M&G Investment Funds (2) Annual Long Report and audited ......The Authorised Corporate Director (ACD) of M&G Investment Funds (2) presents its Annual Long Report and audited Financial

M&G Investment Fund s (2)Annual Long Report and audited Financial Statementsfor the year ended 31 May 2019

Contents

M&G Investment Funds (2)

Authorised Corporate Director’s Report Page 1

Directors’ statement Page 3

Depositary’s Responsibilities and Report Page 4

Independent Auditor’s Report Page 5

Financial statements and notes Page 7

Authorised Corporate Director’s Reports, including the financial highlights and financial statements and notes for:

M&G Gilt & Fixed Interest Income Fund Page 11

M&G Global High Yield Bond Fund Page 23

M&G Index-Linked Bond Fund Page 47

M&G Index Tracker Fund Page 59

M&G Short Dated Corporate Bond Fund Page 75

M&G UK Income Distribution Fund Page 93

M&G UK Select Fund Page 111

Other regulatory disclosures Page 126

Glossary Page 127

The Authorised Corporate Director (ACD) of M&G Investment Funds (2)presents its Annual Long Report and audited Financial Statements forthe year ended 31 May 2019.

The audited financial statements of M&G Investment Funds (2) andthe investment report and audited financial statements and notes ofeach sub-fund are presented in their individual sections of this reportas set out in the contents page.

Please note that we have included an explanation of key investmentterminology in the ‘Glossary’ (at the back of this report).

Company information

M&G Investment Funds (2) is an umbrella Open-Ended InvestmentCompany (OEIC) and contains seven sub-funds, hereinafter referredto as ‘funds’ in the rest of this report. Each fund is a UCITS(Undertakings for Collective Investment in Transferable Securities)scheme as defined in the Collective Investment Schemes sourcebook,as issued (and amended) by the Financial Conduct Authority (FCA).This OEIC is an Investment Company with Variable Capital (ICVC)incorporated under the Open-Ended Investment CompaniesRegulations 2001. It is authorised and regulated by the FCA under theFinancial Services and Markets Act 2000.

The Company was authorised on 1 August 2001 and was launchedon 24 January 2002, following the conversion of a series of authorisedunit trusts.

The Company’s principal activity is to carry on business as an OEIC.The Company is structured as an umbrella company, and differentfunds may be established by the ACD from time to time with theagreement of the Depositary and approval from the FCA. The fundsare operated separately and the assets of each fund are managed inaccordance with the investment objective and policy applicable to that fund.

As at 31 May 2019 none of the funds held shares of the other fundswithin this OEIC.

A shareholder is not liable for the debts of the Company and will neverbe liable to make any further payment to the Company after paying thepurchase price of the shares.

Fund managers

The following fund managers are employed by M&G Limited which isan associate of M&G Securities Limited.

M&G Gilt & Fixed Interest Income FundMatthew Russell

M&G Global High Yield Bond FundStefan Isaacs & James Tomlins

M&G Index-Linked Bond FundBen Lord

M&G Index Tracker FundRichard O’Connor

M&G Short Dated Corporate Bond FundMatthew Russell

M&G UK Income Distribution FundMichael Stiasny

M&G UK Select Fund Rory AlexanderAt the start of the review period Sam Ford was the fund manager.

ACDM&G Securities Limited, 10 Fenchurch Avenue, London EC3M 5AG, UKTelephone: 0800 390 390 (UK only)

(Authorised and regulated by the Financial Conduct Authority. M&GSecurities Limited is a member of the Investment Association andof the Tax Incentivised Savings Association.)

Directors of the ACDM Ammon, G N Cotton, C Dobson (non executive director), N M Donnelly, P R Jelfs, M McGrade (non executive director), L J Mumford

Investment manager M&G Investment Management Limited, 10 Fenchurch Avenue, London EC3M 5AG, UKTelephone: +44 (0)20 7626 4588

(Authorised and regulated by the Financial Conduct Authority)

RegistrarDST Financial Services Europe Ltd, DST House, St. Nicholas Lane, Basildon, Essex SS15 5FS, UK


DepositaryNatWest Trustee & Depositary Services Limited, Drummond House,1 Redheughs Avenue, Edinburgh EH12 9RH, UK


Independent auditorErnst & Young LLPAtria One,144 Morrison Street, Edinburgh EH3 8EX, UK

1

M&G Investment Funds (2)Authorised Corporate Director’s Report

ANNUAL LONG REPORT AND AUDITED FINANCIAL STATEMENTS • May 2019

Important information

As a result of the Extraordinary General Meetings of Shareholders held on 4 October 2018, the non-sterling share classes of the M&G Short Dated Corporate Bond Fund and M&G Global High YieldBond Fund were merged into corresponding share classes of theequivalent sub-funds in M&G (Lux) Investment Funds 1. The effectivedate of the merger for the M&G Short Dated Corporate Bond Fund was 26 October 2018 and the effective date of the merger for the M&G Global High Yield Bond Fund was 9 November 2018. For further details of the mergers, please refer to:www.mandg.com/brexitmergerdocumentation.

The investment objective and policy change for the M&G UK SelectFund took place on 1 March 2019.

On 8 April 2019, the Sterling Class ‘PP’ (Accumulation) shares werelaunched for the M&G Short Dated Corporate Bond Fund and M&G Global High Yield Bond Fund.

As per shareholder letter 17 June 2019, we are making changes tothe way we charge for M&G funds based in the UK, starting onThursday 1 August 2019. The annual charge should be simpler tounderstand and easier to compare with other fund charges. We arecombining all the charges that make up the current ongoing chargefigure (OCF) into a single annual charge. Only exceptional items suchas unforeseen legal and tax expenses, also known as extraordinaryexpenses, will be excluded from the annual charge. To find out the newannual charge and the OCF on the KIID for the share class(es) youare invested in, visit our website www.mandg.co.uk.

On 28 September 2018, the Depositary changed from NationalWestminster Bank Plc to NatWest Trustee & Depositary ServicesLimited.

Investor information

The Prospectus, Instrument of Incorporation, Key Investor InformationDocuments, costs and charges illustration, the latest Annual or InterimInvestment Report and Financial Statements as well as a list ofpurchases and sales are available free of charge on request from thefollowing addresses. The Instrument of Incorporation can also beinspected at our offices or at the office of the Depositary.

Customer services and administration for UK clients:M&G Securities Limited,PO Box 9039, Chelmsford CM99 2XG, UK

Please remember to quote your name and M&G client reference andsign any written communication to M&G. Failure to provide this willaffect your ability to transact with us.

Telephone: 0800 390 390 (UK only)

For security purposes and to improve the quality of our service, wemay record and monitor telephone calls. You will require your M&Gclient reference. Failure to provide this will affect your ability to transactwith us.

Customer services and administration for non-UK clients:M&G Securities Limited,c/o RBC I&TS, 14, Porte de France, L-4360 Esch-sur-Alzette, Grand Duchy of Luxembourg

Please remember to quote your name and M&G client reference andsign any written communication to M&G. Failure to provide this willaffect your ability to transact with us.

Telephone: +352 2605 9944Email: [email protected]

For security purposes and to improve the quality of our service, wemay record and monitor telephone calls. You will require your M&Gclient reference. Failure to provide this will affect your ability to transactwith us.

Austrian paying and information agent:Société Générale, Vienna Branch, Prinz Eugen-Strasse 8-10/5/Top 11, 1040 Wien, Austria

Belgian financial agent:Société Générale Private Banking NV, Kortrijksesteenweg 302, 9000 Gent, Belgium

Danish representative agent:Nordea Bank Danmark A/S, Client Relations DK, Investor Services & Solutions,Postbox 850, Reg.no.6428. HH. 6.1., 0900 København C, Denmark

French centralising agent:RBC Investor Services, Bank France S.A.,105 rue Réaumur, 75002 Paris, France

During the financial year, the effective proportion of the net assets ofthe M&G UK Select Fund in PEA (‘Plan d’Epargne en Actions’) eligibleassets has permanently been equal to at least 75%.

German information agent:M&G International Investments Limited,mainBuilding, Taunusanlage 19, 60325 Frankfurt am Main, Germany

Greek paying agent and distributor:Eurobank Ergasias S.A.,8, Othonos Street, 10557 Athens, Greece

Irish facilities agent:Société Générale S.A., Dublin Branch,3rd Floor IFSC House – The IFSC, Dublin 1, Ireland

2

M&G Investment Funds (2) Authorised Corporate Director’s Report


Italian paying agents:Allfunds Bank, S.A., Via Santa Margherita 7, 20121 Milano, Italy

Banca Monte dei Paschi di Siena S.p.A., Piazza Salimbeni 3, 53100 Siena, Italy

Banca Sella Holding S.p.A.,Piazza Gaudenzio Sella 1, 13900 Biella, Italy

BNP PARIBAS Securities Services,Piazza Lina Bo Bardi 3, 20124 Milano, Italy

CACEIS Bank Luxembourg, Milan Branch, Piazza Cavour 2, 20121 Milano, Italy

RBC Investor Services Bank S.A., Milan BranchVia Vittor Pisani 26, 20124 Milano, Italy

State Street Bank S.p.A., Via Ferrante Aporti 10, 20125 Milano, Italy

Société Générale Securities Services S.A., Via Benigno Crespi 19A - MAC 2, 20159 Milano, Italy

Luxembourg paying and information agent:Société Générale Bank & Trust S.A., Centre operationnel, 28-32, place de la Gare, 1616 Luxembourg,Grand Duchy of Luxembourg

Portuguese distributor:Best - Banco Electrónico de Serviço Total, S.A., Praça Marquês de Pombal, no. 3 - 3º, 1250-161 Lisboa, Portugal

Spanish representative:Allfunds Bank, S.A., Calle Estafeta, No 6 Complejo Plaza de la Fuente, La Moraleja 28109, Alcobendas, Madrid, Spain

Swedish paying agent:Nordea Bank AB (publ), Smålandsgatan 17, 105 71 Stockholm, Sweden

Swiss paying agent and representative:Société Générale, Paris, Zurich Branch, Talacker 50, 8021 Zurich, Switzerland

Authorised Corporate Director’sResponsibilities

The Authorised Corporate Director (ACD) is required to prepare annualand interim long reports for the Company. The ACD must ensure thatthe financial statements, contained in this report, for each of the fundsare prepared in accordance with the Investment Association Statementof Recommended Practice for Financial Statements of UK AuthorisedFunds (SORP) and UK Financial Reporting Standards, and give a trueand fair view of the net revenue or expenses and net capital gains orlosses for the accounting period, and the financial position at the endof that period.

The ACD is required to keep proper accounting records, and to managethe Company in accordance with the Collective Investment Schemessourcebook, as issued (and amended) by the FCA, the Instrument ofIncorporation and the Prospectus, and to take reasonable steps for theprevention and detection of fraud or other irregularities.

Directors’ statement

This report has been prepared in accordance with the requirementsof the Collective Investment Schemes sourcebook, as issued andamended by the Financial Conduct Authority.

G N COTTON }DirectorsL J MUMFORD

15 July 2019

ANNUAL LONG REPORT AND AUDITED FINANCIAL STATEMENTS • May 2019 3

M&G Investment Funds (2) Authorised Corporate Director’s Report

Investor information

Statement of the Depositary’sResponsibilities and Report of theDepositary to the Shareholders of M&G Investment Funds (2) (‘the Company’) for the year ended31 May 2019

The Depositary must ensure that the Company is managed inaccordance with the Financial Conduct Authority’s CollectiveInvestment Schemes sourcebook, the Open-Ended InvestmentCompanies Regulations 2001 (SI2001/1228) (the OEIC Regulations),as amended, the Financial Services and Markets Act 2000, as amended, (together ‘the Regulations’), the Company’s Instrumentof Incorporation and Prospectus (together ‘the Scheme documents’)as detailed below.

The Depositary must in the context of its role act honestly, fairly,professionally, independently and in the interests of the Company andits investors.

The Depositary is responsible for the safekeeping of all custodialassets and maintaining a record of all other assets of the Companyin accordance with the Regulations.

