for global exposure monitoring (i.e. 20%

VaR). We monitor the fund’s VaR on a daily basis to ensure the fund remains within its

specified VaR limits, even if it is credit levered.

• How do we measure credit leverage?

Credit leverage is measured on a regular basis. For the purposes of credit leverage

measurement, default credit exposure is based on the notional value of physical and

derivative instruments that have underlying credit exposure and net of short derivative

credit positions used for hedging purposes.

Risk analysis Credit leverage

35

• Only trade with counterparties where an ISDA contract is in place.

• All counterparties are subject to credit due diligence on an on-going basis with

minimum external rating standards, significant counterparty rating downgrades

may trigger contractual termination clauses.

• Derivatives positions are valued, netted across each counterparty and

collateralised daily. There is zero minimum threshold for posting collateral

subject to a minimum transfer value of £250k.

• Collateral posted/received is specified within the ISDA contract and relevant

annexes, collateral received tends to be cash and G7 Government stock and,

occasionally, corporate bonds.

• All counterparty exposures are monitored daily by the M&G Counterparty Credit

Risk team.

Risk analysis OTC Derivative Counterparties

36

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Credit Interest Inflation FX

M&G Global Macro Bond Fund Risk analysis

VaR break out

Source: M&G, as at 31 August 2012

37


Credit stress test

-0.0

4%

0.0

4%

-3.6

9%

3.9

8%

3.7

4%

-6.0

8%

-7.1

5%

8.5

2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Spreads+1bp Spreads-1bp Spreads+100bp Spreads-100bp SpreadsReduced by

50%

SpreadsDoubling 200%

Spreadsincreasing by

Rating

Spreadsdecreasing by

Rating


38


Interest rate stress test

-0.0

3%

0.0

3%

-1.5

7%

1.6

2%

-3.0

8%

3.3

1%

0.4

8%

-0.6

6%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

IR +1bp IR -1bp IR+50bp IR-50bp IR+100bp IR-100bp IR CurveFlatteners

IR CurveSteepeners


39


Foreign exchange stress test

-8.4

4%

9.9

8%

-5.6

5%

6.1

9%

-7.4

0%

8.1

0%

-3.4

3%

3.3

9%

-4.5

7%

4.2

4%

-2.3

5%

2.6

4%

-2.0

6%

1.9

9%

-10%

-5%

0%

5%

10%

15%

USD -20%

USD+20%

EUR -20%

EUR+20%

JPY -20%

JPY+20%

CHF -20%

CHF+20%

KRW -20%

KRW+20%

MXN -20%

MXN+20%

BRL -20%

BRL+20%


40

USD, 17.21%

JPY, 9.36%

GBP, 33.16%

EUR, 28.15%

CAD, 0.00%

NOK, 1.31%

SEK, 1%

CHF, 0.99%

USD

JPY

GBP

EUR

CAD

AUD

PLN

NZD

NOK

MYR

SGD

DKK

SEK

CHF

KRW

BRL

MXN

CLP

CNY


Current hedged assets split by currency Current unhedged assets split by currency

USD, 43.45%

JPY, 10.37% GBP, 7.76%

EUR, 17.92%

CAD, 0.00%

AUD, 0.00%

NOK, 3.77%

SEK, 3.80%

CHF, 4.40%

USD

JPY

GBP

EUR

CAD

AUD

PLN

NZD

NOK

MYR

SGD

DKK

SEK

CHF

KRW

BRL

MXN

CLP

CNY


41

Fund facts

Top 10 issuers, physical positions only

Rank Issuer Fund (%)

