October 2015

M&G Global Macro Bond Fund

Jim Leaviss, Fund Manager

Fund facts

Fund manager: Jim Leaviss

Deputy fund manager: Claudia Calich (as of 6 July 2015)

Launch date: October 1999

Fund structure: UCITS III

Size: €1,462 million

Sector: Morningstar Global Bond sector

Yield to maturity

(gross of ongoing charges): 1.79%

Source: M&G, 30 September 2015. Ratings, Morningstar Inc. 30 June 2015 and should not be taken as recommendations

M&G Global Macro Bond Fund

Copyright © 2015 Morningstar UK Limited. All Rights Reserved. The information contained herein: (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. Past performance is no guarantee of future results. The Morningstar Rating is an assessment of a fund’s past performance – based on both

return and risk – which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision.

Jim Leaviss Biography

• Joined M&G in 1997 after five years at the Bank of

England and is the Head of the Retail Fixed Interest

team

• Jim is the fund manager of the M&G Global Macro

Bond Fund and the M&G European Inflation Linked

Corporate Bond Fund

• Heads up the M&G Retail Fixed Income team, made

up by 20 individuals, 16 bond funds and AUM in

excess of £40 billion

• He has 21 years of experience in fixed income

markets

Performance in euros

Source: Morningstar, Inc., Pan-European database, 31 August 2015, euro A share class, gross income reinvested, price to price

YTD

2015

%

2014

%

2013

%

2012

%

2011

%

2010

%

2009

%

2008

%

M&G Global Macro Bond Fund 5.1 13.0 -2.2 10.0 7.3 15.3 8.9 1.4

Morningstar Global Bond Sector

Average 3.8 13.5 -7.1 5.1 7.0 13.2 5.9 6.9

Drawdowns -5.6 -0.9 -6.0 -1.1 -5.4 -4.0 -6.6 -4.6

Is it government bonds?

Is it credit?

Is it emerging market bonds and currencies?

Where are the extraordinary, unjustified valuations in

bond markets today?

-5%

0%

5%

10%

15%

20%

US GDP nominal YoY US 5y Treasury Bond Yield

Valuing government bonds: method #1

Source: M&G, Bloomberg, 30 June 2015

US nominal GDP YoY vs US 5yr US Treasuries

On this basis, might you not be better off investing in the

broader economy?

Vietnam Volker - inflation buster

Bond yields falling

behind nominal growth Start of the golden era

for bonds

Bad time to be a

bond investor

Oil

crises

Central Bank

Regime

Change

2.75%

3.00%

3.25%

3.50%

3.75%

4.00%

4.25%“The dots”

Valuing government bonds: method #2

Source: Federal Reserve Bank, M&G, 18 September 2015

“The Dots”: Each dot represents an FOMC member

The median long term Fed funds expectation fell from

3.75% to 3.5% in September "Narayana1" by http://www.minneapolisfed.org/about/whoweare/president.cfm. Licensed under Public Domain via Wikipedia -

https://en.wikipedia.org/wiki/File:Narayana1.jpg#/media/File:Narayana1.jpg

"Janet Yellen official Federal Reserve portrait" by United States Federal Reserve -

http://www.federalreserve.gov/aboutthefed/bios/board/yellen_janet_rdax_161x201.jpg. Licensed under Public Domain via Commons -

https://commons.wikimedia.org/wiki/File:Janet_Yellen_official_Federal_Reserve_portrait.jpg#/media/File:Janet_Yellen_official_Federal_Reserve_portrait.jpg"Richmon

d lacker" by Federal Reserve - Federal Reserve Bank. Transferred from en.wikipedia to Commons by Atmoz using CommonsHelper.. Licensed under Public Domain

via Commons - https://commons.wikimedia.org/wiki/File:Richmond_lacker.jpg#/media/File:Richmond_lacker.jpg

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Highest FOMC long-run rate expectation

Lowest FOMC long-run rate

expectation

USD forward rate 10y10y

Median FOMC long-run rate

expectation

Valuing government bonds: method #2

Source: Bloomberg, Federal Reserve, 29 September 2015

Forward-looking yields remain below the Fed’s long run expectations

We are short duration, but not outright negative

Deflation is incredibly rare

Source: M&G, Bordo and Eichengreen, IMF and OECD. Note: Sample 1960-2010; 3300 observations

Deflation in economies with floating exchange rates rarer still

Deflation episodes are rare

98.0%

1.4% 0.8%

Positive inflation episodes

1y deflation episodes

Deflation episodes longer than 1y

Even rarer in countries with floating exchange

rates

1.0%

0.4%

0.7%

0.1%

1y deflation episodes - pegs1y deflation episodes - floating currencyDeflation episodes > 1y - pegsDeflation episodes > 1y - floating currency

