Going global in fixed income January 2013

Agenda

Going global in fixed income China – another debt bubble in the making?

The US – a comeback story M&G Global Macro Bond Fund

Going global in fixed income

Going global with M&G in fixed income…

… and exploiting investment opportunities in a £33 trillion market 35000 30000 25000 20000 15000 10000 Face value of global vs. domestic debt £33 trillion market 5000 0 Sovereign debt UK bonds Corporate debt Global bonds High yield and emerging markets

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

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

Source : Bloomberg, as at 31 December 2012. The face value of global bonds outstanding is calculated on the basis of the Merr ill 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 Merr ill Lynch Sterling Corporate & Collateralized Index, Merrill Lynch Sterling High Yield Index and the Merrill Lynch UK Gilts Index.

Sterling is up over 16% since 2009

Hurting our exports, while we remain addicted to imported goods 4 UK current account balance 1975-76 sterling -28% vs US dollar, -29% vs Deutsche mark 2 1990-91 sterling -20% vs US dollar, -15% vs Deutsche mark 2008-09 sterling -19% vs US dollar, -17% vs euro 0 -2 -4 -6

A current account deficit this large has historically preceded a sterling crash

Source: ONS, Bloomberg, as at December 2012.

China – another debt bubble in the making?

China – the world’s biggest credit bubble since 2009

25 15 5 -5 55

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

45 35 2011 2010 2009

Chinese GDP growth will have to slow down

Source : IMF Global Financial Stability Report, April 2012 55 45 35 25 15 5 -5

A China slowdown has a significant impact on its trading partners 180 170 160 150 140 130 120 110 100 90 Brazil, 5y CDS, BBB

Emerging markets are not a safe haven

Source: Bloomberg, as at 31 December 2012

Berkshire Hathaway, 5y CDS, AA Which one do you want to be long or short of?

A China slowdown has a significant impact on its trading partners 2,6 2,4 2,2 2,0 1,8 3,8 3,6 3,4 3,2 3,0 2,8 130 bps Philippines, 2021, BB+, USD

Emerging markets are not a safe haven

Source: Bloomberg, as at 31 December 2012

Wal-Mart, 2021, AA, USD 20 bps

The US – a comeback story

US is likely to become energy self-sufficient

Gas imports

100% 80%

Net oil & gas import dependency 2010 2035

60% European Union 40% China 20%

United States

0%

Gas exports

-20% 20% 40% 60%

Heading for energy independence in the next 20 years

Source: International Energy Agency, World Energy Outlook 2012, November 2012 India 80% Japan 100%

Oil Imports

US housing market indicates a solid economic recovery

10 12 14 4 6 8 0

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

2

short supply strong growth large supply weak growth

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

Source : Bloomberg, as at 30 September 2012 10 8 6 4 2 0 -2 -4 -6 -8 -10

Mortgages will be refinanced and new houses built

The building materials and construction sector looks attractive to us

• 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

EUR 9.625% 2017

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

M&G Global Macro Bond Fund

M&G Global Macro Bond Fund

A flexible and focused global bond fund 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

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

Fund positioning summary

M&G Global Macro Bond Fund Key portfolio themes Duration Low duration of around 2.4 years Inflation Central banks no longer care about inflation, so we have 24% in linkers Government bonds Quality dominates. Generally we prefer credit over government bonds. Investment grade We prefer corporate issuers – but have added financials recently, particularly US banks.

High yield Still overcompensates for default, but valuations have come closer to fair value Emerging markets We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey Currencies 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

Source: M&G, as at 31 December 2012

% 15 10 5 0 35 30 25 20 Geographic breakdown

Fund positioning summary

M&G Global Macro Bond Fund Key portfolio themes Duration Low duration of around 2.4 years Inflation Central banks no longer care about inflation, so we have 24% in linkers Government bonds Quality dominates. Generally we prefer credit over government bonds. Investment grade We prefer corporate issuers – but have added financials recently, particularly US banks.

High yield Still overcompensates for default, but valuations have come closer to fair value Emerging markets We are very selective – some corporate exposure, but short positions in Brazil, Indonesia, Russia, South Africa & Turkey Currencies 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

Source: M&G, as at 31 December 2012

% 35 25 15 5 -5 65 55 45 Currency breakdown Short positions

110 90 70 170 150 130

Global opportunity set and designed to achieve lower volatility

M&G Global Macro Bond Fund Credit crisis 71.5% 57.1% 44.6% 41.6% 33.5% 32.8% M&G Global Macro Bond Fund IMA £ High Yield sector average IMA £ Corporate Bond sector average IMA Global Bond sector average IMA UK Gilts sector average IMA £ Strategic Bond sector average

Our most flexible bond fund

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

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