M&G European Inflation Linked Corporate Bond FundBen Lord, Fund ManagerApril 2012
Biography    Co-fund managers                       •   Jim Leaviss is Head of Fixed Interest at M&G International        ...
M&G European Inflation Linked Corporate Bond Fund    Fund facts                       Inception                           ...
M&G European Inflation Linked Corporate Bond Fund                       Performance since inception in September 2010     ...
Agenda    M&G    •   Index-Linked Fixed Income    •   M&G European Inflation Linked Corporate Bond Fund    •   Fund positi...
Comparing nominal bonds and index-linked bonds    Nominal bond: yield – inflation = real yield    2% - 3% = -1%    Index-l...
Payoff profiles     Inflation (CPI) Assumption        3%      4%      5%     Nominal 2015 OAT real yield      -2.0%   -2.8...
Long-term, global reasons to consider inflation protection      • Demographics        – Population growth8
World population         10           9           8           7           6    bn 5           4           3           2   ...
Long-term, global reasons to consider inflation protection       • Demographics         – Population growth         – Depe...
Old age dependency ratio         75                                 U.K                       U.S         65              ...
Long-term, global reasons to consider inflation protection       • Demographics         – Population growth         – Depe...
Long-term, global reasons to consider inflation protection       • Demographics         – Population growth         – Depe...
Global inflation series     re-based to 1 in December 1899 on a log scale     10,000,000,000,000                          ...
Does the ECB now have an inflationary bias?             5             4             3                                     ...
Inflation expectations              5 year breakeven rates for US, UK and Germany     3.0     2.5                         ...
Agenda     M&G     •   Index-Linked Fixed Income     •   M&G European Inflation Linked Corporate Bond Fund     •   Fund po...
Fund Objective      Aims to deliver CPI after fees over the medium term18
10y IL and conventional yields                   Conventional and inflation-linked 10y bund yields (%)            4.0     ...
Breakevens are exceptionally cheap at the front end                              2.1                                      ...
What am I buying when I purchase an inflation-linked     corporate bond?                                                  ...
Some issuers of inflation-linked corporate bonds22
Synthetic inflation-linked corporate bonds     How to create one                                                  Credit d...
Agenda     M&G     •   Index-Linked Fixed Income     •   M&G European Inflation Linked Corporate Bond Fund     •   Fund po...
M&G European Inflation Linked Corporate Bond Fund     Fund positioning                   Asset Allocation (Fund %)        ...
We have been flexible and taken advantage of recent     volatility     850                                                ...
Fund duration     Duration positioning since inception in September 2010                   Fund duration (LHS) Vs. 5y bund...
Financials sector exposure                      Financials Exposure Feb12                    Financials Exposure Dec 11   ...
Conclusions     • Long-term demographics and global factors support inflation     • Central banking: risks growing, inflat...
Appendix30
Banking exposure             Capital Structure breakdown Feb 12        Capital Structure breakdown Dec 11                 ...
Fund facts     Top 15 holdings        Rank        Issuer                                    Issue(s)                   Fun...
Fund facts     Top 15 CDS Positions                                Rank        Company                         Fund %     ...
Value at Risk     Well below 10% upper limit                  Value at Risk (VaR)     15.0%     10.0%      5.0%      0.0% ...
Prices may fluctuate and you may not get back your original investment.This document is designed for investment profession...