Inflation expectations

Source: Bloomberg, 29 September 2015 (latest data available)

Valuations support inflation protection

Inflation protection looks cheap

Five-year breakeven rates for the US and Germany

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

United States Germany

CPI target

0.5%

1.0%

The drop in oil prices could lead to higher G7 GDP

growth

Source: M&G, Bloomberg, 30 September 2015

-2%

-1%

0%

1%

2%

3%

4%

5%-100%

-50%

0%

50%

100%

150%

Oil price change YoY % (inverted, 18m lead, lhs) G7 GDP growth YoY % (rhs)

Oil

pri

ce

ch

an

ge

G7

GD

P g

row

th

166 177 142 185

671

0

500

1000

1500

2000

2500

Global IG US IG Euro IG UK IG Global HY

Sp

rea

d in

bas

is p

oin

ts

Historic level of investment grade and HY spreads

Source: Bloomberg, 6 October 2015 (the chart is considering data starting from 31/12 1996)

Credit valuations have improved, but it’s not outright cheap

% times

spreads

tighter

% times

spreads wider

Spread range

Current

spread

78

73

71 71

69

Be mindful of liquidity

Source: Royal Bank of Scotland, December 2014

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

10

20

30

40

50

60

70

80

US corporate total market value (RHS) US corporate bonds dealer inventories (LHS)

US

do

llars

(bill

ion

s)

US

do

llars

(billio

ns)

Australia

Brazil

Chile

China

Colombia

Czech Republic

Egypt

France

Germany

Greece

Hong Kong

India

Indonesia

Italy Japan

Korea

Malaysia

Mexico

Peru

Poland Singapore

South Africa

Spain

Switzerland

Thailand

Turkey

UK US

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

15% 20% 25% 30% 35% 40% 45%

GD

P g

row

th

Since 1990s China has invested lots, and it looks productive. But…

Source: M&G, World Bank, December 2013. Countries selected are world’s 50 biggest economies as at 2011 and where data available since 1991

Average real GDP Growth per capita pa, 1991-2011

China

Fixed capital formation

Be very afraid of the overinvestment death spiral…

Source: M&G, World Bank, January 2014. * China population growth for 2013 estimated at 0.5%

… when soaring investment has lower and lower returns

The quality of China’s GDP growth has become increasingly poor;

higher investment is resulting in lower growth

2007

2013*

China (2007-2013) 1986

South Korea (1986-1996)

1996

1988

1996

Thailand (1988-1996)

1973

Soviet Union (1973-1989)

1989

1997

Spain (1997-2007)

2007 2002

Iceland (2002-2006)

2006

2001 Kazakhstan (2001-2007)

2007

0%

2%

4%

6%

8%

10%

12%

14%

15% 20% 25% 30% 35% 40% 45% 50% 55%

Rea

l G

DP

gro

wth

pe

r ca

pita

Gross Fixed Capital Formation, % GDP

China still has tools to manage slowdown

Source: M&G, Bloomberg, 31 August 2015 * See IMF “Assessing Reserves Adequacy”. Range equates to February 2011

PBoC still has many levers to pull

0

1

2

3

4

5

6

7

8

0

5

10

15

20

25

%

%

China Required Reserve Deposit Ratio

China 1 year benchmark lending rates (rhs)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

China foreign exchange…

$b

n

IMF range for « adequate

reserves* » (30% STD +

10%X +10%M2)

?

Emerging Markets: the adjustment continues

Source: Bloomberg, M&G, 29 September 2015

Are EMs starting to look attractive?

4

6

8

10

12

14

16

18

% y

ield

Brazil ColombiaTurkey South Africa

Indonesia Mexico

Russia

JP Morgan GBI EM Global Diversified index yields YTD currency spot returns in US Dollars

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Since 10th August Total YTD

Government bonds are overvalued – remain short duration

Credit valuations have improved, but credit is still not outright

cheap

Deflation is unlikely to persist and inflation protection is cheap

China is slowing down, and will slow further. This is bad news for

emerging market economies but particularly for EM credit

M&G Global Macro Bond Fund Key fund convictions

0%

10%

20%

30%

40%

50%

60%

70%

High yield* Investmentgrade*

Net governmentbonds**

Inflation-linked EM bonds***

30-Jun-13 30-Sep-13 31-Dec-13 31-Mar-14 30-Jun-14

30-Sep-14 31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15

Asset split

Source: M&G, 30 September 2015

M&G Global Macro Bond Fund

subset

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