FOR INVESTMENT PROFESSIONALS ONLY M&G Global Floating Rate High Yield Fund Second quarter 2018 Fund manager – James Tomlins Quarterly Review Overview • High yield bonds experienced mixed returns in the second quarter of 2018, as rising trade war tensions and political turmoil in Italy weighed on market sentiment. • The fund produced a modest return over the period. A significantly underweight exposure to Italian issues proved helpful in the aftermath of the Italian election, although this was offset by an underweight energy exposure. • While remaining defensively positioned overall, we have taken advantage of recent market weakness by adding back small amounts of credit risk. We are currently seeing some attractively valued opportunities in the primary high yield FRN market where we are able to capture an additional yield compared to equivalent bonds trading in the secondary market. Past performance is not a guide to future performance. Risks associated with this fund: For any past performance shown, please note that past performance is not a guide to future performance. The value of investments and the income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invested. The fund may use derivatives with the aim of profiting from a rise or a fall in the value of an asset (for example, a company’s bonds). However, if the asset’s value varies in a different manner, the fund may incur a loss. The value of the fund may fall if the issuer of a fixed income security held is unable to pay income payments or repay its debt (known as a default). The fund invests mainly in one type of asset. This type of fund can experience larger-than-average price changes when compared to a fund which invests in a broader range of assets. When interest rates rise, the value of the fund is likely to fall. Further risk factors that apply to the fund can be found in the fund’s Key Investor Information Document (KIID). Things you should know: The fund allows for the extensive use of derivatives.
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FOR INVESTMENT PROFESSIONALS ONLY
M&G Global Floating Rate High Yield Fund Second quarter 2018 Fund manager – James Tomlins
Quarterly Review
Overview • High yield bonds experienced mixed returns in the second quarter of 2018, as rising trade war tensions and political
turmoil in Italy weighed on market sentiment.
• The fund produced a modest return over the period. A significantly underweight exposure to Italian issues proved helpful in the aftermath of the Italian election, although this was offset by an underweight energy exposure.
• While remaining defensively positioned overall, we have taken advantage of recent market weakness by adding back small amounts of credit risk. We are currently seeing some attractively valued opportunities in the primary high yield FRN market where we are able to capture an additional yield compared to equivalent bonds trading in the secondary market.
Past performance is not a guide to future performance.
Risks associated with this fund: For any past performance shown, please note that past performance is not a guide to future performance. The value of investments and the income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invested. The fund may use derivatives with the aim of profiting from a rise or a fall in the value of an asset (for example, a company’s bonds). However, if the asset’s value varies in a different manner, the fund may incur a loss. The value of the fund may fall if the issuer of a fixed income security held is unable to pay income payments or repay its debt (known as a default). The fund invests mainly in one type of asset. This type of fund can experience larger-than-average price changes when compared to a fund which invests in a broader range of assets. When interest rates rise, the value of the fund is likely to fall. Further risk factors that apply to the fund can be found in the fund’s Key Investor Information Document (KIID). Things you should know: The fund allows for the extensive use of derivatives.
Market and fund performance High yield bonds experienced mixed returns in the second quarter of 2018 as rising trade war tensions and political turmoil in Italy weighed on market sentiment. The uncertain political backdrop contributed to negative returns in European high yield, with financials amongst the worst affected. In contrast, US high yield bonds delivered positive returns, helped by the recent strength in oil prices and the more favourable economic backdrop.
The prospect of rising global interest rates was another key theme. This contributed to heightened volatility across many fixed income assets, although the lack of
duration on high yield floating rate notes (FRNs) meant they were not directly exposed to these headwinds.
The fund produced a modest return over the period, with a positive price swing contributing 60 basis points to returns. In terms of the underlying portfolio, a significantly underweight exposure to Italian issues and an avoidance of the Italian banking sector proved helpful in the aftermath of the Italian election. However, relative performance was held back by an underweight energy exposure as the sector continued to benefit from the recent strength in oil prices.
Portfolio activity and outlook While remaining defensively positioned overall, we have taken advantage of recent market weakness by adding back small amounts of credit risk. We are currently seeing some attractively valued opportunities in the primary high yield FRN market, where we are able to capture an additional yield compared to equivalent bonds trading in the secondary market.
In the aftermath of the Italian election, we took the opportunity to add some high-quality names at attractive levels, including issues from financial services provider Nexi Capital and software company TeamSystem Group.
With market sentiment improving towards the end of the quarter, we decided to sell down some of our lower conviction names, such as heat exchange manufacturer Galapagos and medical outsourcer IDH.
We continue to favour defensive businesses offering stable cashflows and healthy balance sheets, with a preference for areas such as cable operators and packaging companies. We are also keeping a significant exposure to senior-secured issues, which
we would expect to hold up better than unsecured high yield bonds in any future market downturn.
We believe that HY FRNs continue to offer an attractive source of income and are well placed to perform in an environment of rising interest rates. In our view, the positive global economic backdrop is expected to provide further support for these assets. Default rates are expected to remain at very low levels, with the asset class continuing to over-compensate investors for the level of default risk. However, at this stage of the cycle we believe it is important to remain selective. We are keeping a cautious exposure to some of the troubled areas, in particular the retail sector, where many businesses face long-term structural headwinds.
Long-term performance
Past performance is not a guide to future performance.