The Depositary must ensure that:

• the Company’s cashflows are properly monitored and that cash ofthe Company is booked into the cash accounts in accordance withthe Regulations;

• the sale, issue, redemption and cancellation of shares are carriedout in accordance with the Regulations;

• the value of shares in the Company is calculated in accordancewith the Regulations;

• any consideration relating to transactions in the Company’s assetsis remitted to the Company within the usual time limits;

• the Company’s income is applied in accordance with theRegulations; and

• the instructions of the Authorised Fund Manager (‘the AFM’) arecarried out (unless they conflict with the Regulations).

The Depositary also has a duty to take reasonable care to ensure thatthe Company is managed in accordance with the Regulations and theScheme documents in relation to the investment and borrowingpowers applicable to the Company.

Having carried out such procedures as we consider necessary todischarge our responsibilities as Depositary of the Company, it is ouropinion, based on the information available to us and the explanationsprovided, that in all material respects the Company, acting throughthe AFM:

(i) has carried out the issue, sale, redemption and cancellation, andcalculation of the price of the Company’s shares and theapplication of the Company’s income in accordance with theRegulations and the Scheme documents of the Company, and

(ii) has observed the investment and borrowing powers andrestrictions applicable to the Company.

Edinburgh NatWest Trustee and15 July 2019 Depositary Services Limited


M&G Investment Funds (2) Depositary’s Responsibilities and Report

Independent Auditor’s Report to the shareholders of M&G Investment Funds (2)Opinion

We have audited the financial statements of M&G Investment Funds (2)ICVC (“the Company”) for the year ended 31 May 2019 which comprisethe Statement of Total Return and Statement of Change in Net AssetsAttributable to Shareholders together with the Balance Sheet for eachof the Company’s funds, the accounting policies of the Company, therelated notes for each fund and the Distribution Tables, including thesummary of significant accounting policies. The financial reportingframework that has been applied in their preparation is applicable lawand United Kingdom Accounting Standards (United Kingdom GenerallyAccepted Accounting Practice) including FRS 102 ‘The FinancialReporting Standard applicable to the UK and Republic of Ireland’.

In our opinion, the financial statements:

• give a true and fair view of the financial position of the Companycomprising each of its funds as at 31 May 2019 and of the netrevenue and the net capital (losses) on the scheme property of theCompany comprising each of its funds for the year then ended; and

• have been properly prepared in accordance with United KingdomGenerally Accepted Accounting Practice including FRS 102 ‘The Financial Reporting Standard applicable in the UK andRepublic of Ireland’.

Basis for opinion

We conducted our audit in accordance with International Standardson Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilitiesunder those standards are further described in the Auditor’sresponsibilities for the audit of the financial statements section of ourreport below. We are independent of the Company in accordance withthe ethical requirements that are relevant to our audit of the financialstatements in the UK, including the FRC’s Ethical Standard, and wehave fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relationto which the ISAs (UK) require us to report to you where:

• the ACD’s use of the going concern basis of accounting in thepreparation of the financial statements is not appropriate; or

• the ACD has not disclosed in the financial statements any identifiedmaterial uncertainties that may cast significant doubt about thecompany’s ability to continue to adopt the going concern basis ofaccounting for a period of at least twelve months from the date whenthe financial statements are authorised for issue.

Other information

The other information comprises the information included in the annualreport, other than the financial statements and our auditor’s reportthereon. The ACD is responsible for the other information.

Our opinion on the financial statements does not cover the otherinformation and, except to the extent otherwise explicitly stated in thisreport, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, ourresponsibility is to read the other information and, in doing so, considerwhether the other information is materially inconsistent with thefinancial statements or our knowledge obtained in the audit orotherwise appears to be materially misstated. If we identify suchmaterial inconsistencies or apparent material misstatements, we arerequired to determine whether there is a material misstatement in thefinancial statements or a material misstatement of the otherinformation. If, based on the work we have performed, we concludethat there is a material misstatement of the other information, we arerequired to report that fact.

We have nothing to report in this regard.

Opinions on other matters prescribed by the rules of the Collective Investment Schemes sourcebook of the Financial Conduct Authority

In our opinion:

• the financial statements have been properly prepared in accordancewith the Statement of Recommended Practice relating to AuthorisedFunds, the rules of the Collective Investment Schemes sourcebookof the Financial Conduct Authority and the Instrument ofIncorporation;

• the information given in the ACD’s report for the financial year forwhich the financial statements are prepared is consistent with thefinancial statements; and

• there is nothing to indicate that proper accounting records have notbeen kept or that the financial statements are not in agreement withthose records.

Matters on which we are required to report byexception

We have nothing to report in respect of the following matter in relationto which the rules of the Collective Investment Schemes sourcebookof the Financial Conduct Authority require us to report to you if, in ouropinion:

• we have not received all the information and explanations which, tothe best of our knowledge and belief, are necessary for thepurposes of our audit.

Responsibilities of the Authorised Corporate Director(ACD)

As explained more fully in the ACDs’ responsibilities statement set outon page 3, the ACD is responsible for the preparation of the financialstatements and for being satisfied that they give a true and fair view,and for such internal control as the ACD determines is necessary toenable the preparation of financial statements that are free frommaterial misstatement, whether due to fraud or error.

In preparing the financial statements, the ACD is responsible forassessing the Company’s ability to continue as a going concern,disclosing, as applicable, matters related to going concern and usingthe going concern basis of accounting unless the ACD either intendsto liquidate the Company or to cease operations, or has no realisticalternative but to do so.


M&G Investment Funds (2)Independent Auditor’s Report

Auditor’s responsibilities for the audit of the financialstatements

Our objectives are to obtain reasonable assurance about whether thefinancial statements as a whole are free from material misstatement,whether due to fraud or error, and to issue an auditor’s report thatincludes our opinion. Reasonable assurance is a high level ofassurance, but is not a guarantee that an audit conducted inaccordance with ISAs (UK) will always detect a material misstatementwhen it exists. Misstatements can arise from fraud or error and areconsidered material if, individually or in the aggregate, they couldreasonably be expected to influence the economic decisions of userstaken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financialstatements is located on the Financial Reporting Council’s website athttps://www.frc.org.uk/auditorsresponsibilities. This description formspart of our auditor’s report.

Use of our report

This report is made solely to the Company’s shareholders, as a body,pursuant to Paragraph 4.5.12 of the rules of the Collective InvestmentSchemes sourcebook of the Financial Conduct Authority. Our auditwork has been undertaken so that we might state to the Company’sshareholders those matters we are required to state to them in anauditor’s report and for no other purpose. To the fullest extent permittedby law, we do not accept or assume responsibility to anyone other thanthe Company and the Company’s shareholders as a body, for our auditwork, for this report, or for the opinions we have formed.

Edinburgh Ernst & Young LLP15 July 2019 Statutory Auditor

1. The maintenance and integrity of the M&G website is the responsibility of the

ACD; the work carried out by the auditors does not involve consideration of these

matters and, accordingly, the auditors accept no responsibility for any changes

that may have occurred to the financial statements since they were initially

presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination

of financial statements may differ from legislation in other jurisdictions.


M&G Investment Funds (2) Independent Auditor’s Report

Independent Auditor’s Report to the shareholders of M&G Investment Funds (2)

The financial statements for M&G Investment Funds (2) comprise theindividual financial statements for each fund and the notes below.

Notes to the financial statements

1 Statement of compliance

The financial statements of M&G Investment Funds (2) have beenprepared in compliance with UK Financial Reporting Standard 102(FRS 102) and in accordance with the Statement of RecommendedPractice (SORP) for Authorised Funds issued by the InvestmentAssociation in May 2014.

2 Summary of significant accounting policies

a) Basis of preparation

The financial statements of M&G Investment Funds (2) areprepared on a going concern basis, under the historical costconvention as modified by the revaluation of certain financialassets and liabilities measured at fair value through profit or loss.

b) Functional and presentational currency

The functional and presentational currency of M&G InvestmentFunds (2) is UK sterling.

c) Exchange rates

Transactions in currencies other than each fund’s functionalcurrency are translated at the rate of exchange ruling on the dateof the transaction and where applicable assets and liabilities aretranslated into the fund’s functional currency at the rate ofexchange ruling as at 12 noon on 31 May 2019 being the lastbusiness day of the accounting period.

d) Investments - recognition and valuation

The provisions of both Section 11 and Section 12 of FRS 102have been applied in full. All investments have been designatedas fair value through profit and loss and recognised initially at fairvalue, which is normally the transaction price (excludingtransaction costs and accrued interest).

At the end of the reporting period all investments have beenmeasured at their fair value using the prices and the portfolioholdings determined at 12 noon on 31 May 2019, being the lastvaluation point of the accounting period, as this is not materiallydifferent from a valuation carried out at close of business on thebalance sheet date.

Where separate bid and offer prices are available, the bid price isused for investment assets and the offer price for investmentliabilities. Otherwise, the single price or most recent transactionprice is used. Interest accrued is not included in the fair value. Themethods of determining fair value for the principal classes ofinvestment are:

• Equities and debt securities which are traded on an active marketare included at the quoted price, which is normally the bid price,excluding any accrued interest in respect of bonds.

• Equities traded on the Alternative Investment Market (AIM), whoseliquidity cannot be guaranteed, are included at their quoted bidprice as this represents the most objective and appropriate methodof valuation.

• Collective investment schemes operated by the ACD are includedat either their cancellation price for dual priced funds or their singleprice for single priced funds.

• Collective investment schemes operated by another manager areincluded at either their bid price for dual priced funds or their singleprice for single priced funds.

• Other equities and debt securities which are unquoted or notactively traded on a quoted market are included at a valueestimated by the ACD using an appropriate valuation technique,excluding any accrued interest in respect of bonds.

• Exchange traded futures and options are included at the cost ofclosing out the contract at the balance sheet date.

• Over the counter equity options, credit default swaps, interest rateswaps, asset swaps and inflation swaps are included at a valueprovided by Markit Valuations Limited, an independent creditderivative price provider. Their fair value excludes any accruedinterest in respect of derivatives where the income is revenue innature.

• Forward currency contracts, for share class hedging andinvestment, are included at a value determined by reference tocurrent forward exchange rates for contracts with similar maturityprofiles.

e) Recognition of income and expenses

• Dividends, including ordinary stock dividends, from equityinvestments are recognised when the security is quoted ex-dividend.

• Distributions from collective investment schemes are recognisedwhen the scheme is priced ex-distribution.

• Interest income, including coupons from debt securities and bankinterest is recognised on an accruals basis.

• Underwriting commission is recognised when the issue takesplace.

• Revenue from derivatives is recognised on an accruals basis.• Fee rebates from investing in other collective investment schemesare recognised on an accruals basis.

• Expenses are recognised on an accruals basis.f) Treatment of income and expenses

• Any increases or decreases in the fair value of investments andgains and losses realised on sales of investments are treated ascapital and recognised in net capital gains / (losses).

• The value of any enhancement to a stock dividend is treated ascapital.

• Ordinary equity dividends, including ordinary stock dividends aretreated as revenue.

• Special dividends, share buy backs or additional share issues maybe treated as revenue or capital depending on the facts of eachparticular case.

• Distributions from collective investment schemes are treated asrevenue in nature, except for any element of equalisation, whichrepresents the average amount of income included in the pricepaid for the collective investment scheme, which is treated ascapital.


M&G Investment Funds (2)Financial statements and notes

• Debt security interest comprises the coupon interest and thedifference between the purchase price and the expected maturityprice spread over its expected remaining life. This is treated asrevenue with the difference adjusting the cost of the shares andtreated as capital.

• Other interest income, such as bank interest is treated as revenue.• Underwriting commission is treated as revenue, except where thefund is required to take up all or some of the shares underwritten,in which case a proportion of the commission received is deductedfrom the cost of the shares and treated as capital.

• The treatment of the income on derivative contracts depends uponthe nature of the transaction. Both motive and circumstances areused to determine whether the returns should be treated as capitalor revenue. Where positions are undertaken to protect or enhancecapital, and the circumstances support this, the returns arerecognised in net capital gains; similarly where the motives andcircumstances are to generate or protect revenue, and thecircumstances support this, the returns are included within netrevenue before taxation. Where positions generate total returns itwill generally be appropriate to apportion such returns betweencapital and revenue to properly reflect the nature of thetransaction.

• Expenses relating to the purchase and sale of investments aretreated as capital; all other expenses are treated as revenue.

