M&G Fund of Investment
Trust Shares
a sub-fund of M&G Investment Funds (3)
Annual Short Report June 2015
Investment approach
The M&G Fund of Investment Trust Shares is a diversified portfolio of approximately 60 investment companies with exposure to a wide range of international markets and investment classes. The fund manager uses his judgement to decide upon areas and investment vehicles from which long-term growth can be obtained. Additional criteria used include the investment philosophy and objective of the underlying holdings and the ability of each manager to deliver on them; and the discount at which its shares are trading. Holdings may be sold if there is a change in the fund manager’s view; a failure of the underlying company to deliver on stated objectives; corporate activity, which leads the fund manager to take profits; or if the fund manager believes a holding has become overvalued.
The Authorised Corporate Director (ACD) of M&G Investment Funds (3) presents its Annual Short Report for M&G Fund of Investment Trust Shares which contains a review of the sub-funds investment activities and investment performance during the period. The ACD’s Annual Long Report and audited Financial Statements for M&G Investment Funds (3), incorporating all the sub-funds and a Glossary of terms is available free of charge either from our website at www.mandg.co.uk/reports or by calling M&G Customer Relations on 0800 390 390.
ACD
M&G Securities Limited, Laurence Pountney Hill, London EC4R 0HH Telephone: 0800 390 390
(Authorised and regulated by the Financial Conduct Authority. M&G Securities Limited is a member of the Investment Association (formerly the Investment Management Association) and of the Tax Incentivised Savings Association.)
Investment objective and policy
The portfolio is normally limited to shares of investment trust companies. These shares provide a wide spread of investment in the UK and overseas stockmarkets and are often available at substantial discounts in relation to underlying asset values. Income is not a major factor, and the yield can be expected to be slightly less than the average for investment trust companies.
As at 1 July 2015, for the year ended 30 June 2015
Investment performance
Global stockmarkets had an eventful ride over the 12 months under review, with many markets coming under pressure in late 2014, before rallying in spring 2015 and subsequently succumbing to renewed weakness in early summer. Against this changeable environment, the fund produced a positive return over the review period.
A range of factors served to undermine investor confidence for much of the second half of 2014. These included geopolitical tension in Ukraine and the Middle East, a slowdown in the pace of economic growth in China and the potential implications for the global economy, and the end of supportive measures for the economy in the US. Concern about the sharp decline in oil prices in the latter months of 2014 was also a cause of unease.
The weakness of commodity prices was relevant for several of the fund’s holdings; namely BlackRock World Mining Trust and mining investment company Golden Prospect Precious Metals. Both were hurt by the lower prices and produced disappointing returns over the period under review. We subsequently sold the position in Golden Prospect Precious Metals and reduced the holding in BlackRock World Mining Trust.
Sentiment improved from the beginning of 2015 as investors focused on positive developments. Notable among these was the continued progress of the global economy, although growth is modest and the pace of expansion across different countries is mixed. In addition, investors were cheered by ongoing monetary policy decisions by central banks and government actions across the globe, which have been largely supportive for growth. However, uncertainty returned from April onwards due to some weaker-than-expected US economic data and a lack of progress in Greek debt negotiations. Greece duly failed to repay a loan to the International Monetary Fund (IMF) by the deadline, placing it formally in arrears.
Turning to individual markets, policymakers in many Asian countries have been pursuing broadly accommodative monetary policies in order to support economic activity. Nevertheless, markets in the region came under pressure at times because of fears that slower economic growth in China would lead to reduced demand for Asian products. Furthermore, sustained weakness of the Japanese yen over the review period fuelled concerns about the competitiveness of some
Risk profile
The fund invests in the shares of investment trust companies and is exposed to a wide spread of investments in the UK and overseas stockmarkets. The fund is, therefore, subject to the price volatility of the global stockmarkets and the performance of individual investment trust companies. The fund is also subject to fluctuations in currency exchange rates. Diversification across markets, industries and asset classes is therefore key in managing liquidity risk and reducing market risk. The fund’s risks are measured and managed as an integral part of the investment process.
The risk management policies are set out in note 2 of the Annual Long Report and audited Financial Statements for M&G Investment Funds (3).
The following table is the risk and reward indicator table and is based on Sterling Class ‘A’ shares.
This is the risk number associated with the fund.
• The above risk number is based on the rate at which the value of the fund has
moved up and down in the past and is based on historical data and may not be a reliable indicator of the future risk profile of the fund.
• The risk number shown is not guaranteed and may change over time and the lowest risk number does not mean risk free.
• Please note that during this period the risk number has not changed.