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Eilc presentation bl citywire luxembourg apr 12(2)

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Eilc presentation bl citywire luxembourg apr 12(2)

  1. 1. M&G European Inflation Linked Corporate Bond FundBen Lord, Fund ManagerApril 2012
  2. 2. Biography Co-fund managers • Jim Leaviss is Head of Fixed Interest at M&G International • He joined M&G in 1997 after five years at the Bank of England • As well as heading up the team, Jim is the fund manager of the M&G Global Macro Bond fund, the M&G Gilt and Fixed Interest fund, and co- manager on the M&G Inflation Linked Corporate Bond funds • Ben Lord joined M&G in 2007 and was appointed fund manager of the M&G High Interest Fund in February 2009 • Since launch in September 2010, he has also been the co-fund manager on the M&G UK Inflation Linked Corporate Bond Fund and the M&G European Inflation Linked Corporate Bond Fund • Ben previously worked at Gordian Knot as a credit analyst covering global financial institutions • He obtained an MA (Hons) from the University of Edinburgh and is a CFA charterholder2
  3. 3. M&G European Inflation Linked Corporate Bond Fund Fund facts Inception September 2010 Co-fund manager Jim Leaviss Co-fund manager Ben Lord Fund size €101.5m Morningstar EUR Sector Inflation-Linked Bond3 Source: M&G Investment Information, as at 30 March 2012
  4. 4. M&G European Inflation Linked Corporate Bond Fund Performance since inception in September 2010 M&G European Inflation Linked Corporate Bond Fund – performance since inception Chart Title 108.0 106.0 104.0 Indexed to 100 = 102.0 17/09/2010 100.0 98.0 96.0 94.0 MSTAR PE EUR Corporate Bond Sector MSTAR EUR Government Bond Sector M&G European Inflation Linked Corporate Bond Mstar EUR Inflation-Linked Bond Sector EU Harmonized Indices of Consumer Prices4 Source: M&G, Morningstar as at 31 March 2012. Pan European database, Bid-to-bid, gross income reinvested, Euro A Share class
  5. 5. Agenda M&G • Index-Linked Fixed Income • M&G European Inflation Linked Corporate Bond Fund • Fund positioning5
  6. 6. Comparing nominal bonds and index-linked bonds Nominal bond: yield – inflation = real yield 2% - 3% = -1% Index-linked bond: real yield = realised inflation + real yield Inflation - 0.5% Today 3% Inflation +1% Nominal real yield -1% -2% Linker real yield inflation-0.5% inflation-0.5% Index-linked bonds remove future inflation uncertainty6
  7. 7. Payoff profiles Inflation (CPI) Assumption 3% 4% 5% Nominal 2015 OAT real yield -2.0% -2.8% -3.8% Linker 2015 OATi real yield -0.8% -0.8% -0.8% Veolia 2016 IL corp real yield 1.9% 1.9% 1.9%7 Source: M&G as at 31 March 2012
  8. 8. Long-term, global reasons to consider inflation protection • Demographics – Population growth8
  9. 9. World population 10 9 8 7 6 bn 5 4 3 2 1 0 1950 1975 2000 2025 20509 Source: DB Research, as at. January 2012.
  10. 10. Long-term, global reasons to consider inflation protection • Demographics – Population growth – Dependency ratio10
  11. 11. Old age dependency ratio 75 U.K U.S 65 France Germany 55 Italy Japan 45 % 35 25 15 5 50 60 70 80 90 00 10 20 30 40 50 19 19 19 19 19 20 20 20 20 20 2011 Source: DB Research, as at. 18 January 2012.
  12. 12. Long-term, global reasons to consider inflation protection • Demographics – Population growth – Dependency ratio • Globalisation12
  13. 13. Long-term, global reasons to consider inflation protection • Demographics – Population growth – Dependency ratio • Globalisation • The end of the gold standard13
  14. 14. Global inflation series re-based to 1 in December 1899 on a log scale 10,000,000,000,000 1913 1971 1,000,000,000,000 Germany 100,000,000,000 Italy 10,000,000,000 1,000,000,000 France 100,000,000 Japan 10,000,000 Spain 1,000,000 UK 100,000 US 10,000 1,000 Switzerland 100 10 1 0 014 Source: Deutsche Bank, GFD , 12 September 2011
