Ehyb hycb presentation jt citywire cologne june 12

Investing in High Yield

June 2012

2

Fund Managers Biographies

Stefan Isaacs

• Manager of M&G High Yield Corporate Bond Fund since October 2010

• Also fund manager of the M&G European Corporate Bond Fund since 2007

• Deputy fund manager of the M&G Optimal Income Fund and the M&G European

High Yield Bond Fund

• Previously worked on the M&G high yield dealing desk

James Tomlins

• New deputy fund manager on the M&G High Yield Corporate Bond Fund

• Lead manager of the M&G European High Yield Bond Fund

• Previously worked as deputy fund manager of Cazenove Strategic Bond Fund

• CFA Charterholder

• University of Cambridge (Postgraduate Diploma in Economics and an MA in History)

Source: M&G Investments as at 31 May 2012

3

M&G High Yield Corporate Bond Fund

Source: M&G Investments, as at 31 May 2012

Fund facts

October 1998

Stefan Isaacs (since October 2010) Fund manager

James Tomlins (Since December 2011)

Deputy manager

Fund size

GRY (Gross of fees)

GBP, EUR, USD Share classes

Morningstar EUR High Yield Bond Sectors

Inception

€1,431m

8.2%

4

M&G European High Yield Bond Fund

October 1999

James Tomlins (since Dec 2011) Fund manager

Stefan Isaacs (since Dec 2011)

Deputy manager

Fund size

GRY (Gross of fees)

GBP Unhedged , EUR Share classes

Morningstar Europe High Yield Bond Sector

Inception

€62m

9.5%


Fund facts

5

Performance data

M&G High Yield Corporate Bond Fund -1.8 6.3 0.2

3 months

%

6 months

%

1 year

Source: Morningstar , Inc., Pan European database, as at 31 May 2012 , euro A-H class shares , gross income reinvested, price to price


(Fund sector currently under review with Morningstar)

6

M&G European High Yield Bond Fund Performance data

Source: Morningstar , Inc., Pan European database, as at 31 May 2012 , euro C class shares , gross income reinvested, price to price

M&G European High Yield Bond Fund -3.1 8.8 0.6

Morningstar Europe High Yield Bond -1.6 8.2 -0.4

Quartile 4 2 2

3 months

%

6 months

%

1 year

7

High Yield at M&G One of the largest high yield investors in the UK

M&G Retail Fixed Interest Team – High Yield AUM (£M)

Source: M&G Investments as at 31 March 2012

3,311

1,025

516 427

98 49 50

5,476

M&G OptimalIncome Fund

M&G High YieldCorporate Bond

Fund

M&G StrategicCorporate Bond

Fund

M&G CorporateBond Fund

M&G EuropeanCorporate Bond

Fund

M&G EuropeanHigh Yield Bond

Fund

Other M&G TOTAL

Investing in High Yield Stefan Isaacs, Fund Manager

June 2012

9

Agenda

• Macroeconomic views

• Importance of credit research

• Fund positioning

10

Key convictions for the year ahead Macroeconomic and credit outlook

• The eurozone is entering recession

• Political risks remain elevated

• Default rates are likely to rise in Europe

• The banking system remains starved of capital

• Credit market valuations already price in a recession and rising defaults

• Excellent environment for stock selection

11

Sp

rea

ds (

bps)

Defa

ult R

ate

%

Source: M&G Investments , Bloomberg , S&P at 31 May 2012

European high yield spreads and default rates

High yield valuations Spreads are wide but defaults remain modest

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0

500

1000

1500

2000

2500

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

S&P Euro High Yield 12m Trailing Default Rate Merrill Lynch Euroe High Yield Constrained Index

12

High yield valuations Expected returns on a buy-and-hold basis

BULL CASE

BASE CASE

BEAR CASE

Yield-to-Mat. (%) Recovery rate (%) Annual default

rate (%)

10%

10%

10%

30%

30%

30%

4.25%

6.0%

14.0%

Total return

5 years (%)

40%

33%

1%

Total return

5 years (% p.a.)