Investment review
Low risk High risk
Typically lower rewards Typically higher rewards
1
2
3
4
5
6
7
European Union and investors’ mood may well be unsettled until the result is known. In this environment, the portfolio’s exposure to the UK was disappointing overall, with Artemis Alpha Trust, Better Capital and Hansa Trust holding back returns, although positions in Mercantile Investment Trust and Finsbury Growth & Income Trust were beneficial for the fund’s performance.
With the US economic recovery gaining traction, the Federal Reserve, as anticipated, ended its supportive measures for the economy in October 2014. Investors subsequently turned their attention to the timing of the first hike in interest rates and the extent of further increases. The US continues to produce broadly favourable economic data and its stockmarket made healthy gains over the 12-month period. In this environment, the fund’s holding in the JPMorgan American Investment Trust produced a healthy return, although the Middlefield Canadian Income Trust disappointed.
It is worth noting that the fund has only a small direct exposure to US assets. This is mainly because there are relatively few investment trusts solely focused on the US that are available for inclusion in the portfolio. The fund was therefore not able to benefit fully from the positive performance of the US stockmarket over the review period. Elsewhere within the portfolio, the Biotech Growth Trust, which invests in selected holdings in the global biotechnology industry, and Scottish Mortgage Investment Trust added significant value to performance. The latter invests globally, looking for strong businesses with above-average returns. A new holding in the portfolio, Woodford Patient Capital Trust, was also beneficial for performance.
export-oriented countries in the region relative to their Japanese counterparts. Asian markets were particularly volatile towards the end of the review period due to concern that Chinese equities, or company shares, had risen too high, too quickly in recent months. Against this backdrop, Asian holdings in the portfolio were disappointing overall; the Weiss Korea Opportunities Fund and the Aberdeen Asian Income Fund declined in value, while the Asian Total Return Investment Company rose.
Emerging markets produced healthy gains overall, although performance was mixed; India made robust advances over the 12 months while Brazil was a significant laggard. During 2014, there were a number of elections across developing nations and many politicians based their election campaigns on a reform agenda, with pledges to revive economic growth, which was well received by investors. However, in terms of holdings, the Fundsmith Emerging Equities Trust and the Templeton Emerging Markets Investment Trust held back the fund’s returns.
Meanwhile, Japanese equities performed strongly over the 12 months as Prime Minister Abe’s economic reforms appear to be working well. Within the portfolio, positions in the Baillie Gifford Japan Trust, the JPMorgan Japan Smaller Companies Investment Trust and Baillie Gifford Shin Nippon were supportive of the fund’s performance. In the eurozone, the European Central Bank took steps to support the region’s lacklustre economic activity and the moves encouraged investors in European equities. Improved economic data in the second half of the period under review also served to bolster confidence. European stockmarkets generally performed well over the 12 months, although the weakness of the euro against the British pound held back returns for sterling-based investors. From this section of the portfolio, the European Investment Trust and the JPMorgan European Smaller Companies Investment Trust detracted from performance, while the holding in Fidelity European Values was beneficial.
Although the UK economy continues to advance, the domestic stockmarket was broadly flat over the 12 months under review. The general election in May 2015 unexpectedly resulted in a majority government, removing potential uncertainty associated with an inconclusive result. Nevertheless, the UK is committed to a referendum in the short term on continued membership of the
Outlook
Prospects for continued global growth are favourable; in much of the world there is evidence of modest economic expansion, together with supportive monetary policy and low inflation. Nevertheless, geopolitical tension in parts of the world is likely to persist and economic challenges remain, including the resolution of the Greek crisis and the consequences for the eurozone. In addition, any unexpected upsets in economic progress could hinder some markets.
We remain cautiously optimistic about prospects for the fund. The portfolio has a wide spread of investments across a range of different geographies, industries and company sizes. Furthermore, the fund has exposure to some investments like infrastructure, property and private equity that tend not to behave in the same way as other equity holdings, which could offer some protection in the event of a market downturn. While we cannot predict the future with any certainty, we believe the fund’s broad diversification should minimise the effect of unforeseen disappointments while providing access to potential healthy performances from other sections of the portfolio.
Richard O’Connor
Fund manager
An employee of M&G Limited which is an associate of M&G Securities Limited. Please note that the views expressed in this Report should not be taken as a recommendation or advice on how the fund or any holding mentioned in the Report is likely to perform. If you wish to obtain financial advice as to whether an investment is suitable for your needs, you should consult a Financial Adviser.
