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Mitigating political uncertainty in the UK
January 2020
2
M&G UK Inflation Linked Corporate Bond Fund
The main risks that could affect performance are set out below.
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 effected 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.
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 may lose
as much as or more than the amount invested.
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.
For accumulation shares, if inflation is low or zero, there is a risk that the fund’s expenses exceed the income it earns. If this happens, any shortfall will be taken
from the fund’s capital and the fund's capital growth will be reduced.
This fund is subject to effective yield accounting. As a result, part of its capital inflation protection will be distributed to holders of income shares. Income
shareholders will therefore, in effect, be receiving part of the capital protection as income.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the
best interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund. Further details of the risks
that apply to the fund can be found in the fund's Prospectus.
Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.
It is also important to note that:
The Fund allows for the extensive use of derivatives
The fund may invest more than 35% in securities issued by any one or more of the governments listed in the fund prospectus. Such exposure may be combined
with the use of derivatives in pursuit of the fund objective. It is currently envisaged that the fund’s exposure to such securities may exceed 35% in the UK
government, although this may vary subject only to those listed in the prospectus.
3
Fund facts
Fund name M&G UK Inflation Linked Corporate Bond Fund
Fund manager: Ben Lord
Launch date (manager tenure): September 2010 (since launch)
Fund size: £803.4 million
Investment objective:
The Fund aims to protect the value of capital and income from inflation by generating a
return consistent with or greater than UK inflation over a rolling three to five year
period. There is no guarantee that the Fund will achieve its objective over this, or any
other, period. The income distributions and the value of your investment may rise and
fall and investors may not recoup the original amount they invested.
YTM gross of ongoing charges 1.34%
Benchmark UK Consumer Prices Index
Valuation currency: GBP
Fund structure: UK OEIC – UCITS
Pricing/dealing frequency: Daily
Source: M&G, 31 December 2019
M&G UK Inflation Linked Corporate Bond Fund
Ratings should not be taken as recommendation
Past performance is not a guide to future performance
Ratings as at 31.12.19. 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. FE Crown Fund Ratings based on the fund’s Sterling I Acc shares. FE Crown Fund Ratings do no constitute investment
advice offered by FE and should not be used as the sole basis for making any investment decision. All rights reserved
4
Ben LordBiography
• Joined M&G in 2007 and was appointed fund manager of the M&G Global
Corporate Bond Strategy from launch in September 2013
• Also fund manager of the M&G UK Inflation Linked Corporate Bond Fund and
the M&G Index-Linked Bond Fund as well as being co-fund manager of the
M&G Strategic Corporate Bond Fund and the M&G Corporate Bond Fund
• Ben is the deputy manager of the M&G (Lux) European Inflation Linked
Corporate Bond Fund and the M&G Short Dated Corporate Bond Strategy.
• Previously, Ben worked at Gordian Knot as a credit analyst covering global
financial institutions
• He holds an MA (Hons) from the University of Edinburgh and is a CFA
charterholder
M&G UK Inflation Linked Corporate Bond Fund
Ben Lord, Fund Manager
January 2020
6
Agenda
2019 review
Outlook
Managing 2020
Fund positioning and performance
7
2019
Source: M&G, Bloomberg, 31 December 2019.
Tighter CDS, stable breakeven and yields close to historical lows
Yield (%) CDS Spread (bps)
30
40
50
60
70
80
90
-4
-3
-2
-1
0
1
2
3
4
Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19
5yr UK breakeven
5yr CDS IG (RHS)
5yr Gilt yield
5yr Gilt real yield
8
2.7%
2.8%
2.9%
3.0%
3.1%
3.2%
3.3%
3.4%
120
121
122
123
124
125
126
127
Dec2018
Jan2019
Feb2019
Mar2019
Apr2019
May2019
Jun2019
Jul2019
Aug2019
Sep2019
Oct2019
Nov2019
Dec2019
Yie
ld
NA
V in
GB
P
M&G UK Inflation Linked Corporate Bond Fund UK 5 year breakeven index
Playing Brexit defence has worked
Source: M&G, Bloomberg, 13 January 2020, sterling I class shares. Returns are calculated on a price-to-price basis with income reinvested
Fund vs UK 5Y breakeven performance
Past performance is not a guide to future performance.
9
Playing defence has worked
96
97
98
99
100
101
0%
5%
10%
15%
20%
25%
30%
35%
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19
UKTI 2022 exposure UKTI 2020 exposure UKTI 2022 bond UKTI 2020 bond
Source: M&G, Bloomberg, 31 December 2019.
Fu
nd
exp
osu
re
Pric
e
UK Treasury Inflation-Linked (UKTI) 2020 and 2022 bonds
10
Finding relative value in non-domestic inflationUS TIPS
Source: M&G, Bloomberg, 31 December 2019. TIPS= US Treasury inflation-linked bonds.