1 Japan Govt. 9.1

2 Mexico Govt. 7.6

3 Germany Govt. 5.5

4 Granite Master 3.9

5 Italy Govt. 3.7

6 USB 3.6

7 Tesco 3.1

8 US Govt. 3.1

9 Nationwide 2.5

10 Toyota 2.0


1 Granite Master 3.9

2 USB 3.6

3 Tesco 3.1

4 Nationwide 2.5

5 Toyota 2.0

6 Unity Media 1.7

7 National Grid 1.6

8

Sunrise

Communications 1.4

9 Seven River Crossing 1.4

10 Cemex 1.3

Including government bonds Excluding government bonds


42

Fund facts

Top 5 CDS/CDX positions


1 Itraxx Europe 10.3

2 CDX NA HY 5.5

3 CDX NA IG 2.4

4 France Govt. 2.4

5 Austria Govt. 1.5


1 Poland Govt. -0.9

2 Brazil -0.6

3 Indonesia -0.6

4 South Africa Govt. -0.6

5 UK Govt. -0.6

Long positions (sold protection) Short positions (bought protection)


Prices may fluctuate and you may not get back your original investment.

This document is designed for investment professionals’ use only, not for onward distribution to any other person or entity. For Switzerland: Distribution of this document in or from Switzerland is

not permissible with the exception of the distribution to qualified investors according to the Swiss Collective Investment Schemes Act, the Swiss Collective Investment Schemes Ordinance and the

respective Circular issued by the Swiss supervisory authority ("Qualified Investors"). Supplied for the use by the initial recipient (provided it is a Qualified Investor) only. In Spain the M&G Investment

Funds are registered for public distribution under Art. 15 of Act 35/2003 on Collective Investment Schemes as follows: M&G Investment Funds (1) reg. no 390, M&G Investment Funds (2) reg. no 601, M&G

Investment Funds (3) reg. no 391, M&G Investment Funds (5) reg. no 972, M&G Investment Funds (7) reg. no 541, M&G Investment Funds (9) reg. no 930, M&G Global Dividend Fund reg. no 713 M&G Dynamic

Allocation Fund reg. no 843, M&G Global Macro Bond Fund reg. no 1056 and M&G Optimal Income Fund reg. no 522. The collective investment schemes referred to in this document (the "Schemes") are open-

ended investment companies with variable capital, incorporated in England and Wales. In the Netherlands, all funds referred to, with the exception of M&G Investment Funds (2), M&G Investment Funds (5), M&G

Investment Funds (9) and the M&G Dynamic Allocation Fund, are registered with the Dutch regulator, the AFM. This information is not an offer or solicitation of an offer for the purchase of investment shares in one

of the Funds referred to herein. Purchases of a Fund should be based on the current prospectus. The prospectus, Key Investor Information Document (KIID), annual report and subsequent semi-annual report, are

available free of charge, in paper form, from the ACD: M&G Securities Limited, Laurence Pountney Hill, London, EC4R 0HH, GB, or one of the following: M&G International Investments Limited, German branch,

Bleidenstraße 6-10, D-60311 Frankfurt am Main, the German paying agent J.P. Morgan AG, Junghofstraße 14, D-60311 Frankfurt am Main, the Austrian paying agent, Raiffeisen Bank International A.G., Am

Stadtpark 9, A-1030 Wien, the Luxembourg paying agent, J.P. Morgan Bank Luxembourg S.A., European Bank & Business Center, 6 c route de Treves, 2633 Senningerberg, Luxembourg, Allfunds Bank, Calle

Estafeta, No 6 Complejo Plaza de la Fuente, La Moraleja 28109, Alcobendas, Madrid, M&G International Investments Limited, 34 Avenue Matignon, 75008, Paris, France or from the French centralising agent of the

Fund: RBC Dexia Investors Services Bank France. For Switzerland: Please refer to M&G International Investments Ltd., Bleidenstraße 6-10, D-60311 Frankfurt am Main or, for Sweden, from the paying agent,

Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, 106 40 Stockholm, Sweden. For Italy, they can also be obtained from one of the appointed paying agents, details of which can be found by visiting the

contact section on the following website: www.mandg-investments.it. Before subscribing you should read the prospectus, which includes investment risks relating to these funds. This financial promotion is

published by M&G International Investments Ltd. Registered Office: Laurence Pountney Hill, London EC4R 0HH, authorised and regulated by the Financial Services Authority and registered with the CNMV in Spain.

Past performance is not a guide to future performance. Performance stats are quoted gross of Italian tax on capital gains

http://www.mandg-investments.it/







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