Investment activities
During the review period, we invested in investment trusts that we believed offered interesting opportunities. Woodford Patient Capital Trust, mentioned earlier, is one such new holding. This trust is focused on providing access to small, private companies, primarily in the UK. The UK excels in life sciences and has a strong academic reputation but many products are subsequently commercialised outside the UK because of a lack of long-term capital investment at home. The trust’s highly experienced fund manager seeks to address this issue by investing in carefully chosen businesses, with the aim of helping them to fulfil their potential. Initially, the trust will have exposure to larger companies with growth opportunities but over time will move more towards early-stage firms. The fund manager will work closely with the selected companies and the trust has no annual management fee. We also started a new holding in Gabelli Value Plus Trust, which listed on the London Stock Exchange during the period under review. In our opinion, the trust, which invests in US equities, has a sensible management team and an impressive track record.
Other new positions were started in order to bolster the portfolio’s exposure to micro, or very small, companies, and property. This involved taking a stake in the River & Mercantile UK Micro Cap Investment Company and the Ediston Property Investment Company, which had both recently listed on the stock exchange.
These purchases were funded mainly through sales. For example, we trimmed the position in the Fundsmith Emerging Equities Trust, which entered the portfolio when the stock was listed in June 2014. The trust subsequently made significant progress and reducing the stake allowed us to lock in some of these gains. Nevertheless, we retain a meaningful exposure to the trust, which provides direct exposure to the growing consumer classes in the developing world.
Meanwhile, we cut back our allocation to some developing markets, although we still have meaningful presence in these assets. By way of illustration, we sold the position in the Aberdeen Latin American Income Fund, which had come under pressure due to its exposure to commodities.
North American smaller companies 2.30 2.23
39,961 North Atlantic Smaller Companies
Investment Trust 761 2.30
Global emerging markets 3.97 5.48
58,000 Advance Developing Markets Trust 249 0.75 50,000 Fundsmith Emerging Equities Trust 488 1.47 113,000 Templeton Emerging Markets
Investment Trust 581 1.75
Latin America 0.00 0.49 Asia Pacific - excluding Japan 6.99 7.37
387,000 Aberdeen Asian Income Fund 731 2.21 139,000 Asian Total Return 270 0.81 315,038 Edinburgh Dragon Trust 851 2.57 382,500 Weiss Korea Opportunity Fund 463 1.40
Japan 2.56 2.39
15,000 Aberdeen Japan Investment Trust 75 0.23 172,574 Baillie Gifford Japan Trust 771 2.33
Japanese smaller companies 4.23 3.89
188,487 Baillie Gifford Shin Nippon 706 2.13 290,000 JPMorgan Japan Smaller Companies
Investment Trust 696 2.10
Private equity 4.38 4.21
318,000 F&C Private Equity Trust 688 2.08 60,000 Pantheon International
Participations 762 2.30
Property 3.86 3.15
250,000 Ediston Property
Investment Company 269 0.81 355,225 TR Property Investment Trust 1,011 3.05
Specialist 11.90 12.76
623,497 Bilfinger Berger Global
Infrastructure Fund 761 2.29 112,416 Biotech Growth Trust 871 2.63 146,262 BlackRock World Mining Trust 422 1.27 359,538 CATCo Reinsurance
Opportunities Fund 263 0.79 350,000 JPMorgan Global Convertibles
Income Fund 356 1.07 130,000 Polar Capital Technology Trust 753 2.27 278,000 Utilico Emerging Markets 523 1.58
Split capital 1.98 2.37
465,000 Ecofin Water & Power Opportunities 655 1.98
AIM quoted 1.84 1.91
1,080,678 Advance Frontier Markets Fund 611 1.84
Portfolio statement
Value 30.06.15 30.06.14[a]
Holding £’000 % % Global growth 20.57 20.15
132,193 Alliance Trust 640 1.93 503,000 BACIT Investment Trust 649 1.96 31,000 Caledonia Investments 750 2.26 490,000 Miton Worldwide Growth
Investment Trust 774 2.34 242,170 Monks Investment Trust 1,020 3.08 1,192 Personal Assets Trust 409 1.23 50,000 RIT Capital Partners 767 2.31 600,674 Scottish Mortgage Investment Trust 1,563 4.72 93,000 World Trust Fund 244 0.74
Global growth & income 2.53 3.54
375,776 Ruffer Investment Company Red.