0
5
10
15
20
25
30
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
UST Inflation linked 5yr US 5yr breakeven Fund exposure to US inflation linked
Yie
ld %
Fu
nd
exp
osu
re %
real yield bonds (RHS)
11
Close to highest ever real yield into TIPS out of the UK
Source: M&G, Bloomberg, 14 January 2020. TIPS= US Treasury inflation-linked bonds.
Real yield on 5 year TIPS and 5 year UKTI
0
50
100
150
200
250
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
5yr TIPS FX-adjusted real yield 5yr TIPS unhedged real yield
Yie
ld
Sp
rea
d (b
ps)
5yr TIPS FX-adjusted minus 5yr UKTI
12
Agenda
2019 review
Outlook
Managing 2020
Fund positioning and performance
13
Bank of England inflation expectations remain subdued
Source: Bank of England, January 2020
-1
0
1
2
3
4
5
6
7
8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
CPI YoY (%) 1990-2021 exp
Forecast
14
Proposed reform of the Retail Price IndexLetter from ONS to chancellor
Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/829170/20190304_SirDavidNorgrove_to_Chancellor__RPI_.pdf, M&G
Plan to turn RPI into CPI-H and changes to be phased at the earliest 2025, at the latest 2030
Consultation currently delayed to March 2020
Bullish for front-end breaks and real yields. Long-dated linkers at riskof significant capital loss
Very low linker issuance until 3Q 2020
In our opinion RPI will be CPI H in 2030 with no
compensation paid to holders
15
Source: M&G, January 2020
GBP
Breakevens
Gilt Yields
GBP credit
Weakens
What happens now?Possible scenarios
Up
Down
Widen
(uncertainty)
Strengthens
Down
Up
Rally
(on relief)
Strengthens
Down
?
?
Which could end in no agreement
by 31 Dec. 2020
Tense negotiations
Across goods and services
Full trade agreement
Due to tense negotiations, more time
needed than the transition period agreed
Extension
16
Agenda
2019 review
Outlook
Managing 2020
Fund positioning and performance
17
Managing interest rate riskM&G UK Inflation Linked Corporate Bond Fund: Duration and duration contributions
Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review
Low interest rate duration: 1.2 years…
-1
0
1
2
3
4
5
6
7
2012 2013 2014 2015 2016 2017 2018 2019
Ye
ars
Fund duration Fund credit spread duration
Interest rate duration and spread duration 2012-2019 Duration contribution 2012-2019
-1
0
1
2
3
Ye
ars
GBP EUR USD
GBP 0.64yrs
USD 0.47yrs
EUR 0.07yrs
GBP being the highest contributor
18
Managing credit risk
Source: Bloomberg, M&G, 31 December 2019
CDS are trading very tight versus historical levels
40
50
60
70
80
90
100
110
120
130
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19
Bp
s
CDX IG Itraxx main
CDS Indices
19
Agenda
2019 review
Outlook
Managing 2020
Fund positioning and performance
2019 review
Outlook
Managing 2020
Fund positioning and performance
20
24.5%
0%
10%
20%
30%
Fund positioning summary
Source: Bloomberg, December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund
Review
M&G UK Inflation Linked Corporate Bond Fund
Rank Issuer %
1 United Kingdom inflation linked Gilts 53.96%
2 United States Treasury Inflation Index 4.98%
3 Anglian Water 2.86%
4 Tesco 2.43%
5 RY 2.26%
6 LA 1.82%
7 Lloyds 1.61%
8 BAT International Finance 1.55%
9 Nationwide 1.45%
10 Permanent Master Issuer Plc 1.40%
Top 10 physical net positions
Top 10 CDS positions
‘Risk-free’ exposure
Rank Issuer %
1 CDX USD IG 17.72%
2 ITRX EUR IG 5.92%
3 America Movil 2.90%
4 Anheuser-Busch 2.44%
5 Bayer US Finance 2.37%
6 General Electric 1.63%
7 CVS 1.41%
8 Koninklijke KPN 0.94%
9 Anglo American 0.53%
10 GE 0.48%
21
Performance in Sterling
Source: Morningstar Inc, and M&G, UK database, 31 December 2019, sterling I class shares. Returns are calculated on a price-to-price basis with income reinvested.
Benchmark returns stated in GBP terms. * CPI is current month value is estimated applying the current rate 12 months ago.
M&G UK Inflation Linked Corporate Bond Fund
Past performance is not a guide to future performance.
95
100
105
110
115
120
125
130
Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 Jul 16 May 17 Mar 18 Jan 19 Nov 19Reb
ase
d to
10
0 (
16
.10
.20
10
)
M&G UK Inflation Linked Corporate Bond Fund CPI (GBP)
1
2 4
3
Performance charts © 2019 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 any damages or
losses arising from any use of this information.