  15. 15. Does the ECB now have an inflationary bias? 5 4 3 CPI YoY 2 1 %% Inflation 0 target -1 -215 Source: Bloomberg, as at 31 December 2011
  16. 16. Inflation expectations 5 year breakeven rates for US, UK and Germany 3.0 2.5 UK 2.0 US % GER 1.5 1.0 0.5 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Driven by stronger growth, higher commodity prices, higher taxes, and QE fears16 Source: Bloomberg, as at 31 March 2012
  17. 17. Agenda M&G • Index-Linked Fixed Income • M&G European Inflation Linked Corporate Bond Fund • Fund positioning17
  18. 18. Fund Objective Aims to deliver CPI after fees over the medium term18
  19. 19. 10y IL and conventional yields Conventional and inflation-linked 10y bund yields (%) 4.0 3.5 3.0 2.5 2.0 10Y Bund % 1.5 1.0 0.5 0.0 -0.5 10Y IL Bund -1.0 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-1219 Source: Bloomberg, as at 31 March 2012
  20. 20. Breakevens are exceptionally cheap at the front end 2.1 2.0 2.0 1.9 0.3 Outperformance 1.8 1.7 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 Implied Breakeven Reasonable Bond = OBLi 2.25 201320 Source: M&G as at 31 March 2012
  21. 21. What am I buying when I purchase an inflation-linked corporate bond? PURE CREDIT RISK (Spread) BT I/L 2025 BBB REALISABLE YIELD Spread = 2.3% = Risk-Free + Spread + Realised Inflation = -0.3% + 2.3% + 3.7% = 5.7% PURE INTEREST RATE RISK (Duration) 2024 gilt linker Risk-free yield = -0.3% An inflation-linked corporate bond is a combination of duration risk and credit risk, plus inflation21 Source: Bloomberg, M&G as at 31 March 2012
  22. 22. Some issuers of inflation-linked corporate bonds22
  23. 23. Synthetic inflation-linked corporate bonds How to create one Credit default swap (Pure Credit Risk): Synthetic Vivendi linker Vivendi CDS 5y = 1.5% = Risk Free + CDS spread + RPI = -1.8% + 1.5% + 3.7% = 3.4% Pure interest rate risk (duration): UKTI gilt 2.5% 2016 “Risk free” yield = -1.8% CDS + government linker = synthetic inflation linked corp23 Source: Bloomberg, M&G as at 31 March 2012
  24. 24. Agenda M&G • Index-Linked Fixed Income • M&G European Inflation Linked Corporate Bond Fund • Fund positioning24
  25. 25. M&G European Inflation Linked Corporate Bond Fund Fund positioning Asset Allocation (Fund %) Credit Split incl. Derivatives (Fund %) Cash FRN AAA 15.4 0.6 8.8 Synthetic IL AA 13.8 Bonds 33.2 A 38.2 Fixed 19.9 BBB 23.3 BB 3.6 B 3.7 CCC & Below 0.0 Index Linked Index Linked Corporate Government NR 1.3 bonds Bonds 21.5 15.9 Cash 0.6 Core of fund in index linked credit, Overall fund duration: 1.3 year25 Source: Bloomberg, M&G as at 31 March 2012
  26. 26. We have been flexible and taken advantage of recent volatility 850 50.00% 45.00% 750 40.00% 650 35.00% 550 30.00% 450 25.00% 20.00% 350 15.00% 250 10.00% 150 5.00% 50 0.00% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 iTraxx Main (LHS) iTraxx Xover (LHS) M&G UK Inflation Linked Corporate Bond risk free cash level (RHS) Built up cash before summer, and quickly deployed cash after spreads widened.26 Source: Bloomberg, M&G as at 31 March 2012
  27. 27. Fund duration Duration positioning since inception in September 2010 Fund duration (LHS) Vs. 5y bund linker and 10y conventional bund (RHS) 4.0 4.0 3.0 3.0 2.0 2.0 1.0 0.0 1.0 -1.0 0.0 -2.0 Fund 10y Bund 5y IL Bund27 Source: M&G as at 31 March 2012
  28. 28. Financials sector exposure Financials Exposure Feb12 Financials Exposure Dec 11 44.7 45.1 20.1 5.4 4.3 6.0 4.6 4.0 Banking Insurance Banks Insurers M&G European Inflation Linked Corporate Bond Fund ML EMU Corporate index28 Source: M&G as at 31 March 2012
  29. 29. Conclusions • Long-term demographics and global factors support inflation • Central banking: risks growing, inflationary bias a fact • Credit is cheap. A combination of (cheap) inflation protection and (cheap) credit could be a very wise strategy29