Pref. shares 838 2.53
UK all companies 1.52 0.00
450,775 Woodford Patient Capital Trust 505 1.52
UK growth 7.50 7.95
201,737 Artemis Alpha Trust 547 1.65 18,818 Artemis Alpha Trust
(subscription shares) 4 0.01 430,555 Better Capital PCC 301 0.91 50,000 Hansa Trust ‘A’ shares 415 1.25 40,000 Keystone Investment Trust 722 2.18 30,000 Mercantile Investment Trust 498 1.50
UK growth & income 4.90 4.71
113,400 Finsbury Growth & Income Trust 650 1.96 483,870 Troy Income & Growth Trust 337 1.02 251,710 Value & Income Trust 635 1.92
UK smaller companies 2.34 1.20
87,000 Montanaro UK Smaller Companies
Investment Trust 451 1.36 300,000 River & Mercantile UK Micro Cap
Investment Company 324 0.98
Europe 6.59 6.36
575,000 Fidelity European Values 1,010 3.05 300,000 JPMorgan European Investment Trust
(income shares) 382 1.15 100,000 The European Investment Trust 794 2.39
European smaller companies 2.50 2.43
343,650 JPMorgan European Smaller
Companies Investment Trust 828 2.50
North America 5.64 4.47
500,000 Gabelli Value Plus Trust 500 1.51 353,028 JPMorgan American Investment Trust 951 2.87 460,000 Middlefield Canadian Income Trusts
Red. Pref. Shares 416 1.26
Investment review
Portfolio statement (continued)
Value 30.06.15 30.06.14[a]
Top 10 portfolio transactions
for the year ended 30 June 2015
Purchases £’000
Gabelli Value Plus Trust 500
Woodford Patient Capital Trust 451
River & Mercantile UK Micro Cap Investment Company 300
Ediston Property Investment Company 250
Bilfinger Berger Global Infrastructure Fund 17
Total purchases 1,518 Largest sales £’000
Seneca Global Income Trust (formerly Midas Income & Growth Trust) 418
World Trust Fund 327
Biotech Growth Trust 316
Fundsmith Emerging Equities Trust 269
Scottish Mortgage Investment Trust 203
Baille Gifford Japan Trust 157
TR Property Investment Trust 154
Golden Prospect Precious Metals 134
Advance Developing Markets Trust 133
Aberdeen Latin American Income Fund 130
Other sales 658
Total sales 2,899 Unquoted / unlisted 0.00 0.00 75,000 Bioscience Investment Trust 0 0.00 2,000,000 M&G Equity Investment Trust (capital shares) 0 0.00 1,305,397 M&G Equity Investment Trust (income shares) 0 0.00 26,744 Thompson Clive Investment Trust 0 0.00 Futures (0.04) 0.04 11 E-Mini S&P 500 Sep 2015 (14) (0.04) Portfolio of investments 32,497 98.06 97.10 ‘AAA’ rated money market funds[b] 1.87 2.55 620,000 Northern Trust Global Fund - Sterling 620 1.87 Total portfolio 33,117 99.93 99.65 Net other assets 20 0.07 0.35 Net assets attributable to shareholders 33,137 100.00 100.00 All securities are on an official stock exchange listing except where referenced. [a]The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. [b]Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk. Counterparty exposure Financial derivative exposure Total as at Futures 30.06.15 Counterparty £’000 £’000
Bank of America Merrill Lynch (14) (14)
Total (14) (14)
Portfolio statement (continued) Value 30.06.15 30.06.14[a] Holding £’000 % %
The following sections show performance at share class level. Please note past performance is not a guide to future performance and the value of investments, and the income from them, will fluctuate. This will cause the fund price to fall as well as rise and you may not get back the original amount you invested.
To give an indication of how the results of the investment activities during the year have affected the performance of the fund the following tables show the returns attributable to Sterling Class ‘A’. For the specific performance of your share class please refer to the Annual Long Report and audited Financial Statements for M&G Investment Funds (3), which is available free of charge either from our website at www.mandg.co.uk/reports or by calling M&G Customer Relations on 0800 390 390.
Performance since launch
To give an indication of how the Fund has performed since launch, the graph below shows total return of Sterling Class ‘A’ (Accumulation) shares. 100 150 200 300 500 700 1,000 1,500 2,000 3,000 5,000 7,000 10,000 50 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09111315
* Net income reinvested May 1968 = 100, plotted annually Chart date 1 July 2015
Source: M&G
Sterling Class ‘A’ (Accumulation) shares*
Long-term performance
one year three years five years since 01.07.14 02.07.12 01.07.10 launch % % p.a.[a] % p.a.[a] % p.a.[a]
Sterling[b]
Class ‘A’ +7.3 +13.3 +10.4 +9.9[c]
[a]Shows the compound rate of return, per annum, over the period.
[b]Bid to bid with net income reinvested.
[c] 10 May 1968, the end of the initial offer period of the predecessor unit trust.
Yield
The net historic yield on 1 July 2015
Historic % Sterling
Class ‘A’ 0.60
Historic yield: The historic yield reflects distributions declared over the past twelve months as a percentage of the mid-market price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions.