• Rebates of charges from holdings in collective investmentschemes are treated as revenue or capital in accordance with theunderlying scheme’s distribution policy.

g) Tax

Dividends and similar income receivable are recognised at an amount that includes any withholding tax but excludesirrecoverable tax credits. Any withholding tax suffered is shown aspart of the tax charge.

Tax is accounted for at the appropriate rate of corporation tax withrelief for double taxation taken where appropriate. The taxaccounting treatment follows the principal amounts involved.

Deferred tax is recognised in respect of temporary timingdifferences that have originated but not reversed by the balancesheet date. Deferred tax is measured on a non-discounted basis,at the average rate of tax expected to apply in the period in whichit expects the deferred tax to be realised or settled. A deferred taxasset is only recognised to the extent that it is more likely than notthat the asset will be recovered.

Marginal tax relief has not been taken into account in respect ofexpenses offset against capital.

h) Allocation of returns to share classes

The annual management charge, any share class hedging returnsand associated share class hedging charge are directlyattributable to individual share classes. All other returns areapportioned to each fund’s share classes pro-rata to the value of

the net assets of the relevant share class on the day that theincome or expenses are recognised.

All available net revenue accounted for in accordance with theabove policies and adjusted where relevant by any specificdistribution policies set out in the notes to that fund’s financialstatements, is distributed to holders of Income shares or retainedand reinvested for holders of Accumulation shares. Shouldexpenses and taxation together exceed revenue, there will be nodistribution and the shortfall will be met from capital.

Distributions which have remained unclaimed by shareholders formore than six years are credited to the capital property of the fund.

3 Risk management policies

The ACD is responsible for establishing, implementing and maintainingan adequate and documented risk management policy for identifying,measuring and managing all risks to which funds are or might beexposed.

The Company’s investment activities expose it to various types of riskwhich are associated with the financial instruments and markets inwhich it invests; market risk, credit risk and liquidity risk.

These financial statements are designed to enable users to evaluatethe nature and extent of those risks and how they are managed.

The following risk management policies are applicable to the funds,with specific risk disclosures set out in the notes to the financialstatements of each fund.

Market risk

Market risk is the risk of loss resulting from fluctuations in the marketvalue of positions in a fund’s portfolio attributable to changes in marketvariables, such as interest rates, exchange rates, equity andcommodity prices or an issuer’s creditworthiness.

In relation to market risk, processes are applied that take account ofthe investment objective and policy of each fund. All funds are subjectto an investment oversight process in accordance with the type andnature of the fund. In addition all funds are monitored for compliancewithin regulatory limits.

In measuring and monitoring market risk, the global exposure of a fundmay be calculated using a ‘commitment’ approach or ‘Value at Risk’(VaR) approach.

Commitment approach

The commitment approach is applied for funds investing only intraditional asset classes, namely equities, fixed income, money marketinstruments and collective investment schemes.

In addition, the approach is applied for funds which use or intend touse derivatives or instruments embedding derivatives, but only forefficient portfolio management purposes, or in a simple way notnecessarily restricted to efficient portfolio management.

Under the commitment approach the global exposure of funds ismeasured and monitored using a commitment (adjusted notional)methodology.

Market risk is considered on a daily basis and forms the foundation ofinvestment oversight analysis. This can include for each fund (but isnot limited to) the analysis of factors such as fund concentration; style,geographical, industry and market capitalisation biases; active,systematic and specific risk measurements; active money; and betacharacteristics.




2 Summary of significant accounting policies(continued)

f) Treatment of income and expenses (continued)

Value at Risk approach

The Value at Risk (VaR) approach is a methodology for estimatingthe maximum potential loss due to market risk based on historicmarket volatilities and correlations. More particularly, the VaRapproach gives a broad indication of the maximum potential loss ata given confidence level (probability), over a specific time period undernormal market conditions.

Instrument and portfolio modelling techniques are based on marketaccepted practices and are subject to regular audit (back-testing).Market risk factors that are analysed include LIBOR / swap rates,government yield curves, equity prices, exchange rates, marketvolatility, credit spreads and credit default swap (CDS) spreads.

The VaR model is based on a Monte Carlo process with actual VaRbeing reported on the basis of a 99% confidence interval over a onemonth period (20 business days). Risk factor history used in the MonteCarlo process is based on 250 business days. From the variance /covariance matrices, a parametric Monte Carlo scenario set of 5,000simulations is derived and applied to the fund.

VaR does have limitations in its ability to present valid levels of risk inextreme market conditions. Accordingly, the Risk Analysis team alsocarries out monthly stress testing and scenario based analysis. Stresstesting allows for extreme sets of market circumstances which maynot be reflected in historical data sets thereby enabling furtherassessment of combinations of market movements which may causeserious damage to portfolio values. The key element to the scenariobased analysis is challenging the correlation assumptions implicitwithin statistical based models such as VaR.

The stress test and scenario based analysis is customised for eachfund type and the VaR analysis is produced on a daily basis.

The table below shows funds using the ‘commitment’ approach andthose using the ‘Value at Risk (VaR)’ approach:Fund Global exposure approach

M&G Gilt & Fixed Interest Income Fund VaR

M&G Global High Yield Bond Fund VaR

M&G Index-Linked Bond Fund VaR

M&G Index Tracker Fund Commitment

M&G Short Dated Corporate Bond Fund VaR

M&G UK Income Distribution Fund Commitment

M&G UK Select Fund Commitment

Liquidity risk

Liquidity risk is the risk that a fund’s holdings cannot be sold, liquidatedor closed out at limited cost in an adequately short time frame and thatthe ability of the scheme to comply at any time with its obligation tosell and redeem shares is thereby compromised.

The overall liquidity profile for each fund is reviewed and updatedregularly. The liquidity profile takes into account investment, cashflowand market liquidity considerations.

Investment liquidity considerations include an assessment of assetclass liquidity conditions, liquidity of underlying holdings, portfolioconstruction and concentration, the scale of individual stock ownershipand the nature of the investment strategy.

Cashflow liquidity is managed in each fund on a daily basis usingreports that include subscription and redemption information as wellas the impact of trading, derivative lifecycle events and corporateaction activity. In addition to the daily reporting, the fund managers areprovided with reporting that highlights the impact of reasonablypredictable events in the portfolio, including an allowance for thepotential future exposures that might result from derivative exposures.

Market (or distribution-related) considerations include an assessmentof asset demand, fund growth, client concentration and the persistencyof the client base. Supplementary to this, market liquidity stress testsare carried out on a monthly basis for all sophisticated funds.

Credit risk

For funds exposed to credit risk, the credit rating, yield and maturity ofeach interest bearing security is considered to determine if the yieldfully reflects the risk. The capital value of interest-bearing securitieswithin the funds will fall in the event of the default or perceivedincreased credit risk of an issuer.

The capital value of interest-bearing securities within a fund may alsobe affected by interest rate fluctuations such that when interest ratesrise, the capital value of the interest-bearing securities is likely to falland vice versa.

Funds investing in derivatives are exposed to counterparty risk. Thisis the risk that the other party to the transaction fails to fulfil theirobligations, either by failing to pay or failing to deliver securities. Tominimise this risk, carefully selected, financially strong and well-established counterparties are selected following a thorough duediligence review and collateral is posted daily (in the form of cash orhigh-quality government bonds). Derivative positions are valued on amark-to-market basis (revalued to reflect prevailing market prices) dailyand collateral moves from one counterparty to the other to reflectmovements in the unrealised profit or loss. As a result, the maximumloss to the fund would be limited to that day’s price movements inaffected derivatives contracts.

For funds in which they are used, credit default swaps are bought andsold in response to detailed credit research to take advantage ofanticipated movements in credit spreads on individual stocks andbaskets of securities. When a fund buys a credit default swap thedefault risk associated with the underlying security transfers to thecounterparty. When a fund sells a credit default swap the fundassumes the credit risk of the underlying security.




3 Risk management policies (continued)



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Investment objective

The fund aims to provide income and capital growth.

Investment policy

At least 70% of the fund is invested in short, medium or long-datedgilts according to the fund manager’s view at any given moment of thelikely course of interest rates and trend of the gilt market. The fund’sexposure to gilts may be gained through the use of derivatives.Derivatives may also be used for efficient portfolio management. TheFund may also invest in collective investment schemes, othertransferable securities, other debt instruments, cash, near cash, othermoney market securities, warrants and other derivative instruments.

Investment approach

The fund manager’s investment approach is driven primarily bymacroeconomic factors such as views on interest rates, inflation andeconomic growth and tends not to be influenced by short-termchanges in the economic or market environment.

Risk profile

The fund invests in fixed income securities, or bonds, issued by the UK government. It is, therefore, subject to the price volatility of theUK government bond market. It is also influenced by developments inthe broader global government bond market. UK government bondsare highly liquid securities, meaning they are normally traded withrelative ease.

The fund’s exposure to debt securities may be gained through the useof derivatives. In association with the use of derivatives, includingthose instruments not traded through an exchange, collateral isdeposited in order to mitigate the risk that a counterparty may defaulton its obligations or become insolvent.

Portfolio diversification is key in managing liquidity and default risks aswell as reducing market risk. The fund’s risks are measured andmanaged as an integral part of the investment process.

The following table shows the risk number associated with the fundand is based on Sterling Class ‘A’ shares.

The above 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 so may not be a reliable indicator of the future

risk profile of the fund.

• is not guaranteed and may change over time and the lowest risk number does not

mean risk free.

• has not changed during this period.

Low risk High risk

Typically lower rewards Typically higher rewards

1 2 3 4 5 6 7

Investment review

As at 3 June 2019, for the year ended 31 May 2019

Performance against objective

Between 1 June 2018 (the start of the review period) and 3 June 2019,the M&G Gilt & Fixed Interest Income Fund’s Sterling Class ‘A’ and ‘I’shares delivered a total return (the combination of income and growthof capital) of 4.2% and 4.4%, respectively. This was behind theaverage return from the fund’s peer group, the IA UK Gilts sector, whichwas 5.0% over the same period.

Over this reporting period, the fund has met its objective of providingincome and capital growth. The fund has also met its objective overthree and five years and since launch.*

* For the performance of each share class, please refer to the ‘Long-term

performance by share class’ table in the ‘Fund performance’ section of this report.

Investment performance

UK government bonds (also known as gilts) were favoured by investorsduring periods of increased uncertainty with regard to the country’sBrexit discussions, in particular fears of a disorderly or ‘hard’ Brexit,as investors turned to the perceived safety of government bonds. Giltswere also supported at times of heightened international tradetensions. (Bonds are loans in the form of a security, usually issued bya government (government bonds) or a company (corporate bonds),which normally pay a fixed rate of interest over a given period, at theend of which the initial amount borrowed is repaid.)

A variety of factors weighed on investor sentiment throughout thesecond half of 2018, including concerns about the negative impact ofrising US interest rates, escalating trade war tensions between the USand China, and political turmoil in Europe and several emergingmarkets. The mood then changed in early 2019, as investors tookcomfort from statements by the US Federal Reserve that it wouldmoderate its strategy of raising interest rates, due to the globaleconomic slowdown, lower oil prices and muted domestic inflation.However, a deterioration in US-China trade developments as well asevents in UK domestic politics led to a pronounced ‘risk-off’ mood atthe end of the period under review, which led to strong returns for giltsin May 2019.

In terms of political developments, Brexit talks continued to dominatethe headlines in the UK over the period under review. Prime MinisterTheresa May secured a withdrawal treaty with the European Union(EU), but members of parliament have rejected the treaty three times.The original date for Brexit came and went and a new deadline of 31 October 2019 has been agreed. However, the UK was compelledto hold elections to the European Parliament in May. Theresa Mayresigned, paving the way for a new prime minister and potentiallyincreasing the possibility of a ‘no deal’.

The UK economy has held up fairly well, with interest rates relativelylow and record high employment levels, while UK companies’ balancesheets are well capitalised. In general terms, domestic growth appearsto have been hampered as firms delay investment decisions due toBrexit-related uncertainty. However, a surge in business activity inspring 2019 appears to reflect companies’ preparation for potentialBrexit-related difficulties.