7.0%

5.8%

0.2%

Current YTM on

ML Euro HY Index

Average recovery

rate for unsecured

bonds 36.8%

2000-2004 6.5%

2006-2010 4.7%

1920-2010 3.3%

Source: M&G Investments , Bloomberg , Merrill Lynch at 31 December 2011

Itraxx Crossover index at

700 bps

= 45% of these companies will default

in the next 5 years

15

Agenda




16

0 1 2 3 4 5 6 7 8 9 10

0

200

400

600

800

1000

1200

1400

1600

0 1 2 3 4 5 6 7 8 9 10

European high yield spreads

BB+ BB BB- B+ B B- CCC+ CCC CCC- CC+

Sp

rea

ds (

bp

s)

CREDIT RATING

Exceptional spread dispersion is the stockpicker’s dream

Source: M&G Investments , Bloomberg at 31 December 2011

30 June 2007

17

0

200

400

600

800

1000

1200

1400

1600

0 1 2 3 4 5 6 7 8 9 100 1 2 3 4 5 6 7 8 9 10

European high yield spreads

BB+ BB BB- B+ B B- CCC+ CCC CCC- CC+

Sp

rea

ds (

bp

s)

CREDIT RATING

Exceptional spread dispersion is the stockpicker’s dream

Source: M&G Investments , Bloomberg at 31 December 2011

30 December 2011

18 Source: M&G, as at 30 December 2011.

5 Private placement

16 Leveraged finance

8 Asset Backed Securities

4 Restructuring

10 Industrials

7 Financials and sovereigns

5 Project & infrastructure finance

1 Quantitative analysis

137 fixed income investment professionals

including 56 credit analysts

Market leading credit analyst teams Analysing global companies and sovereigns

19

Examples Stock selection


Good Bad

Business risk Diversified Non-Cyclical One product, price taker, cyclical

Balance sheet Appropriate leverage and falling Appropriate leverage and falling

Structure Secured Robust legal system,

Good covenants

Unsecured, scope for fraud,

expropriation, no covenants

Ownership & Strategy Publically listed Very aggressive ; private equity

Valuation Cheap Rich

20


* Direct claim over assets Source: M&G Investments, as at 31 May 2012

21


• Swedish cable operator

• Stable and cash generative business

• Unsecured, Caa1/CCC+

• M&G Rating: CCC+

• Yield-to-Maturity = 10.3%

• CCC-rated but strong fundamentals

BUY AVOID

BUY AVOID

• German/US healthcare company

• Very stable business

• Unsecured, Ba1/BB+

• M&G Rating: BB


• Great company but no value – just

downside

• French mass-market OEM

• Weak margins and market

• Unsecured, Ba1/BB+

• M&G Rating: BB


• Poor company offering little value

• German cable network operator

• Stable and cash generative

• Unsecured, B3/B

• M&G Rating: B+


• Good value

* Direct claim over assets

EUR 10.75% 2019 EUR 8.75% 2015

EUR 9.625% 2019 EUR 5.625% 2017


22

Red Screens at Night , Stock Pickers Delight Stock selection still crucial

Source: M&G, Bloomberg, as at 31 March 2012. Rebased to 100

%

50

60

70

80

90

100

110

120

Ziggo

Virgin Media

Seat

PagesJaunes

23

Agenda




24

Key portfolio themes Rationale for fund positioning

• BB and B-rated European high yield looks attractive

• Preference for defensive cash generative industries

• We are underweight cyclical sectors such as automotive

• Peripheral credit: generally cautious but will take risk selectively

• We remain cautious on financials

25

One process – two products M&G High Yield Corporate Bond Fund M&G European High Yield Bond Fund

Fund manager Stefan Isaacs (Lead)

James Tomlins (Deputy)

James Tomlins (Lead),

Stefan Isaacs (Deputy)

Description A diversified, global high yield fund that

invests across the non investment grade

universe, predominantly in Europe &

North America

A focused, high conviction, high yield fund

that predominantly invests in non

investment grade bonds denominated in

European currencies

Peer group IMA Sterling High Yield

Morningstar EUR High Yield

Morningstar Europe High Yield

Base currency & hedged

share classes

GBP

EUR Hedged

USD Hedged

EUR

GBP Unhedged

Investment universe Global High Yield Pan European High Yield

Typical credit ratings BB+ to CCC- BB+ to CCC-

Key restrictions Min 50% in sub investment grade

Max Single Issuer Exposure:

AAA – A 5%

BBB – B 4%

CCC 3%

Min 70% in European currency

denominated debt

Max Single Issuer Exposure:

AAA – CCC 5%

Target # of issuers 125 +/- 25 75 +/- 15

GRY* 8.2% 9.5%

* Internal estimate, as of 31 May 2012

26

Credit rating breakdown - fund (%) including derivatives


Fund positioning I

M&G High Yield Corporate Bond Fund M&G European High Yield Bond Fund

2.5

0.0

0.7

1.7

37.6

44.8

12.0

0.4

0.3

0.0

AAA

AA

A

BBB

BB

B

CCC

CC & Below

NR

Cash

27

Fund positioning II Top overweight positions - fund (%) including derivatives


ML European Currency High Yield Index


M&G European High Yield Corporate Bond Fund

ML Euro High Yield Constrained Index


20.5

7.7

11.3

8.8

3.0

6.9

Media Utility Capital Goods

28

Fund positioning III Top underweight positions – fund (%) including derivatives


ML European Currency High Yield Index

M&G European High Yield Corporate Bond Fund

ML Euro High Yield Constrained Index



3.1 2.9

0.0

17.5

13.3

2.6

Banking Automotive Technology &Electronics

29

Sector breakdown, physical positions (Fund %)

Rank Issuer Issue Fund %

1 Bundesrepublik Deutschland Bundesobligat Obli 2 1/4 04/15/13 3.0

2 Norcell Sweden Holding 2 Ab Norcel 10 3/4 09/29/19 2.8

3 Smurfit Kappa Acquisitions Mdpac 7 1/4 11/15/17 2.4

4 Virgin Media Finance Plc Vmed 8 7/8 10/15/19 2.1

5 Kabel Deutschland Vertrieb Und Service G Kabegr 6 1/2 06/29/18 1.9

6 Edcon Pty Ltd Edcon 0 06/15/14 1.7

7 Upcb Finance V Ltd Upcb 7 5/8 01/15/20 1.7

8 New World Resources Nv Nworld 7 7/8 05/01/18 1.7

9 Kinove German Bondco Gmbh Kinove 10 06/15/18 1.7

10 Intergen Nv Intgen 8 1/2 06/30/17 1.6

11 Bormioli Rocco Holdings Sa Bormio 10 08/01/18 1.6

12 Ziggo Bond Co Bv Ziggo 8 05/15/18 1.5

13 Catalent Pharma Solutions Inc Ptsac 9 3/4 04/15/17 1.5

14 Rexam Plc Rexln 6 3/4 06/29/67 1.5

15

Unitymedia Hessen Gmbh and Co Kg /

Unityme Unity 8 1/8 12/01/17 1.5

Top 15 Issues



30

Top 15 Issues

Sector breakdown, physical positions (Fund %)