Income
Dividend income per share Calendar Distributed Reinvested year Interim Final Total Sterling (net) p p p p Class ‘A’ 2010 6.3560 6.4660 12.8220 28.0623 2011 4.0800 4.0940 8.1740 18.0680 2012 2.9780 3.4100 6.3880 14.2093 2013 4.8370 5.9522 10.7892 24.1175 2014 4.0945 6.2002 10.2947 23.1830 2015[a] 4.5754 5.8489 10.4243 23.6149 [a]Up to final: ex-distribution date 1 July 2015;
payment date 31 August 2015.
Ongoing charges
Final distribution Ongoing charges Inc Acc figure[a]
30.08.15[a] 01.07.15[a] 30.06.15 30.06.14
Sterling p p % %
Class ‘A’ 0.4667 1.0454 1.19 1.19
[a]The ongoing charges figure is the ratio of the relevant annualised total disclosable costs of each share class from the most recent reporting period to the average net asset value for that share class over the same period.
Financial highlights
We explain below the payments made to meet the ongoing costs of investing and managing the fund, comprised of operating charges and portfolio transaction costs.
Operating charges
Operating charges include payments made to M&G and to providers independent of M&G:
•
Investment management:Charge paid to M&G for investment management of the fund (also known as Annual Management Charge).•
Administration:Charge paid to M&G for administration services in addition to investment management – any surplus from this charge will be retained by M&G.•
Oversight and other independent services:Charges paid to providers independent of M&G for services including depositary, custody and audit.Operating charges do not include transaction costs or any entry and exit charges (also known as initial and redemption charges). The charging structures of share classes may differ, and therefore the amounts may also differ.
Operating charges are the same as the ongoing charges shown in the Key Investor Information Document, other than where an estimate has been used for the ongoing charge because a material change has made the operating charges unreliable as an estimate of future charges.
Fund performance
Performance of share class
Net asset value Net asset value Net asset value per share as at per share as at % change 30.06.15 30.06.14
Inc Acc Inc Acc Inc Acc Sterling p p p p % %
Class ‘A’ 1,762.05 4,010.72 1,665.13 3,767.59 +5.82 +6.45
Prices
Calendar Income shares Accumulation shares year Highest Lowest Highest Lowest Sterling (net) p p p p Class ‘A’ 2010 1,377.93 1,080.73 3,041.35 2,371.79 2011 1,420.23 1,159.56 3,143.87 2,574.39 2012 1,357.66 1,208.27 3,029.84 2,689.22 2013 1,643.58 1,366.72 3,695.63 3,060.80 2014 1,723.62 1,559.11 3,900.01 3,523.96 2015[a] 1,844.16 1,689.84 4,183.73 3,833.63 [a]To 1 July 2015.
Financial highlights
Operating charges and portfolio transaction costs
Financial highlights
Portfolio transaction costs
Portfolio transaction costs are incurred by funds when buying and selling investments. These costs vary depending on the types of investment, their market capitalisation, country of exchange, method of execution and the quality of research provided. They are made up of direct and indirect portfolio transaction costs:
•
Direct portfolio transaction costs: Broker execution commission,taxes, and costs of research from brokers and other research providers.
•
Indirect portfolio transaction costs: ‘Dealing spread’ – thedifference between the buying and selling prices of the fund’s investments; some types of investment, such as fixed interest securities, have no direct transaction costs and only the dealing spread is paid.
Investments are bought or sold by a fund when changes are made to the investment portfolio and in response to net flows of money into or out of the fund from investors buying and selling shares in the fund. To protect existing investors, portfolio transaction costs incurred as a result of investors buying and selling shares in the fund are recovered from those investors through a ‘dilution adjustment’ to the price they pay or receive. The table below shows direct portfolio transaction costs paid by the fund before and after that part of the dilution adjustment relating to direct portfolio transaction costs.
Further information on this process is in the Prospectus, which is available free of charge on request either from our website at www.mandg.co.uk/reports or by calling M&G Customer Relations on 0800 390 390.
Direct portfolio transaction costs[a]
30.06.15 30.06.14 30.06.13 % % %
Broker commission 0.01 0.01 0.02 Taxes 0.00 0.01 0.03 Costs before dilution adjustment 0.01 0.02 0.05 Dilution adjustment[b] 0.00 0.00 0.00
Total direct portfolio transaction costs 0.01 0.02 0.05
[a]As a % of average net asset value.
[b]In respect of direct portfolio transaction costs.
Financial highlights
Contact
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M&G Securities Limited is authorised and regulated by the Financial Conduct Authority and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England number 90776.