M&G Gilt & Fixed Interest Income Fund Authorised Corporate Director’s Report

The Bank of England raised interest rates by a quarter of a percentagepoint in August 2018, taking them to 0.75%. However, further increasesare likely to be closely linked to Brexit developments and prospects forthe domestic economy. In the current uncertain environment, changesto interest rates are likely to be limited and gradual. UK inflation, asmeasured by the Consumer Prices Index, stood at 2.0% in May,compared with a five-year high of 3.1% in November 2017.

In the US, the Federal Reserve (Fed) increased interest rates threetimes during the review period − in June, September and December2018 – each time by a quarter of a percentage point. Meanwhile, aftersome weakness in early 2019, the news from Europe has been morepositive recently, with stronger-than-expected economic growth,although it remains lacklustre.

Overall, UK government bonds rose in value over the 12 months underreview, buoyed by investor demand for safe-haven assets amid theeconomic and geopolitical uncertainties. Gilts with the longest timeuntil repayment (+15 years) delivered the strongest gains (6%), whilereturns from issues maturing in less than five years were comparativelymodest (+1.3%).

Investment activities

The fund’s performance is affected by its ‘duration’, which refers to theportfolio’s sensitivity to changes in interest rates.

For some time, we have positioned the portfolio to be less sensitive tothe possibility of rising interest rates and we broadly maintained thisposition over the 12 months under review. However, we may look toincrease duration in the coming months as we are unconvinced aboutthe market’s expectation of cuts in US interest rates in the rest of thisyear. Furthermore, the UK economy continues to advance, albeitmodestly, despite Brexit-related uncertainty, making cuts in thedomestic interest rate less likely.

Government bonds with a short time until repayment are often lesssensitive to interest rate movements than bonds with a longer maturitydate. We generally favour gilts maturing in 7-10 years, while we alsofavour gilts maturing in 25-30 years. We also see value in gilts maturingin 35-40 years.

We continued to find ‘relative value’ opportunities within the gilt market,which involved buying the gilts that seemed to offer the most attractivevalue. For example, we sold some positions in gilts maturing in 30years, instead buying some maturing in 40 years, which appearedmore attractively valued. In other activities, we switched out of someUS dollar-denominated holdings – bonds from KfW and EuropeanInvestment Bank – after they had performed better than their sterling equivalents.

Outlook

At the time of writing, the outlook remains relatively uncertain due toa lack of clarity about Brexit, while global economic growth appearsto be easing and international trade wars continue. Despite theabsence of any meaningful progress regarding Brexit, the UKeconomy is still growing, albeit at a modest pace with a lack ofbusiness investment and slower economic activity among the UK’smain trading partners acting as a drag. Recent data suggest that UKmanufacturing and construction declined in May 2019, while growthcontinues in the important services sector, but remains modest.

Following Theresa May’s resignation, a multi-candidate leadershipcontest is expected to see a new prime minister in place by the end ofJuly, with the outcome likely to affect the course of the Brexitnegotiations. This in turn will have a significant influence on prospectsfor the UK economic and political backdrop. Leaving the EU without adeal would probably weaken sterling, which could lead to higher importcosts and potentially higher inflation. In contrast, a more orderly exitmay prove supportive to sterling.

Gilts tend to be favoured by investors during volatile periods due totheir perceived status as a lower risk asset class. We therefore feelthat UK government bonds should prove attractive to investors in thecurrent uncertain climate.

Matthew Russell 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 performance (continued)

Investment review

Portfolio statement

as at 31 May 2019 2019 2018Holding £’000 % %

FIXED INCOME 551,536 98.51 98.73 Debt securities 552,159 98.62 98.75 ‘AAA’ credit rated bonds 57,849 10.33 6.78 £8,000,000 European Investment Bank 0.875% 15/12/2023 7,968 1.42

£7,000,000 European Investment Bank 2.5% 31/10/2022 7,375 1.32

£6,000,000 European Investment Bank 4.5% 07/06/2029 7,802 1.39

£3,500,000 FMS Wertmanagement 1.125% 07/09/2023 3,523 0.63

£25,000,000 KfW 1.125% 07/12/2021 25,141 4.49

£6,000,000 Nordic Investment Bank 1.125% 15/12/2023 6,040 1.08

‘AA’ credit rated bonds 483,292 86.32 90.40 £5,677,535 CTRL Section 1 Finance 5.234% 02/05/2035 7,403 1.32

£6,000,000 NRW Bank 1% 15/06/2022 6,000 1.07

£5,000,000 Transport for London 3.875% 23/07/2042 6,359 1.14

£76,200,000 UK Treasury 1.5% 22/07/2026 80,471 14.37

£26,000,000 UK Treasury 1.5% 22/07/2047 26,236 4.69

£30,000,000 UK Treasury 1.625% 22/10/2028 32,055 5.73

£33,000,000 UK Treasury 1.75% 07/09/2022 34,269 6.12

£12,000,000 UK Treasury 1.75% 22/01/2049 12,834 2.29

£45,000,000 UK Treasury 1.75% 22/07/2057 49,893 8.91

£18,000,000 UK Treasury 2.5% 22/07/2065 24,985 4.46

£12,000,000 UK Treasury 3.25% 22/01/2044 16,445 2.94

£3,000,000 UK Treasury 3.5% 22/07/2068 5,281 0.94

£46,000,000 UK Treasury 3.75% 07/09/2020 47,790 8.54

£5,000,000 UK Treasury 3.75% 07/09/2021 5,357 0.96

£22,000,000 UK Treasury 4.25% 07/12/2040 33,656 6.01

£10,000,000 UK Treasury 4.25% 07/12/2046 16,300 2.91

£5,000,000 UK Treasury 4.5% 07/09/2034 7,299 1.30

£48,000,000 UK Treasury 6% 07/12/2028 70,659 12.62

‘A’ credit rated bonds 4,988 0.89 0.83 £5,000,000 Deutsche Pfandbriefbank 1% 04/12/2020 4,988 0.89

Bonds with no credit rating 6,030 1.08 0.74 £4,392,000 PRS Finance 1.75% 24/11/2026 4,534 0.81

£1,439,000 PRS Finance 2% 23/01/2029 1,496 0.27

Debt derivatives (623) (0.11) (0.02) Interest rate futures (623) (0.11) (0.02) (502) UK Long Gilt Bond Sep 2019 (623) (0.11)

Portfolio of investments 551,536 98.51 98.73

CASH EQUIVALENTS 782 0.14 0.13 ‘AAA’ rated money market funds [a] 782 0.14 0.13 782,000 Northern Trust Global Fund - Sterling 782 0.14

Total portfolio (notes 2c & 2d on page 7) 552,318 98.65 98.86Net other assets / (liabilities) 7,551 1.35 1.14

Net assets attributable to shareholders 559,869 100.00 100.00

All securities are on an official stock exchange listing except where referenced.

[a] Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the

aim of reducing counterparty risk.



Investments

Fund performance

Please note past performance is not a guide to future performanceand 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 notget back the original amount you invested.

The following chart and tables show the performance for two of thefund’s share classes – Sterling Class ‘A’ (Accumulation) shares andSterling Class ‘I’ (Accumulation) shares.

We show performance for these two share classes because:

• The performance of the Sterling Class ‘A’ (Accumulation) share iswhat most individuals investing directly with M&G have received. Ithas the highest ongoing charge of all the sterling share classes.Performance is shown after deduction of this charge. All UKinvestors in the fund therefore received this performance or better.

• The performance of the Sterling Class ‘I’ (Accumulation) share isthe most appropriate to compare with the average performance ofthe fund’s comparative sector. It is the share class used by theInvestment Association in the calculation of the comparativesector’s average performance. This share class is available fordirect investment with M&G subject to minimum investment criteria, or via third parties who may charge additional fees. Theperformance shown takes the deduction of the ongoing charge forthis share class into account but it does not take account of chargesapplied by any other party through which you may have invested.

The fund is available for investment in different share classes, each with varying levels of charges and minimum investments; please refer to the Prospectus for M&G Investment Funds (2), which is available free of charge either from our website atwww.mandg.co.uk/prospectuses or by calling M&G CustomerRelations.

Fund level performance

Fund net asset value

2019 2018 2017as at 31 May £’000 £’000 £’000

Fund net asset value (NAV) 559,869 596,796 648,310

Performance since launch

To give an indication of how the fund has performed since launch, thechart below shows total return of Sterling Class ‘A’ (Accumulation)shares and Sterling Class ‘I’ (Accumulation) shares.

The fund’s Sterling Class ‘I’ (Accumulation) shares were launched on3 August 2012. Performance data shown prior to this date is that ofthe fund’s Sterling Class ‘A’ (Accumulation) shares.

To give an indication of the performance of the fund, the following table shows the compound rate of return, per annum, over the period.Calculated on a price to price basis with income reinvested.

Long-term performance by share class

One Three Five Since year years years launch 01.06.18 03.06.16 03.06.14 % [a] % p.a. % p.a. % p.a.

Sterling [b] Class ‘A’ +4.2 +2.8 +4.7 +6.7 [c]

Class ‘I’ +4.4 +3.0 +5.0 +3.2 [d]

[a] Absolute basis.

[b] Price to price with income reinvested.

[c] 9 December 1980, the end of the initial offer period of the predecessor unit trust.

[d] 3 August 2012, the launch date of the share class.

150

200

300

500

700

1,000

1,500

120

10090

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 13 15 17 1911

Sterling Class ‘I’ (Accumulation) shares*

December 1980 = 100, plotted monthly Chart date 3 June 2019


Sterling Class ‘A’ (Accumulation) shares*

Morningstar (IA) UK Gilts sector average*

* Income reinvested Source: Morningstar, Inc. and M&G


M&G Gilt & Fixed Interest Income Fund Financial highlights

Operating charges and portfoliotransaction costs

We explain below the payments made to meet the ongoing costs ofinvesting and managing the fund, comprising operating charges andportfolio transaction costs.

Operating charges

Operating charges include payments made to M&G and to providersindependent of M&G:

• Investment management: Charge paid to M&G for investmentmanagement of the fund (also known as Annual ManagementCharge).

• Administration: Charge paid to M&G for administration servicesin addition to investment management – any surplus from thischarge will be retained by M&G.

• Oversight and other independent services: Charges paid toproviders independent of M&G for services which includedepositary, custody and audit.

• Ongoing charges from underlying funds: Ongoing charges onholdings in underlying funds that are not rebated.

The operating charges paid by each share class of the fund are shownin the following performance tables. Operating charges do not includeportfolio transaction costs or any entry and exit charges (also known asinitial and redemption charges). The charging structures of shareclasses may differ, and therefore the operating charges may differ.

Operating charges are the same as the ongoing charges shown in theKey Investor Information Document, other than where an estimate hasbeen used for the ongoing charge because a material change has madethe operating charges unreliable as an estimate of future charges.

For this fund there is no difference between operating charges andongoing charges figures, unless disclosed under the specific shareclass performance table.

Portfolio transaction costs

Portfolio transaction costs are incurred by funds when buying andselling investments. These costs vary depending on the types ofinvestment, their market capitalisation, country of exchange andmethod of execution. They are made up of direct and indirect portfoliotransaction costs:

• Direct portfolio transaction costs: Broker execution commissionand taxes.

• Indirect portfolio transaction costs: ‘Dealing spread’ – thedifference between the buying and selling prices of the fund’sinvestments; some types of investment, such as fixed interestsecurities, have no direct transaction costs and only the dealingspread is paid.

Investments are bought or sold by a fund when changes are made tothe investment portfolio and in response to net flows of money into orout of the fund from investors buying and selling shares in the fund.

To protect existing investors, portfolio transaction costs incurred as aresult of investors buying and selling shares in the fund are recoveredfrom those investors through a ‘dilution adjustment’ to the price theypay or receive. As the fund invests mainly in fixed interest securities,the direct transaction costs paid on other investments are too small tobe reflected in the table below. To give an indication of the indirectportfolio dealing costs the table below shows the average portfoliodealing spread.

Further information on this process is in the Prospectus, which isavailable free of charge on request either from our website atwww.mandg.co.uk/prospectuses or by calling M&G Customer Relations.


as at 31 May 2019 2018 2017 Average [a]

Indirect portfolio transaction costs % % % %

Average portfolio dealing spread 0.07 0.08 0.07 0.07

[a] Average of first three columns.