Rank Issuer Issue Fund %

1 GERMANY(FED REP) 2.25% IDX/LKD 15/04/13 EUR 8.0%

2 UK(GOVT OF) 2.5% I/L STK 16/04/20 GBP 2.3%

3 UNITY MEDIA GMBH 9.625% SNR 01/12/19 EUR1000 1.9%

4 NORCELL SWEDEN H 2 10.75% NTS 29/09/19 EUR'REG 1.8%

5 GERMANY(FED REP) 1.5% I/L 15/04/16 EUR0.01 1.7%

6 NORDENIA VERPACKUN 9.75% A/BKD 15/07/2017 EUR 1.5%

7 ARDAGH PACKAGING F 7.375% SNR 15/10/17 EUR'REG 1.4%

8 CODERE FIN(LUX)SA 8.25% SNR 15/06/15 EUR'REGS 1.4%

9 EDCON HOLDINGS FRN SNR 06/14 EUR1000'REGS' 1.3%

10 REXAM 6.75%-FRN SUB 29/06/67 EUR 1.3%

11 SMURFIT KAPPA ACQ 7.25% SNR 15/11/17 EUR'REGS 1.3%

12 UNITY MEDIA GMBH 9.5% SNR NTS 15/03/21 EUR 1.2%

13 SMURFIT KAPPA ACQ 7.75% SNR 15/11/19 EUR1000 1.2%

14 BAKKAVOR FINANCE 2 8.25% EMTN 15/02/18 GBP'REG 1.2%

15 INTERGEN NV 9.5% SNR 30/06/2017 GBP1000 1.1%


31 Source: M&G as at 31 May 2012


Peripherals = 10.2%

Spain 5.18

Italy 4.64

Greece 0.01

Portugal 0.37

United Kingdom 25.32

Germany 18.04

USA 11.29

Ireland 7.44

Switzerland 6.68

Netherlands 5.42

South Africa 4.14

Sweden 3.19

Poland 2.17

Czech Republic 2.06 other

4.05

32 Source: M&G as at 31 May 2012


Portugal 0.25

Italy 3.76 Greece

0.82

Spain 4.07

United Kingdom 24.73

USA 22.22

Germany 17.29

Ireland 6.40

Switzerland 3.82

France 3.39

Netherlands 2.94

South Africa 2.71

Sweden 2.04 Poland

1.81

Czech Republic 1.11

Other 2.64

Peripherals = 8.9%

33

• Economic and political risk to remain elevated through 2012

• BB – B rated valuations are attractive

• Spread dispersion remains elevated: it’s a stock pickers’ environment

Investing in high yield in 2012 Key takeaways

34

www.bondvigilantes.com

www.twitter.com/bondvigilantes

35

Appendix

36

Investment process Bottom-up stockpicking

Analysis

• Market position • Cash flow

• Product analysis • Growth

• Management • Balance sheet

Output

• Internal credit rating of over 700 issuers

• All research is published on our intranet

• Continuous credit risk monitoring

Recommendation

• Daily meeting with fund manager

• Recommendation based on fundamentals

Investment Decision

High yield dealer M&G Risk Team

• Daily Value at Risk

• Liquidity, credit and interest rates stress tests

• Continuous risk monitoring

• Market Insights: liquidity, new issues etc.

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

This document is designed for investment professionals’ use only, not for onward distribution to any other person or entity. For Switzerland: Distribution of this document in

or from Switzerland is not permissible with the exception of the distribution to qualified investors according to the Swiss Collective Investment Schemes Act, the Swiss

Collective Investment Schemes Ordinance and the respective Circular issued by the Swiss supervisory authority ("Qualified Investors"). Supplied for the use by the initial

recipient (provided it is a Qualified Investor) only. In Spain the M&G Investment Funds are registered for public distribution under Art. 15 of Act 35/2003 on Collective Investment

Schemes as follows: M&G Investment Funds (1) reg. no 390, M&G Investment Funds (2) reg. no 601, M&G Investment Funds (3) reg. no 391, M&G Investment Funds (5) reg. no 972,

M&G Investment Funds (7) reg. no 541, M&G Investment Funds (9) reg. no 930, M&G Global Dividend Fund reg. no 713 M&G Dynamic Allocation Fund reg. no 843, M&G Global Macro

Bond Fund reg. no 1056 and M&G Optimal Income Fund reg. no 522. The collective investment schemes referred to in this document (the "Schemes") are open-ended investment

companies with variable capital, incorporated in England and Wales. In the Netherlands, all funds referred to, with the exception of M&G Investment Funds (2), M&G Investment Funds

(5), M&G Investment Funds (9) and the M&G Dynamic Allocation Fund, are registered with the Dutch regulator, the AFM. This information is not an offer or solicitation of an offer for the

purchase of investment shares in one of the Funds referred to herein. Purchases of a Fund should be based on the current prospectus. The prospectus, Key Investor Information

Document (KIID), annual report and subsequent semi-annual report, are available free of charge, in paper form, from the ACD: M&G Securities Limited, Laurence Pountney Hill, London,

EC4R 0HH, GB, or one of the following: M&G International Investments Limited, German branch, Bleidenstraße 6-10, D-60311 Frankfurt am Main, the German paying agent J.P. Morgan

AG, Junghofstraße 14, D-60311 Frankfurt am Main, the Austrian paying agent, Raiffeisen Bank International A.G., Am Stadtpark 9, A-1030 Wien, the Luxembourg paying agent, J.P.

Morgan Bank Luxembourg S.A., European Bank & Business Center, 6 c route de Treves, 2633 Senningerberg, Luxembourg, Allfunds Bank, Calle Estafeta, No 6 Complejo Plaza de la

Fuente, La Moraleja 28109, Alcobendas, Madrid, M&G International Investments Limited, 34 Avenue Matignon, 75008, Paris, France or from the French centralising agent of the Fund:

RBC Dexia Investors Services Bank France. For Switzerland: Please refer to M&G International Investments Ltd., Bleidenstraße 6-10, D-60311 Frankfurt am Main or, for Sweden, from

the paying agent, Skandinaviska Enskilda Banken AB (publ), Sergels Torg 2, 106 40 Stockholm, Sweden. For Italy, they can also be obtained from one of the appointed paying agents,

details of which can be found by visiting the contact section on the following website: www.mandg-investments.it. Before subscribing you should read the prospectus, which includes

investment risks relating to these funds. This financial promotion is published by M&G International Investments Ltd. Registered Office: Laurence Pountney Hill, London EC4R 0HH,

authorised and regulated by the Financial Services Authority and registered with the CNMV in Spain. Past performance is not a guide to future performance. Performance stats are

quoted gross of Italian tax on capital gains

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