Mand g global macro bond citywire north mr - sep 13

M&G Global Macro Bond Fund

September 2013


• Fund manager: Jim Leaviss

• Deputy fund manager: Mike Riddell

• Launch date: October 1999

• Fund structure: UCITS III

• Size: £1,313 million

• Sector: IMA Global Bond sector

• Gross redemption yield: 3.1%

Fund facts

Source: M&G 31 July 2013. Ratings, 30 June 2013 and should not be taken as recommendations

An S&P Capital IQ fund grading represents an opinion only and should not be relied on when making an investment decision. Past performance is not indicative of future results. Currency exchange rates may

affect the value of investments. Copyright © 2012 by McGraw-Hill international (UK) Limited (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.

Mike Riddell

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

originally as a portfolio analyst

• 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 CFA charterholder

Biography

M&G Global Macro Bond Fund €A Acc

Risk-adjusted performance vs sector over 1 year, 3 years and 5 years

Source: Morningstar, Inc., Pan-European database, 31 July 2013, euro A share class, gross income reinvested, price to price

Aims to deliver attractive risk-adjusted returns

– ranks 1st quartile over 1 year, 3 years and 5 years

-10

-8

-6

-4

-2

0

2

4

6

8

10

4 6 8 10 12

Annualised volatility of returns p.a. (%)

1 year

1 year

3 years

5 years

M&G Global Macro Bond Fund Morningstar Global Bond sector average

Annualis

ed r

etu

rns p

.a. (%

)

3 years

5 years


September 2013

Michael Riddell, deputy Fund Manager

Source: www.youtube.com, M&G, June 2013

Ben Bernanke questioned by Kevin Brady at the Joint

Economic Committee on 22 May 2012

0

1

2

3

4

5

6

7

8

9

10

UK

Germany

US

%

10 occasions when the 10 year bond has risen by 1% or more

The recent rise in yields has been triggered by Ben Bernanke’s

comments on the Fed’s tapering intentions

Source: M&G, Bloomberg, August 2013

How was the 1994-experience?

Sell off in 1994 was painful but ‘93 and ’95 were good years

1993- 1995: Indexed returns vs Fed rate

Date US Treasuries US Corp BBB Merrill Lynch US HY Index Fed Rate

1993 9.65% 12.21% 18.99% 3%

1994 -3.16% -2.45% -3.10% 5.5%

1995 18.61% 22.02% 20.50% 6% (peak)

1993-1995 25.10% 31.78% 36.39%

1994-1995 15.45% 19.57% 17.40%

Source : Bloomberg, M&G, June 2013

Source: Bloomberg, M&G, 21 August 2013

Fed rate hike expectations up dramatically F

ed

Fu

nd

s R

ate

Fu

ture

, 30 D

ay,

in %

21/08/13

Significantly tighter monetary policy expected until 2016

21/05/13

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Forward Guidance as part of

Central Banks‟ exit strategy

Central Banks’ exit strategies – forward guidance

Source: www.youtube.com, M&G, August 2013

%

Source: Bloomberg, M&G, August 2013

Unemployment has fallen steadily in the US

The unemployment rate could hit the threshold level of 7% soon

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

10

US unemployment rate

QE3 starts

“Tapering threshold”

“Rate hike threshold”

%

Source: Bloomberg, M&G, August 2013

But don’t forget inflation…

Impossible for the Fed (and other central banks) to hike whilst

inflation falling aggressively

0

0.5

1

1.5

2

2.5

3

3.5

4

UK core CPIyoy

US corePCE yoy

Eurozonecore CPI yoy

Why Maradona should matter to Central Banks today

Source: www.youtube.com, M&G, June 2013

Tighter Fed policy as well as a China

slowdown are negative for EM

Fed balance sheet expansion has led to strong capital flows into EM

Source: Nomura, M&G, June 2013

For each $bn of Fed balance sheet expansion, capital flows

into EM rose by $1.4bn

Five EM countries: Mexico, Brazil, Indonesia, South Africa, Turkey

Fed balance sheet (lhs)

Non-FDI in flows (rhs)

$b

n

3400

3200

3000

2800

2600

2400

2200

2000 -50

0

50

100

150

200

250

300

$b

n

Sept-09 Jun-10 Mar-11 Dec-11 Sep-12

Fed balance sheet expansion vs. non-FDI inflows into EM countries

Rapid credit growth is a strong warning sign

Change in gross private non-financial sector

debt as % of GDP, 2002 – 2012

Source : IMF, Citi, M&G, July 2013

China has seen a bigger credit bubble than US and UK’s

bubbles in run up to 2008

50%

40%

30%

20%

0%

-10%

-20%

-30%

10%

Change from 2002 to 2008

Change from 2008 to 2012

China is heavily indebted relative to emerging

peers - Total Debt to GDP vs GDP per Capita

300%

Tota

l D

ebt / G

DP

250%

0%

200%

150%

100%

50%

GDP per Capita

Malaysia

Korea

Taiwan

Thailand

Slovenia

Hungary

Poland

Brazil Czech Republic

Slovakia

Russia

Mexico Philippines

Indonesia Pakistan

India

China

Japan 1988

Source: Economic Perspectives IMF

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

3 4 5 6 7 8 9 10 11 12 13 14 15

AUD

BRL

MXN

NZD

SEK

NOK

JPY ZAR

DKK EUR

Historic Vol 1y

Historic major FX short positions versus USD in 2013

Source: M&G, Bloomberg, August 2013

To

tal re

turn

SGD

KRW

CAD

GBP

TWD

CHF

Currency positions can be a valuable source of returns in a

global bond fund



A flexible and focused global bond fund

A „go-anywhere‟ total return global bond fund

Can invest in all global fixed income asset classes and currencies

Designed to outperform the IMA Global Bond sector with lower volatility

Can go negative duration

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

Europe Government Bonds Europe Investment Grade Europe High Yield M&G Global Macro BondFund

All FI asset classes have inherent duration risk

In bear markets, flexibility and making the right call

are crucial

Current duration

Neutral duration

Ye

ars

Source: M&G, Merrill Lynch, August 2013

Duration range Current duration

Sector Sector Sector

AAA AA A BBB BB B

0 years

4 years

10 years

2 years

6 years

8 years

CCC

-4 years

-2 years

Credit risk

Du

rati

on

(in

tere

st

rate

ris

k)

1 Feb 2009

2 Jul 2011

4 July 2013

3 August 2012

A fully flexible global bond fund

Credit risk and typical duration range

Looking to maximise total returns by taking – or reducing –

risk when appropriate

Duration positioning over the past year

Fund positioning summary: duration


Source: M&G, 31 July 2013

Ye

ars

Very short duration versus the global bond universe during the

market sell off in May and June, but have added duration recently

0

1

2

3

4

5

-10

0

10

20

30

40

50

60

70

80Asset allocation over the past year

%


Fund positioning summary: asset allocation


Reduction in credit risk in the first half of 2013

Developed market government bonds

Inflation-linked government bonds

Developed market corporates

Inflation-linked corporates

Financials

Emerging market government bonds

Emerging market corporates

Government bonds Corporate bonds Emerging market bonds

Selected currency exposure over the past year


Fund positioning summary: currency


We have recently taken profits on our long USD position, while we

have a neutral allocation to sterling

-15%

5%

25%

45%

65%

85%

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13

USD

EM currencies

GBP

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Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London,

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Mand g global macro bond citywire north mr - sep 13