Fund performance

Specific share class performance

The following tables show the performance of each share class. All‘Performance and charges’ percentages represent an annual rateexcept for the ‘Return after operating charges’ which is calculated asa percentage of the opening net asset value per share (NAV). ‘Dilutionadjustments’ are only in respect of direct portfolio transaction costs.

Sterling Class ‘A’ Income share performanceThe share class was launched on 9 December 1980.

for the year to 31 May 2019 2018 2017Change in NAV per share UK p UK p UK p

Opening NAV 98.07 100.31 94.61

Return before operating charges and after directportfolio transaction costs 4.56 (0.16) 7.67

Operating charges (0.89) (0.89) (0.91)

Return after operating charges 3.67 (1.05) 6.76

Distributions (1.34) (1.19) (1.06)

Closing NAV 100.40 98.07 100.31

Direct portfolio transaction costs UK p UK p UK p

Costs before dilution adjustments 0.00 0.00 0.00

Dilution adjustments [a] 0.00 0.00 0.00

Total direct portfolio transaction costs 0.00 0.00 0.00

Performance and charges % % %

Direct portfolio transaction costs [b] 0.00 0.00 0.00

Operating charges 0.91 0.91 0.91

Return after operating charges +3.74 -1.05 +7.15

Distribution yield 1.32 1.28 1.16

Effect on yield of charges offset against capital 0.90 0.90 0.90

Other information

Closing NAV (£’000) 33,890 69,191 81,898

Closing NAV percentage of total fund NAV (%) 6.05 11.59 12.63

Number of shares 33,755,518 70,551,081 81,642,684

Highest share price (UK p) 100.74 100.37 105.49

Lowest share price (UK p) 94.16 95.01 95.31

Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 9 December 1980.


Opening NAV 556.19 562.03 524.72




Distributions (2.65) (1.75) (2.62)

Retained distributions 2.65 1.75 2.33

Closing NAV 577.27 556.19 562.03











Other information

Closing NAV (£’000) 335,149 332,613 351,649


Number of shares 58,057,391 59,802,398 62,567,997



Sterling Class ‘I’ Income share performanceThe share class was launched on 3 August 2012.


Opening NAV 1,116.92 1,139.58 1,072.94




Distributions (15.29) (13.55) (12.92)

Closing NAV 1,146.29 1,116.92 1,139.58











Other information

Closing NAV (£’000) 37,391 40,417 43,948


Number of shares 3,261,897 3,618,641 3,856,533

Highest share price (UK p) 1,150.22 1,141.00 1,197.04

Lowest share price (UK p) 1,073.32 1,081.32 1,080.95



Sterling Class ‘I’ Accumulation share performanceThe share class was launched on 3 August 2012.


Opening NAV 1,187.96 1,197.44 1,115.43




Distributions (8.63) (6.67) (8.51)


Closing NAV 1,236.08 1,187.96 1,197.44











Other information

Closing NAV (£’000) 153,439 154,575 170,815


Number of shares 12,413,361 13,011,801 14,265,003



[a] In respect of direct portfolio transaction costs.

[b] As a percentage of average net asset value.





Statement of total return

2019 2018for the year to 31 May Note £’000 £’000 £’000 £’000

Income

Net capital gains / (losses) 3 17,466 (9,122)

Revenue 5 7,884 7,460

Expenses 6 (4,688) (5,017) ______ ______Net revenue / (expense) beforetaxation 3,196 2,443

Taxation 7 (2) 0 ______ ______Net revenue / (expense) aftertaxation 3,194 2,443

Total return before distributions 20,660 (6,679)Distributions 8 (3,782) (3,388)

Change in net assets attributableto shareholders from investmentactivities 16,878 (10,067)

Statement of change in net assets attributable to shareholders

2019 2018for the year to 31 May £’000 £’000 £’000 £’000

Opening net assets attributable toshareholders 596,796 648,310Amounts received on issue of shares 53,662 65,884

Amounts paid on cancellation of shares (110,223) (109,331) ______ ______ (56,561) (43,447)

Dilution adjustments 36 46

Change in net assets attributable toshareholders from investment activities(see above) 16,878 (10,067)

Retained distributions on Accumulationshares 2,716 1,947

Unclaimed distributions 4 7

Closing net assets attributable toshareholders 559,869 596,796

Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets

Fixed assets Investments 552,159 589,360

Current assets Debtors 9 4,804 6,739

Cash and bank balances 10 3,281 950

Cash equivalents 782 805

Total assets 561,026 597,854

Liabilities Investment liabilities (623) (146)

Creditors Bank overdrafts 0 (92)

Distribution payable (245) (348)

Other creditors 11 (289) (472)

Total liabilities (1,157) (1,058)

Net assets attributable to shareholders 559,869 596,796


1 Accounting policies

The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 7 and 8.

2 Distribution policy

In determining the amount available for distribution to Income shares,the annual management charge and administration charge are offsetagainst capital, increasing the amount available for distribution whilstrestraining capital performance to an equivalent extent.


3 Net capital gains / (losses) 2019 2018for the year to 31 May £’000 £’000

Non-derivative securities 19,659 (9,254)

Derivative contracts (1,592) 117

Currency gains / (losses) (596) 20

Transaction charges (5) (5)

Net capital gains / (losses) 17,466 (9,122)

4 Portfolio transactions and associated costs

The following tables show portfolio transactions and their associatedtransaction costs. For more information about the nature of the costsplease see the section on ‘Operating charges and portfolio transactioncosts’ on page 15.

2019 2018 for the year to 31 May £’000 £’000

a) Purchases Debt securities [a] 319,477 701,505

b) Sales Debt securities [a] 369,704 733,712

2019 % of 2018 % ofc) Direct portfolio transaction costs £’000 average NAV £’000 average NAV

Commissions paid Derivatives 2 0.00 1 0.00

Taxes paid Derivatives 2 0.00 0 0.00

Total direct portfolio transactioncosts 4 0.00 1 0.00

d) Indirect portfolio transaction costs % %

Portfolio dealing spread [b] 0.07 0.08

[a] These transaction types do not attract direct portfolio transaction costs.

[b] Average portfolio dealing spread at the balance sheet date.


M&G Gilt & Fixed Interest Income Fund Financial statements and notes

5 Revenue 2019 2018for the year to 31 May £’000 £’000

Bank interest 1 0

Derivative revenue (129) (106)

Interest distributions 24 16

Interest on debt securities 7,988 7,550

Total revenue 7,884 7,460

6 Expenses 2019 2018for the year to 31 May £’000 £’000

Payable to the ACD or associate Annual management charge 3,782 4,050

Administration charge 852 912

4,634 4,962

Payable to the Depositary or associate Depositary’s charge (including VAT) 39 41

Other expenses Audit fee (including VAT) 11 10

Safe custody charge 4 4

15 14

Total expenses 4,688 5,017

7 Taxation 2019 2018for the year to 31 May £’000 £’000

a) Analysis of charge in the year Corporation tax 0 0

Withholding tax 2 0

Deferred tax (note 7c) 0 0

Total taxation 2 0

b) Factors affecting taxation charge for the year Net revenue / (expense) before taxation 3,196 2,443

______ ______Corporation tax at 20% 639 489

Effects of:

Interest distributions (639) (489)

Withholding tax 2 0

Total tax charge (note 7a) 2 0

c) Provision for deferred taxation Provision at the start of the year 0 0

Deferred tax in profit and loss account (note 7a) 0 0

Provision at the end of the year 0 0

The fund has not recognised a deferred tax asset in the current financial year

(2018: same).

8 Distributions 2019 2018for the year to 31 May Inc [a] Acc [b] Inc [a] Acc [b]

Interest distributions £’000 £’000 £’000 £’000

First interim 258 666 371 518

Second interim 261 755 349 459

Third interim 238 635 334 445

Final 245 660 348 525

Total net distributions 3,718 3,349

Income deducted on cancellation of shares 102 83

Income received on issue of shares (38) (44)

Distributions 3,782 3,388

Net revenue / (expense) per statement oftotal return 3,194 2,443

Expenses offset against capital 588 945


[a] Distributions payable on Income shares.

[b] Retained distributions on Accumulation shares.

9 Debtors 2019 2018as at 31 May £’000 £’000

Amounts receivable on issues of shares 0 530

Debt security interest receivable 4,804 6,208

Distributions receivable 0 1

Total debtors 4,804 6,739

10 Cash and bank balances 2019 2018as at 31 May £’000 £’000

Amounts held at futures clearing houses and collateral manager 1,335 950

Cash held as bank balances 1,946 0

Total cash and bank balances 3,281 950

11 Other creditors 2019 2018as at 31 May £’000 £’000

ACD’s annual management charge payable 112 108

Administration charge payable 25 24

Amounts payable on cancellation of shares 134 320

Derivative expense payable 2 6

Expenses payable 16 14

Total other creditors 289 472

12 Contingent assets, liabilities and outstandingcommitments

There were no contingent assets, liabilities or outstandingcommitments at the balance sheet date (2018: same).




13 Shares in issue

The following table shows each class of share in issue during the year.Each share class has the same rights on winding up however theymay have different charging structures as set out in note 14.

Opening Movements ClosingShare class 01.06.18 Issued Cancelled 31.05.19

Sterling Class ‘A’ Income 70,551,081 2,406,783 (39,202,346) 33,755,518

Class ‘A’ Accumulation 59,802,398 5,733,093 (7,478,100) 58,057,391

Class ‘I’ Income 3,618,641 263,941 (620,685) 3,261,897

Class ‘I’ Accumulation 13,011,801 1,403,049 (2,001,489) 12,413,361

14 Charging structure

The table below sets out the charging structure for each class of share.The charging structure is the same for both Income and Accumulationshares of each class. Annual Entry Exit management charge charge chargeShare class % % %

Sterling Class ‘A’ nil n/a 0.75

Class ‘I’ nil n/a 0.50

15 Related parties

M&G Securities Limited, as Authorised Corporate Director (ACD), is arelated party and acts as principal on all the transactions of shares inthe fund except with in specie transactions, where M&G SecuritiesLimited acts as an agent. The aggregate monies received throughissues, and paid on cancellations, are disclosed in the ‘Statement ofchange in net assets attributable to shareholders’ and note 8. Amountsdue to / from M&G Securities Limited in respect of share transactionsat the year end are disclosed in notes 9 and 11 where applicable.

Amounts paid to M&G Securities Limited in respect of the ACD’sannual management charge and administration charge are disclosedin note 6. Amounts due at the year end in respect of the ACD’s annualmanagement charge and administration charge are disclosed in note 11.

At the balance sheet date, shareholders from within Prudential plc, ofwhich M&G Securities Limited is a wholly owned subsidiary, haveholdings totalling 47.07% (2018: 48.21%) of the fund’s shares.

16 Events after the balance sheet date

There were no events after the balance sheet date to disclose.

17 Fair value analysis

Financial instruments have been measured at their fair value and havebeen classified below using a hierarchy that reflects the significanceof the inputs used in measuring their fair value:

Level 1: Unadjusted quoted price in an active market for anidentical instrument

This includes instruments such as publicly traded equities, highly liquidbonds (e.g. Government bonds) and exchange traded derivatives (e.g.futures) for which quoted prices are readily and regularly available.

Level 2: Valuation technique using observable market data

This includes instruments such as over-the-counter (OTC) derivatives,debt securities, convertible bonds, mortgage-backed securities, asset-backed securities and open-ended funds which have been valuedusing models with observable market data inputs.

Level 3: Valuation technique using unobservable inputs

This refers to instruments which have been valued using models with unobservable data inputs. This includes single broker-pricedinstruments, suspended/unquoted securities, private equity, unlistedclosed-ended funds and open-ended funds with restrictions onredemption rights. However no such financial instruments were held.

Assets Liabilities Assets Liabilitiesas at 31 May 2019 2019 2018 2018Basis of valuation £’000 £’000 £’000 £’000

Level 1 463,530 (623) 504,085 (146)

Level 2 88,629 0 85,275 0

Level 3 0 0 0 0

552,159 (623) 589,360 (146)

In accordance with FRS 102 (22.4a) the shares in issue for each classmeet the definition of a puttable instrument as the shareholders havethe right to sell the shares back to the issuer. The shares in the fundmay be issued and redeemed on any business day at the quoted price.These shares are not traded on an exchange. However, the price isobservable and transactions within the fund take place regularly at thatprice. The shares in issue as detailed in note 13 meet the definition ofa level 2 financial instrument ‘Valuation techniques using observablemarket data’.