2019 2018 2017 2016 2015
% % % % %
M&G UK Inflation Linked Corporate Bond Fund 3.8 -1.0 2.3 5.8 -1.7
(IA) £ Strategic Bond Sector Average 9.2 -2.5 5.7 7.1 0.1
UK Consumer Price Index - Estimated 1.5 2.1 2.9 1.6 0.2
22
Summary
Source: M&G, January 2020
Duration
Breakevens
Tactical opportunities from steepening at front-end
However long-term Gilt valuations are not justified
Cheaper than they have been for some time
Politically, there’s good reason to keep them
CreditBeing patient and waiting for better opportunities
At these levels, we are more concerned about the risk of spreads widening
23
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 ISAs and other investment products. The company’s registered office
is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
24
www.bondvigilantes.com
www.twitter.com/bondvigilantes
25
Investment limits
• VaR limits*
– Upper limit: 10.0%
– Lower limit: 0.0%
• Restrictions by issuer rating*
– AAA - BBB 5%
– BB & below 3%
– Structured credit (inv grade) 2.5%
– Structured credit (high yield) 1.5%
Sector - Sterling Strategic Bond Sector
– Minimum 80% Sterling (or hedged back to Sterling)
– Minimum 70% exposure to investment grade credit (including derivatives)
– Minimum 50% in index-linked bonds
Duration range* -2 years to +5 years
Source: M&G. *Please note, these investment limits have been defined by the fund investment team and are subject to change
M&G UK Inflation Linked Corporate Bond Fund
26
Fund positioning summary
Source: Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly
Fund Review
M&G UK Inflation Linked Corporate Bond Fund
UK breakeven curve exposureUK linker exposure
53.9
38.5
0%
10%
20%
30%
40%
50%
60%
Total
Dec-19
Dec-18
31.3
22.6
0.0
32.6
5.9
0.00%
10%
20%
30%
40%
1-3 year 4-6 year 7+ year
Dec-19
Dec-18
27
Fund positioning summary
Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review.
*Includes derivative positions
M&G UK Inflation Linked Corporate Bond Fund
BBBs remain good value but moving up in quality
Credit rating breakdown*. December 2017 versus December 2019
4.9%
14.6%
18.5%
24.6%
20.8%
11.1%
45.4%
47.9%
4.0%
1.2%
0.0%
0.0%
0.0%
0.8%
AAA
AA
A
BBB
BB
B
CCC & below
Cash
December 2017 December 2019
28
Appendix
- M&G Corporate Bond Fund & M&G Strategic Corporate Bond Fund
29
M&G Corporate Bond Fund
The main risks that could affect performance are set out below:
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.
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 may lose as much as or more than the amount 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.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the
fund in the best interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.
Further details of the risks that apply to the fund can be found in the fund's Prospectus.
Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.
It is also important to note that:
The Fund allows for the extensive use of derivatives
30
M&G Strategic Corporate Bond Fund
The main risks that could affect performance are set out below:
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.
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 may lose as much as or more than the amount 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.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may
temporarily suspend the fund in the best interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund.
Further details of the risks that apply to the fund can be found in the fund's Prospectus.
Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.
It is also important to note that:
The Fund allows for the extensive use of derivatives
31
Modified duration vs iBoxx Sterling Corporate Index
Source: M&G, Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the
Monthly Fund Review
M&G Corporate Bond Fund
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Du
ratio
n (
ye
ars
)
M&G Corporate Bond Fund iBoxx Sterling Corporate Index
32
Modified duration vs iBoxx Sterling Corporate Index
Source: M&G, Bloomberg, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the
Monthly Fund Review
M&G Strategic Corporate Bond Fund
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Dec-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Sep-16 Sep-17 Sep-18 Sep-19
Du
ratio
n (
ye
ars
)
M&G Strategic Corporate Bond Fund iBoxx Sterling Corporate Index
33
Asset allocation over time
Source: M&G, 31 December 2019. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review
M&G Corporate Bond Fund vs M&G Strategic Corporate Bond Fund
Government bonds (and cash) IG corporate
HY corporate Financials
5%
7%
9%
11%
13%
2014 2015 2016 2017 2018 2019
M&G Strategic Corp Bond Fund M&G Corp Bond Fund
55%
60%
65%
70%
2014 2015 2016 2017 2018 2019
M&G Strategic Corp Bond Fund M&G Corp Bond Fund
2%
4%
6%
8%
2014 2015 2016 2017 2018 2019
M&G Strategic Corp Bond Fund M&G Corp Bond Fund
15%
20%
25%
30%
2014 2015 2016 2017 2018 2019
M&G Strategic Corp Bond Fund M&G Corp Bond Fund
34
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 ISAs and other investment products. The company’s registered office
is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
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