January 2013

Going global in fixed income

Agenda

Going global in fixed income

China – another debt bubble in the making?

M&G Global Macro Bond Fund

The US – a comeback story

Going global in fixed income

Going global with M&G in fixed income…

Source: M&G , as at 22 November 2012.

… and exploiting investment opportunities in a £33 trillion market

A fully flexible global bond fund has a more than 20 times bigger opportunity set than any pure UK fixed income fund

£33 trillion market£

bn

Source : Bloomberg, as at 31 December 2012. The face value of global bonds outstanding is calculated on the basis of the Merrill Lynch Global Sovereign Broad Market Plus Index, Merrill Lynch Global High Yield and Emerging Markets Index and Merrill Lynch Global Broad Market Corporate Plus Index. The face value of UK bonds outstanding is calculated on the basis of the Merrill Lynch Sterling Corporate & Collateralized Index, Merrill Lynch Sterling High Yield Index and the Merrill Lynch UK Gilts Index.

Face value of global vs. domestic debtFace value of global vs. domestic debt

Sterling is up over 16% since 2009Hurting our exports, while we remain addicted to imported goods

A current account deficit this large has historicallypreceded a sterling crash Source: ONS, Bloomberg, as at December 2012.

2008-09 sterling-19% vs US dollar, -17% vs euro

1975-76 sterling-28% vs US dollar, -29% vs Deutsche mark

1990-91 sterling-20% vs US dollar, -15% vs Deutsche mark

% o

f G

DP

UK current account balanceUK current account balance

2012

China – another debt bubble in the making?

Hunga

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ptUkr

aine

Roman

iaM

exico

Kazak

hsta

nPhi

lippi

nes

Croat

iaVen

ezue

laSou

th A

frica

Peru

Indo

nesia

Korea

Colom

bia

Niger

iaPol

and

Russia

Chile

Indi

aTur

key

Thaila

ndM

alay

siaBra

zilLe

bano

nChi

na

-5

5

15

25

35

45

55

-5

5

15

25

35

45

55

2011

2010

2009

Chinese GDP growth will have to slow down

China – the world’s biggest credit bubble since 2009

Annual change in private credit as % of GDP, 2009-11Annual change in private credit as % of GDP, 2009-11

Source : IMF Global Financial Stability Report, April 2012

Emerging markets are not a safe haven

A China slowdown has a significant impact on its trading partners

Source: Bloomberg, as at 31 December 2012

Which one do you want to be long or short of?

Emerging markets are not a safe haven

A China slowdown has a significant impact on its trading partners

Source: Bloomberg, as at 31 December 2012

130 bps

20 bps

The US – a comeback story

Net oil & gas import dependencyNet oil & gas import dependency

US is likely to become energy self-sufficient

Source: International Energy Agency, World Energy Outlook 2012, November 2012

80%

100%

40%

60%

0%

20%

-20%20% 40% 60% 80% 100%

China

United States

India

European Union

JapanGas imports

Gas exports Oil Imports

2010

2035

Heading for energy independence in the next 20 years

US

GD

P Y

oY

(%)

Ho

usi

ng

inve

nto

ry –

mo

nth

s’ s

up

ply

(i

nve

rted

sca

le)

weak growth

strong growthshort supply

large supply

US housing market indicates a solid economic recovery

Source : Bloomberg, as at 30 September 2012

The US economy looks in much better shape than the UK and the Eurozone – so how can this be reflected in the portfolio?

US new one family homes months’ supply (3m average) vs US GDP yoyUS new one family homes months’ supply (3m average) vs US GDP yoy

• Global construction materials

• Cyclical business, volatile cash flow

• Unsecured, NA/B-; M&G Rating: B

• Current yield = 5.6%

• Performance in 2012 = +40%

• Improving credit, favoured play on US housing market

Source: M&G, Bloomberg, as at 31 December 2012

Mortgages will be refinanced and new houses builtThe building materials and construction sector looks attractive to us

EUR 9.625% 2017

M&G Global Macro Bond Fund

M&G Global Macro Bond FundA flexible and focused global bond fund

Source: M&G as at 31 December 2012. Ratings as at 30 November and should not be taken as recommendations

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

Fund size: £349 million

Fund positioning summaryM&G Global Macro Bond Fund

Key portfolio themesKey portfolio themes Geographic breakdownGeographic breakdown

%

We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand

We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand

We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey

We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey

Quality dominates. Generally we prefer credit over government bonds.

Quality dominates. Generally we prefer credit over government bonds.

Still overcompensates for default, but valuations have come closer to fair value

Still overcompensates for default, but valuations have come closer to fair value

Central banks no longer care about inflation, so we have 24% in linkers

Central banks no longer care about inflation, so we have 24% in linkers

Low duration of around 2.4 yearsLow duration of around 2.4 years

We prefer corporate issuers – but have added financials recently, particularly US banks.

We prefer corporate issuers – but have added financials recently, particularly US banks.

CurrenciesCurrencies

Emerging marketsEmerging markets

Government bondsGovernment bonds

High yieldHigh yield

InflationInflation

DurationDuration

Investment gradeInvestment grade

Source: M&G, as at 31 December 2012Source: M&G, as at 31 December 2012

Fund positioning summaryM&G Global Macro Bond Fund

Key portfolio themesKey portfolio themes Currency breakdownCurrency breakdown

%

We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand

We like the USD and have short positions in sterling, the Japanese yen, the Aussie dollar and Kiwi dollar as well as the SA rand

We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey

We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey

Quality dominates. Generally we prefer credit over government bonds.

Quality dominates. Generally we prefer credit over government bonds.

Still overcompensates for default, but valuations have come closer to fair value

Still overcompensates for default, but valuations have come closer to fair value

Central banks no longer care about inflation, so we have 24% in linkers

Central banks no longer care about inflation, so we have 24% in linkers

Low duration of around 2.4 yearsLow duration of around 2.4 years

We prefer corporate issuers – but have added financials recently, particularly US banks.

We prefer corporate issuers – but have added financials recently, particularly US banks.

CurrenciesCurrencies

Emerging marketsEmerging markets

Government bondsGovernment bonds

High yieldHigh yield

InflationInflation

DurationDuration

Investment gradeInvestment grade

Source: M&G, as at 31 December 2012Source: M&G, as at 31 December 2012

Short positions

Global opportunity set and designed to achieve lower volatilityM&G Global Macro Bond Fund

Our most flexible bond fundSource: M&G, Morningstar as at 31 December 2012. Sterling X Inc class shares, UK database, net income reinvested, price to price.

To

tal r

etu

rn,

ind

exe

d t

o 1

00

71.5%71.5%

57.1%

44.6%41.6%33.5%32.8%

Credit crisis

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

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 Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776