The general risk management policies for the fund are set out in note3 to the financial statements on pages 8 and 9.

19 Market risk sensitivity and exposure

VaR is the risk measurement methodology used to assess the fund’sleverage and market risk volatility. When VaR is calculated as apercentage of the net asset value it may not be greater than the VaRlimit set for the fund.

The VaR limit set during the financial year to 31 May 2019 was 15%(2018: 15%).

The lowest, highest and average VaR, as well as utilisation of VaRwith reference to the limit above, are calculated during the financialyears ended 31 May 2019 and 31 May 2018.

2019 2018 Utilisation of Utilisation offor the year 2019 VaR [a] 2018 VaR [a]

to 31 May % of VaR 15% % of VaR 15%

Lowest 3.14 20.93 3.30 22.01

Highest 4.43 29.52 5.01 33.41

Average 3.75 24.98 3.93 26.19

[a] The VaR on the fund has been divided by its maximum limit.




20 Credit risk

The fund is exposed to credit risk both through the credit quality of theinvestments it holds and through the derivative positions withcounterparties. The table below shows the credit quality of theinvestments held in the portfolio. 2019 2018as at 31 May £’000 £’000

Investment grade securities 546,129 584,927

Unrated securities 6,030 4,433

Other investments (623) (146)

Total 551,536 589,214

The tables below show the exposure to counterparties. Collateral isposted daily, in the form of cash or high-quality government bonds, tominimise this exposure. Futuresas at 31 May 2019 £’000

Bank of America Merrill Lynch (623)

Total (623)

Futuresas at 31 May 2018 £’000


Total (146)

21 Leverage risk

Funds using VaR approaches are required to disclose the level ofleverage employed during the financial reporting period.

Derivatives can be used by the fund to generate market exposure toinvestments exceeding the net asset value. As a result of thisexposure, the size of any positive or negative movement in marketsmay have a more significant effect on the net asset value of the fund.

The lowest, highest and average level of leverage employed andutilisation of the leverage level calculated during the financial yearsended 31 May 2019 and 31 May 2018 are disclosed in the table below.

2019 [a] 2019 [a] 2018 [a] 2018 [a]

for the year to 31 May £’000 % [b] £’000 % [b]

Lowest 0 0 0 0

Highest 127,288 23 40,742 7

Average 40,915 7 18,871 3

[a] Leverage has been calculated using the Gross Sum of Notional Approach for

derivative positions only (including forward currency contracts) and excludes all

physical holdings.

[b] Expressed as a percentage over net assets.

22 Interest distribution tables

This fund pays quarterly interest distributions and the following tablesets out the distribution periods.

Quarterly distribution periods Start End Xd Payment

First interim 01.06.18 31.08.18 03.09.18 31.10.18

Second interim 01.09.18 30.11.18 03.12.18 31.01.19

Third interim 01.12.18 28.02.19 01.03.19 30.04.19

Final 01.03.19 31.05.19 03.06.19 31.07.19

The following tables set out for each distribution the rates per sharefor both Group 1 and Group 2 shares.

Group 1 shares are those purchased prior to a distribution period andtherefore their income rate is the same as the distribution rate.

Group 2 shares are those purchased during a distribution period andtherefore their distribution rate is made up of income and equalisation.Equalisation is the average amount of income included in thepurchase price of all Group 2 shares and is refunded to the holders ofthese shares as a return of capital. Being capital it is not liable toIncome Tax. Instead, it must be deducted from the cost of shares forCapital Gains Tax purposes. The tables below show the split of theGroup 2 rates into the income and equalisation components.

Sterling Class ‘A’ Income shares

Interest distributions Group 2 Group 1 & 2for the year Income Equalisation Distributionto 31 May 2019 2019 2019 2018

p p p pFirst interim 0.1040 0.2204 0.3244 0.3009

Second interim 0.1130 0.2324 0.3454 0.2920

Third interim 0.1468 0.1794 0.3262 0.2869

Final 0.1546 0.1907 0.3453 0.3117

Sterling Class ‘A’ Accumulation shares



Second interim 0.4825 0.2577 0.7402 0.4063

Third interim 0.1630 0.4668 0.6298 0.3990

Final 0.2293 0.4354 0.6647 0.4871

Sterling Class ‘I’ Income shares



Second interim 1.9103 2.0272 3.9375 3.3193

Third interim 1.6927 2.0298 3.7225 3.2655

Final 1.0092 2.9303 3.9395 3.5484




Sterling Class ‘I’ Accumulation shares



Second interim 1.1777 1.1323 2.3100 1.5975

Third interim 0.9455 1.1345 2.0800 1.5735

Final 1.2293 0.9742 2.2035 1.7963




22 Interest distribution tables (continued)



Investment policy

At least 80% of the fund is invested in higher yielding corporate debtinstruments which may be denominated in sterling, Europeancurrencies and other major global currencies, should the investmentmanagers deem them to be appropriate investments. The fund’sexposure to higher yielding corporate debt instruments may be gainedthrough the use of derivatives and any currency exposures within thefund may be managed by currency hedges into sterling. Derivativesmay also be used for efficient portfolio management. The fund mayalso invest in collective investment schemes, government and publicsecurities and other transferable securities, cash, near cash, othermoney market instruments, warrants and other derivative instruments.More than 80% of the fund will be in sterling or hedged back to sterling.

Investment approach

The fund manager concentrates on bottom-up analysis of individualbond issues while remaining aware of macroeconomic developments.Emphasis is placed upon investigating the ability of a company orgovernment to meet its interest payments, especially duringunfavourable economic conditions. Credit risk is constantly monitoredand typically spread across a variety of countries and industrial sectors.

Risk profile

The fund invests mainly in higher yielding fixed income securities,which may be denominated in sterling, European currencies and othermajor global currencies. It is, therefore, subject to the price volatility ofthe global bond market as well as the performance of individualissuers. In addition, the fund is subject to fluctuations in currencyexchange rates.

The fund’s focus on higher yielding debt securities implies that it mayexperience greater volatility than a fund that invests primarily ininvestment grade debt securities as higher risk assets could potentiallyexperience a degree of illiquidity in times of market distress.

The fund’s exposure to debt securities may be gained through the useof derivatives. In association with the use of derivatives, includingthose instruments not traded through an exchange, collateral isdeposited in order to mitigate the risk that a counterparty may defaulton its obligations or become insolvent.



The above number:





mean risk free.


Investment review



Between 1 June 2018 (the start of the review period) and 3 June 2019,the M&G Global High Yield Bond Fund delivered a positive total return(the combination of income and growth of capital) for its sterling shareclasses.

Between 1 June 2018 and 9 November 2018, the fund’s US dollarshare class produced a small positive return, but its euro and Swissfranc share classes posted negative returns. On 9 November 2018 thefund’s non-sterling share classes merged into the M&G (Lux) GlobalHigh Yield Bond Fund, a Luxembourg-authorised SICAV, whichlaunched on that date.

In this reporting period, the fund has met its objective of providingincome* and capital growth, and it has also met its objective over threeand five years and since launch.**

* The fund’s distribution and distribution yield are as shown in the ‘Specific share

class performance’ tables in the ‘Financial highlights’ section of this report. This

fund provides a variable level of income.

** For the performance of each share class, please refer to the ‘Long-termperformance by share class’ table in the ‘Fund performance’ section of this report.

Low risk High risk


1 2 3 4 5 6 7


M&G Global High Yield Bond Fund Authorised Corporate Director’s Report


The 12 months under review was a challenging period for high yieldbond markets. (High yield bonds are loans paying fixed interest issuedby companies with a low credit rating. Credit ratings are independentassessments of a borrower’s ability to repay loans. Bonds from low-rated companies are considered riskier than those issued bycompanies with a high credit rating. They therefore pay a higher rateof interest than their higher rated counterparts, to compensateinvestors for the greater possibility that the issuer might be unable to meet its obligations, or in other words, default.)

After delivering solid investment returns throughout much of 2016 and2017, high yield markets faced a more difficult market environmentthroughout much of 2018. A variety of factors weighed on sentimentduring the year, including concerns over the negative impact of risingUS interest rates, escalating trade war tensions between the US andChina, and political turmoil in Europe and several emerging markets.

There was a change of fortune in 2019, with high yield marketsrecovering strongly in the first few months of the year. While globaleconomic activity remained lacklustre, sentiment was boosted by theprospect that further US interest rate rises would be postponed for thetime being. However, high yield bond markets experienced furtherweakness in May as a resurfacing of trade war tensions led to anotherperiod of risk aversion.

From a regional perspective, US high yield bonds outperformed otherregions over the 12-month period, thanks in part to the continuedresilience of the US economy. High yields bonds in Europe andemerging markets, however, endured a more challenging backdrop,with ongoing political uncertainty and slowing economic momentumweighing on returns.

The fund’s sterling share classes delivered a small positive return overthe review period, although they lagged the IA £ High Yield Sector. Thefund’s defensive sector positioning and modest exposure to emergingmarkets proved helpful overall, although this was more than offset bya bias towards European issuers and the financial sector, whichgenerally underperformed.


There were no significant changes to fund positioning and we maintainour preference for defensive companies that offer resilient cashflowsirrespective of the economic environment, such as healthcareproviders and cable operators.

In regional allocation terms, we maintain a slight preference forEuropean high yield. We generally see more compelling value in theEuropean high yield market, following its recent underperformanceversus the US; we think investors can often capture a more attractivelevel of income relative to the risks being taken. Moreover, with theEuropean economy at an earlier stage of the economic cycle, we believe European companies are still being conservativelymanaged and continue to maintain only modest levels of debt on theirbalance sheets.

We remain cautiously positioned in the energy and basic industrysectors, where in most cases we do not think investors are beingadequately compensated for the risks. However, we will invest in theseareas on a selective basis where we see compelling value, for instancepurchasing an issue from oil & gas exploration company SM Energy.

We continue to find attractive opportunities in the primary market andwe purchased newly issued bonds from a variety of companies,including US housebuilder Taylor Morrison and European telecomcompanies Altice and Ziggo. In terms of sales, we closed our positionsin paper-based packaging company Smurfit Kappa and automakerJaguar Land Rover after a strong run.

Fund duration (a measure of a bond fund’s sensitivity to movementsin interest rates) was broadly unchanged over the 12 months and stoodat around 3.4 years as at the end of May. Given the relative strengthof the US economy, we think further US interest rate rises could stillbe on the cards, and we prefer to maintain a cautious stance.

Outlook

In the current environment where interest rates are low and manyassets are generating a low prospective return, or yield, we think highyield bonds currently offer an attractive source of income. Followingmarket weakness throughout much of 2018, we believe these assetslook attractively priced against a backdrop of modest economicexpansion and with the expectation that company default rates remainat historically low levels.

However, given where we are in the market cycle, we believe a cautiousapproach is still warranted and we maintain our preference fordefensive businesses offering stable cashflows and healthy balancesheets. With heightened volatility likely to lead to a greater divergencein bond prices, we believe that careful individual bond selection andin-depth company analysis will become increasingly important to helpidentify the most attractive pockets of value.

In our view, high yield investing is as much about avoiding the losersas picking the winners. On this basis, we remain cautiously positionedin the retail sector. UK fashion retailers in particular have beenexperiencing higher input costs as a result of the depreciation insterling, coupled with signs of a slowdown in consumer spending. Thesector is also facing longer term structural headwinds as shoppersincreasingly move towards online spending and away from traditionalbricks-and-mortar stores. While some of these businesses will be ableto adapt, we continue to be very selective in this space.

Stefan Isaacs & James TomlinsCo-fund managers

Employees of M&G Limited which is an associate of M&G Securities Limited.