  30. 30. Appendix30
  31. 31. Banking exposure Capital Structure breakdown Feb 12 Capital Structure breakdown Dec 11 Lower Tier 2 Lower Tier 2 1.5 6.4 Senior Unsecured Senior 13.8 unsecured 4.531 Source: M&G as at 31 March 2012
  32. 32. Fund facts Top 15 holdings Rank Issuer Issue(s) Fund % 1 Bundesrepublik Deutschland Bundesobligat Multiple 22.6 2 United Kingdom Gilt Inflation Linked Multiple 20.7 3 United States Treasury Inflation Indexed Tii 0 5/8 04/15/13 4.1 4 Severn River Crossing Plc Sevriv 6 1/8 06/30/13 3.9 5 Toyota Motor Credit Corp Toyota 2.413 05/30/17 3.7 6 Tesco Plc Tscoln 4 09/08/16 3.0 7 Oresundsbro Konsortiet Orekon 3.4 09/28/14 2.3 8 Jpmorgan Chase Bank Na Jpm 5 3/8 09/28/16 2.2 9 Sweden Government Bond Sgb 3 1/2 12/01/15 #3105 1.7 10 Wells Fargo Bank Na Wfc 5 1/4 08/01/23 1.6 11 Asif Iii Jersey Ltd Aig 5 3/8 10/14/16 1.5 12 Deco Series Deco 2005-uk1x A1 1.4 13 Hannover Finance Luxembourg Sa Hanrue 5 3/4 02/26/24 1.4 14 Royal Bank Of Scotland Plc/the Rbs 6 3/8 04/29/14 1.3 15 Bank Of America Corp Bac 5 1/4 11/09/16 1.032 Source: Bloomberg, M&G as at 31 March 2012
  33. 33. Fund facts Top 15 CDS Positions Rank Company Fund % 1 Allianz Finance Ii Bv 2.0 2 Edf Sa 2.0 3 E.on International Finance Bv 2.0 4 Hsbc Bank Plc 1.9 5 Procter and Gamble Co/the 1.7 6 Itrx Xover S16 5 Year 1.5 7 Anheuser-busch Inbev Nv 1.5 8 Imperial Tobacco Finance Plc 1.4 9 US Bancorp 1.3 10 Heineken Nv 1.3 11 Telefonaktiebolaget Lm Ericsson 1.3 12 Vivendi Sa 1.2 13 Baa Funding Ltd 1.1 14 Wesfarmers Ltd 1.1 15 Ppr 1.033 Source: Bloomberg, M&G as at 31 March 2012
  34. 34. Value at Risk Well below 10% upper limit Value at Risk (VaR) 15.0% 10.0% 5.0% 0.0% Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 30 day VaR @99% Upper Limit Lower Limit Daily monitoring of global exposure using VaR with methodology 99% one month with an equally weighted observation period (history) of 250 business days.34 Source: M&G, as at 31 March 2012
  35. 35. 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 SwissCollective Investment Schemes Act, the Swiss Collective Investment Schemes Ordinance and the respective Circular issued by the Swiss supervisory authority ("QualifiedInvestors"). 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 DynamicAllocation Fund reg. no 843 and M&G Optimal Income Fund reg. no 522. The collective investment schemes referred to in this document (the "Schemes") are open-ended investmentcompanies with variable capital, incorporated in England and Wales. This information is not an offer or solicitation of an offer for the purchase of investment shares in one of the Fundsreferred 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&GInternational 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 amMain, 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, the Danish paying agent, Nordea Bank Danmark A/S Issuer Services, Securities Services, Hermes Hus,Helgeshøj Allé 33, Postbox 850, DK-0900, Copenhagen C, Denmark, Allfunds Bank, Calle Estafeta, No 6 Complejo Plaza de la Fuente, La Moraleja 28109, Alcobendas, Madrid, M&GInternational Investments Limited, 34 Avenue Matignon, 75008, Paris, France or from the French centralising agent of the Fund: RBC Dexia Investors Services Bank France. ForSwitzerland: Please refer to M&G International Investments Ltd., Bleidenstraße 6-10, D-60311 Frankfurt am Main. For Italy, they can also be obtained from one of the appointed payingagents, 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, whichincludes investment risks relating to these funds. This financial promotion is published by M&G International Investments Ltd. Registered Office: Laurence Pountney Hill, London EC4R0HH, 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 statsare quoted gross of Italian tax (12.5%) on capital gains.

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