Investment review

Investments

Portfolio statement

as at 31 May 2019 2019 2018Holding £’000 % %

EQUITIES 2,413 0.23 0.65 Equities 2,413 0.23 0.65 141,319 Chaparral Energy 456 0.04

680,748 Codere 1,810 0.17

48,841,504 New World Resources [a] 0 0.00

9,295 Patterson-UTI Energy 82 0.01

11,384 Sandridge Energy 65 0.01

9,856 Sandridge Energy wts. 2022 A 0 0.00

4,150 Sandridge Energy wts. 2022 B 0 0.00

FIXED INCOME 987,030 93.23 93.19 Debt securities 984,216 92.97 92.78 ‘AA’ credit rated bonds 51,600 4.87 6.08 £51,531,901 UK Treasury 1.75% 22/07/2019 51,600 4.87

‘A’ credit rated bonds 18,068 1.71 2.40 €5,000,000 Banco Bilbao Vizcaya Argentaria Var. Rate 6% Perpetual 4,401 0.42

€7,000,000 Banco Santander Var. Rate 5.481% Perpetual 6,129 0.58

€2,475,000 HSBC Var. Rate 4.75% Perpetual 2,176 0.20

$1,771,000 HSBC Var. Rate 6% Perpetual 1,383 0.13

£1,095,000 Society of Lloyd’s Var. Rate 4.875% 07/02/2047 1,158 0.11

€2,955,000 Total Var. Rate 3.369% Perpetual 2,821 0.27

‘BBB’ credit rated bonds 108,281 10.23 10.17 €1,900,000 América Móvil Var. Rate 6.375% 06/09/2073 1,973 0.19

€2,100,000 American International Var. Rate 1.42% 15/03/2037 1,416 0.13

$4,758,000 ArcelorMittal 7% 15/10/2039 4,311 0.41

€1,800,000 Banco de Sabadell Var. Rate 6.5% Perpetual 1,506 0.14

$10,000,000 Berry Global Escrow 4.875% 15/07/2026 7,917 0.75

$5,710,000 Commerzbank 8.125% 19/09/2023 5,184 0.49

$2,379,000 Corestates Capital III FRN 3.088% 15/02/2027 1,743 0.16

$6,626,000 Dell International 5.45% 15/06/2023 5,611 0.53

$5,710,000 Energy Transfer Operating 5.875% 15/01/2024 4,961 0.47

€8,556,000 Equinix 2.875% 15/03/2024 7,815 0.74

$10,209,000 GE Capital International Funding 4.418% 15/11/2035 7,740 0.73

£5,559,000 GKN 4.625% 12/05/2032 5,418 0.51

$9,516,000 HCA 4.5% 15/02/2027 7,827 0.74

$2,379,000 HCA 4.75% 01/05/2023 1,987 0.19

$2,724,000 HCA 5% 15/03/2024 2,309 0.22

$3,036,000 HCA 5.5% 15/06/2047 2,540 0.24

$4,758,000 Lear 5.25% 15/01/2025 3,915 0.37

£2,855,000 Legal & General Var. Rate 5.375% 27/10/2045 3,090 0.29

$1,189,000 Newfield Exploration 5.375% 01/01/2026 1,023 0.10

$1,903,000 Park Aerospace 5.5% 15/02/2024 1,589 0.15

$3,997,000 Sabine Pass Liquefaction 5.625% 01/03/2025 3,478 0.33

€3,261,000 Schaeffler 2.875% 26/03/2027 3,002 0.28

$4,195,833 S-JETS 2017-1 5.682% 15/08/2042 3,444 0.32

$7,613,000 Syngenta Finance 5.182% 24/04/2028 6,095 0.58

€5,600,000 UniCredit Var. Rate 5.375% Perpetual 4,118 0.39

$7,322,000 Vodafone Var. Rate 7% 04/04/2079 6,015 0.57

$2,850,000 ZF North America Capital 4.75% 29/04/2025 2,254 0.21

‘BB’ credit rated bonds 510,729 48.24 45.84 €1,690,000 Ardagh Packaging Finance 2.75% 15/03/2024 1,528 0.14

£2,172,000 Arrow Global Finance 5.125% 15/09/2024 2,116 0.20

€5,810,000 Arrow Global Finance FRN 2.875% 01/04/2025 4,847 0.46

$3,806,000 Avis Budget Car Rental 5.25% 15/03/2025 2,947 0.28

€5,263,000 Axalta Coating Systems 3.75% 15/01/2025 4,770 0.45

€2,565,000 Axalta Coating Systems 4.25% 15/08/2024 2,336 0.22

€1,800,000 Bankia Var. Rate 6.375% Perpetual 1,583 0.15

€1,636,000 Belden 3.375% 15/07/2027 1,471 0.14

€1,400,000 Belden 3.875% 15/03/2028 1,269 0.12

£9,000,000 Cabot Financial Luxembourg 7.5% 01/10/2023 9,119 0.86

€4,800,000 CaixaBank Var. Rate 5.25% Perpetual 3,737 0.35

€2,600,000 CaixaBank Var. Rate 6.75% Perpetual 2,392 0.23

$7,500,000 CCO 5% 01/02/2028 5,824 0.55

$9,516,000 CCO 5.125% 01/05/2027 7,504 0.71

$10,468,000 CCO 5.75% 15/02/2026 8,570 0.81

€3,613,000 Cemex 2.75% 05/12/2024 3,234 0.31

$3,800,000 Cemex 5.7% 11/01/2025 3,079 0.29

$2,421,000 Cemex Finance 6% 01/04/2024 1,971 0.19

$6,661,000 Centene 4.75% 15/01/2025 5,390 0.51

$2,220,000 Centene 6.125% 15/02/2024 1,837 0.17

€9,000,000 Chemours 4% 15/05/2026 7,846 0.74

$4,758,000 Cheniere Corpus Christi 5.875% 31/03/2025 4,005 0.38

$1,903,000 Cheniere Energy Partners 5.25% 01/10/2025 1,533 0.14

$5,554,000 Cheniere Energy Partners 5.625% 01/10/2026 4,516 0.43

€1,836,000 Colfax 3.25% 15/05/2025 1,662 0.16

€7,500,000 CPI Property Var. Rate 4.375% Perpetual 6,233 0.59

$1,500,000 Credit Suisse Var. Rate 7.125% Perpetual 1,237 0.12

$1,665,000 Crown Americas 4.25% 30/09/2026 1,287 0.12

€5,120,000 Crown European 3.375% 15/05/2025 4,863 0.46

$7,087,000 CSC 5.5% 15/04/2027 5,746 0.54

$7,137,000 CSC 6.625% 15/10/2025 5,982 0.57

£2,847,458 Delamare Finance 5.5457% 19/02/2029 3,260 0.31

$3,331,000 Dell International 5.875% 15/06/2021 2,679 0.25

€4,493,000 Digi Communications 5% 15/10/2023 4,088 0.39

$2,800,000 Drax Finco 6.625% 01/11/2025 2,245 0.21

€3,460,000 Dufry Finance 4.5% 01/08/2023 3,149 0.30

$5,249,000 Fiat Chrysler Automobiles 5.25% 15/04/2023 4,332 0.41

$2,855,000 Freeport-McMoRan 3.55% 01/03/2022 2,222 0.21



€6,761,000 Gestamp Funding Luxembourg 3.5% 15/05/2023 6,019 0.57

$4,758,000 Goodyear Tire & Rubber 5% 31/05/2026 3,493 0.33

$6,327,000 Grupo KUO 5.75% 07/07/2027 4,930 0.47



Portfolio statement (continued)

as at 31 May 2019 2019 2018Holding £’000 % %

‘BBB’ credit rated bonds (continued)

$9,363,000 Hanesbrands 4.625% 15/05/2024 7,404 0.70

$5,879,000 Hanesbrands 4.875% 15/05/2026 4,614 0.44

$7,137,000 HCA 5.375% 01/09/2026 5,890 0.56

$243,000 HCA 5.875% 01/02/2029 204 0.02

$3,172,000 Hilton Worldwide Finance 4.625% 01/04/2025 2,531 0.24

€2,376,215 IHO Verwaltungs 2.75% 15/09/2021 2,130 0.20

$5,416,000 Inretail Pharma 5.375% 02/05/2023 4,489 0.42

$9,516,000 International Game Technology 6.25% 15/02/2022 7,870 0.74

€1,876,000 Intertrust 3.375% 15/11/2025 1,710 0.16

€3,433,000 InterXion 4.75% 15/06/2025 3,210 0.30

€1,500,000 Intesa Sanpaolo 3.928% 15/09/2026 1,356 0.13

€1,300,000 Intesa Sanpaolo 6.625% 13/09/2023 1,332 0.13

€4,758,000 Intesa Sanpaolo Var. Rate 6.25% Perpetual 4,088 0.39

€4,486,000 Intesa Sanpaolo Var. Rate 7% Perpetual 4,033 0.38

€1,911,000 Intesa Sanpaolo Var. Rate 7.75% Perpetual 1,818 0.17

€4,480,000 Intrum 3.125% 15/07/2024 3,871 0.37

€9,616,000 IQVIA 3.25% 15/03/2025 8,664 0.82

€1,900,000 IQVIA 3.5% 15/10/2024 1,724 0.16

€3,626,000 James Hardie 3.625% 01/10/2026 3,333 0.31

€4,858,000 Levi Strauss 3.375% 15/03/2027 4,483 0.42

$2,855,000 Levi Strauss 5% 01/05/2025 2,320 0.22

€4,071,000 Lincoln Financing 3.625% 01/04/2024 3,519 0.33

€2,688,000 Lloyds Banking Var. Rate 6.375% Perpetual 2,441 0.23

£2,800,000 Lloyds Banking Var. Rate 7% Perpetual 2,804 0.26

€1,583,000 Louvre Bidco 4.25% 30/09/2024 1,383 0.13

$8,522,000 MARB BondCo 6.875% 19/01/2025 6,775 0.64

$7,131,000 MGM Resorts International 5.5% 15/04/2027 5,714 0.54

$7,613,000 Nabors Industries 5.75% 01/02/2025 5,019 0.47

€1,903,000 National Westminster Bank Var. Rate 1.84% Perpetual 1,659 0.16

€12,192,000 Netflix 3.625% 15/05/2027 11,133 1.05

$1,872,000 NOVA Chemicals 4.875% 01/06/2024 1,400 0.13

$2,855,000 Oasis Petroleum 6.25% 01/05/2026 2,047 0.19

$6,302,000 Oasis Petroleum 6.875% 15/03/2022 4,912 0.46

$9,516,000 Olin 5% 01/02/2030 7,314 0.69

€1,400,000 Orano 4.875% 23/09/2024 1,366 0.13

$3,860,000 Owens-Brockway 5% 15/01/2022 3,124 0.30

$2,855,000 Parsley Energy 5.375% 15/01/2025 2,269 0.21

$1,427,000 Parsley Energy 5.625% 15/10/2027 1,137 0.11

€1,820,000 Petrobras Global Finance 4.75% 14/01/2025 1,787 0.17

$4,758,000 Petrobras Global Finance 5.75% 01/02/2029 3,813 0.36


£5,710,000 Petrobras Global Finance 6.625% 16/01/2034 6,224 0.59


$10,468,000 Pilgrim’s Pride 5.75% 15/03/2025 8,487 0.80

€5,252,000 Playtech 4.25% 07/03/2026 4,773 0.45

€5,863,000 Progroup FRN 2.5% 31/03/2024 5,168 0.49

$4,758,000 Rede D’or Finance 4.95% 17/01/2028 3,518 0.33

€5,700,000 Repsol International Finance Var. Rate 4.5% 25/03/2075 5,541 0.52

$3,359,000 Royal Bank of Scotland 6.1% 10/06/2023 2,842 0.27

$1,485,000 Sable International Finance 6.875% 01/08/2022 1,226 0.12

$9,516,000 Sally Holdings 5.625% 01/12/2025 7,516 0.71

€4,352,000 Samhällsbyggnadsbolaget i Norden Var. Rate 4.625% Perpetual 3,810 0.36

$4,758,000 Sealed Air 5.125% 01/12/2024 3,916 0.37

$3,806,000 Service Corporation International 5.375% 15/05/2024 3,109 0.29

$3,524,000 Shea Homes 6.125% 01/04/2025 2,747 0.26

$15,808,000 Sirius XM Radio 5% 01/08/2027 12,435 1.17

$3,806,000 SM Energy 5% 15/01/2024 2,693 0.25

$3,489,000 SM Energy 6.625% 15/01/2027 2,454 0.23

$5,040,000 Société Générale Var. Rate 7.875% Perpetual 4,146 0.39

$10,897,000 Southwestern Energy 7.75% 01/10/2027 8,331 0.79

€1,189,000 Telecom Italia Finance 7.75% 24/01/2033 1,338 0.13

€12,000,000 Telefónica Europe Var. Rate 4.375% Perpetual 10,958 1.04

$4,758,000 Tenet Healthcare 4.375% 01/10/2021 3,818 0.36

$2,379,000 Tenet Healthcare 4.5% 01/04/2021 1,907 0.18

$3,806,000 Tenet Healthcare 6% 01/10/2020 3,110 0.29

$5,062,000 Teva Pharmaceutical Finance 3.15% 01/10/2026 3,096 0.29

$5,007,000 Teva Pharmaceutical Finance 4.1% 01/10/2046 2,636 0.25

€1,351,000 Teva Pharmaceutical Finance 4.5% 01/03/2025 1,095 0.10

$1,586,000 T-Mobile USA 5.125% 15/04/2025 1,280 0.12

$2,855,000 T-Mobile USA 6% 15/04/2024 2,359 0.22

$2,855,000 T-Mobile USA 6.375% 01/03/2025 2,349 0.22

€3,800,000 UBS Group Funding Switzerland Var. Rate 5.75% Perpetual 3,637 0.34

$5,710,000 UBS Group Funding Switzerland Var. Rate 7% Perpetual 4,804 0.45

$7,613,000 United Rentals North America 4.875% 15/01/2028 5,878 0.56

$2,855,000 United Rentals North America 6.5% 15/12/2026 2,413 0.23

€4,919,000 Unitymedia 3.5% 15/01/2027 4,580 0.43

€6,138,000 Unitymedia 4% 15/01/2025 5,627 0.53

$2,046,000 Unitymedia 5% 15/01/2025 1,657 0.16

€1,710,000 Unitymedia 6.25% 15/01/2029 1,683 0.16

$6,344,000 Videotron 5.375% 15/06/2024 5,260 0.50

£4,079,000 Virgin Media Secured Finance 6.25% 28/03/2029 4,263 0.40

€2,438,000 Volvo Car 2.125% 02/04/2024 2,150 0.20

€2,479,000 Wind Tre 3.125% 20/01/2025 2,146 0.20

$766,000 Wind Tre 5% 20/01/2026 588 0.06

€12,055,000 Wind Tre FRN 2.75% 20/01/2024 10,400 0.98

$9,992,000 WPX Energy 5.25% 15/09/2024 7,903 0.75

‘B’ credit rated bonds 238,929 22.57 21.95 $2,825,000 1011778 BC ULC / New Red Finance 5% 15/10/2025 2,192 0.21

$5,892,000 ADES International 8.625% 24/04/2024 4,666 0.44

€8,479,000 Adient Global 3.5% 15/08/2024 5,893 0.56

€3,414,000 Adler Pelzer 4.125% 01/04/2024 2,883 0.27

€1,872,000 Algeco Global Finance FRN 6.25% 15/02/2023 1,669 0.16




as at 31 May 2019 2019 2018Holding £’000 % %

‘BB’ credit rated bonds (continued)

Investments Portfolio statement (continued)

as at 31 May 2019 2019 2018Holding £’000 % %

‘BB’ credit rated bonds (continued)

€5,800,000 Altice France 5.875% 01/02/2027 5,395 0.51

€2,651,000 Altice Luxembourg 7.25% 15/05/2022 2,388 0.23

$7,000,000 Altice Luxembourg 10.5% 15/05/2027 5,592 0.53

$3,500,000 American Axle & Manufacturing 6.25% 01/04/2025 2,685 0.25

€9,620,740 ARD Finance 6.625% 15/09/2023 8,631 0.82

£1,196,000 Ardagh Packaging Finance 4.75% 15/07/2027 1,161 0.11

£3,079,000 Barclays Var. Rate 5.875% Perpetual 2,879 0.27

$13,983,000 Bausch Health 7% 15/01/2028 11,070 1.05

$3,500,000 Bombardier 7.875% 15/04/2027 2,685 0.25

€3,992,000 Burger King France 6% 01/05/2024 3,730 0.35

$6,316,000 Caesars Resort Collection 5.25% 15/10/2025 4,906 0.46

$2,855,000 Carrizo Oil & Gas 6.25% 15/04/2023 2,132 0.20

€4,616,000 Catalent Pharma Solutions 4.75% 15/12/2024 4,237 0.40

€3,520,000 CMA CGM 5.25% 15/01/2025 2,294 0.22

$6,456,000 CommScope 8.25% 01/03/2027 5,132 0.48

$4,357,000 Covey Park Energy 7.5% 15/05/2025 3,134 0.30

£2,321,000 CPUK Finance 4.25% 28/08/2022 2,325 0.22

$6,500,000 CSC 7.5% 01/04/2028 5,528 0.52

$4,758,000 DaVita 5% 01/05/2025 3,597 0.34

$2,379,000 DaVita 5.125% 15/07/2024 1,850 0.17

€1,456,000 Diamond (BC) 5.625% 15/08/2025 968 0.09

€6,557,000 DKT Finance 7% 17/06/2023 6,253 0.59

€6,230,000 Eagle Intermediate Global 5.375% 01/05/2023 5,390 0.51

€2,456,000 Energizer Gamma Acquisition 4.625% 15/07/2026 2,215 0.21

€2,215,000 Fire BC FRN 4.75% 30/09/2024 1,976 0.19

€5,839,000 Gamenet FRN 3.75% 27/04/2023 5,177 0.49

£3,971,000 Garfunkelux Holdco 3 8.5% 01/11/2022 3,365 0.32

€2,149,000 Grupo Antolin-Irausa 3.25% 30/04/2024 1,666 0.16

€4,858,000 Grupo Antolin-Irausa 3.375% 30/04/2026 3,661 0.35

€6,285,000 HEMA Bondco I FRN 6.25% 15/07/2022 4,922 0.46

$2,855,000 Hertz 6.25% 15/10/2022 2,192 0.21

£9,208,000 Iceland Bondco 4.625% 15/03/2025 8,179 0.77

€4,449,000 LSF10 Wolverine Investments 5% 15/03/2024 3,955 0.37

€3,457,000 Matterhorn Telecom 3.875% 01/05/2022 3,082 0.29

$5,250,000 Panther Finance 8.5% 15/05/2027 4,182 0.40

€4,858,000 Paprec FRN 3.5% 31/03/2025 3,960 0.37

€4,862,000 Picard FRN 3% 30/11/2023 4,082 0.39

£4,147,000 Premier Foods Finance 6.25% 15/10/2023 4,271 0.40

£3,096,000 Premier Foods Finance FRN 5.82088% 15/07/2022 3,085 0.29

€5,000,000 Refinitiv US Holdings 6.875% 15/11/2026 4,405 0.42

€4,858,000 Rekeep 9% 15/06/2022 3,364 0.32

$1,400,000 Royal Bank of Scotland Var. Rate 8% Perpetual 1,166 0.11

€4,040,000 Schmolz+Bickenbach 5.625% 15/07/2022 3,018 0.28

€6,834,000 Scientific Games International 5.5% 15/02/2026 5,703 0.54

€9,285,000 Selecta 5.875% 01/02/2024 8,412 0.79

$10,330,000 Sprint 7.875% 15/09/2023 8,721 0.82

$4,758,000 Sprint Capital 6.875% 15/11/2028 3,894 0.37

€1,190,000 Starfruit 6.5% 01/10/2026 1,039 0.10

€3,028,000 Techem Verwaltungsgesellschaft 674 6% 30/07/2026 2,744 0.26

€3,784,000 Unitymedia 3.75% 15/01/2027 3,526 0.33

€1,125,000 Vallourec 6.375% 15/10/2023 808 0.08

€3,056,000 Vallourec 6.625% 15/10/2022 2,303 0.22

€1,000,000 Veritas 7.5% 01/02/2023 861 0.08

$9,868,000 VTR Finance 6.875% 15/01/2024 8,025 0.76

$4,758,000 Yingde Gases Investment 6.25% 19/01/2023 3,785 0.36

€1,762,000 Ziggo 3.75% 15/01/2025 1,592 0.15

€3,800,000 Ziggo Bond 4.625% 15/01/2025 3,423 0.32

$429,000 Ziggo Bond 5.875% 15/01/2025 337 0.03

€618,267 Ziggo Bond 7.125% 15/05/2024 568 0.05

‘CCC’ credit rated bonds 31,820 3.01 2.63 $5,100,000 BWAY 7.25% 15/04/2025 3,885 0.37

€3,214,488 Newco 8% 15/12/2022 2,924 0.28

$5,710,000 Ortho-Clinical Diagnostics 6.625% 15/05/2022 4,250 0.40

€3,616,000 Swissport Financing 9.75% 15/12/2022 3,410 0.32

$3,806,000 Tenet Healthcare 7% 01/08/2025 2,996 0.28

€3,095,000 Unilabs Subholding 5.75% 15/05/2025 2,746 0.26

€6,836,000 Verisure Midholding 5.75% 01/12/2023 6,120 0.58

$7,000,000 Vertiv Intermediate 12% 15/02/2022 5,489 0.52

‘C’ credit rated bonds 0 0.00 0.13

Bonds with no credit rating 24,789 2.34 3.58 £2,855,000 Cattles 1% 01/01/2049 6 0.00

£1,125,000 Heathrow Finance 3.875% 01/03/2027 1,080 0.10

€3,761,784 Hellas Telecom III 1% 01/01/2049 [b] 0 0.00

£2,152,000 House of Fraser Funding 6.54588% 15/09/2020 67 0.01

$4,758,000 Jones Energy 6.75% 01/04/2022 40 0.00

$605,705 K2016470219 South Africa 3% 31/12/2022 4 0.00

ZAR8,212,459 K2016470219 South Africa 3% 31/12/2022 [b] 0 0.00

€50,000 Lehman Brothers 1% 26/09/2040 [b] 0 0.00

$2,603,000 Millicom International Cellular 6.25% 25/03/2029 2,169 0.21

£8,167,000 Ocado 4% 15/06/2024 8,300 0.78

$1,103,000 Puma International Financing 5% 24/01/2026 759 0.07

$3,800,000 Puma International Financing 5.125% 06/10/2024 2,727 0.26

$5,043,000 Sandridge Energy 7.5% 15/03/2021 [b] 0 0.00

$951,595 Seventy Seven Energy 6.5% 15/07/2022 [b] 0 0.00

$3,331,000 Stora Enso 7.25% 15/04/2036 3,101 0.29

€2,174,000 Tasty Bondco 1 6.25% 15/05/2026 1,943 0.18

$5,809,000 Taylor Morrison Communities 5.875% 15/06/2027 4,593 0.44




as at 31 May 2019 2019 2018Holding £’000 % %

‘B’ credit rated bonds (continued)


as at 31 May 2019 2019 2018Holding £’000 % %

‘B’ credit rated bonds (continued)

Debt derivatives 2,814 0.26 0.41 Credit default swaps 3,602 0.34 0.48 [c]

$(27,406,080) Markit CDX North American High Yield Series 28 5 Year Jun 2022 1,395 0.13

$(15,691,690) Markit CDX North American High Yield Series 29 5 Year Dec 2022 802 0.07


$(12,610,000) Markit CDX North American High Yield Series 31 V3 5 Year Dec 2023 621 0.06

$(10,000,000) Markit CDX North American High Yield Series 32 5 Year Jun 2024 420 0.04

€(4,758,000) Telecom Italia Dec 2021 (57) (0.01)

€(2,248,521) Telecom Italia Dec 2023 (140) 0.00

€(1,551,479) Telecom Italia Jun 2024 (121) (0.01)

Asset swaps (46) (0.01) 0.02 [c]

$2,855,000 HCA Pay 5.5% Receive VAR Jun 2047 (46) (0.01)

Interest rate futures (742) (0.07) (0.09) (433) EuroBobl June 2019 (742) (0.07)

CURRENCY (31,408) (2.97) 0.01 Forward currency contracts (31,408) (2.97) 0.01 €30,194,606 Bought for £26,516,059 (expires 05.06.19) 239 0.02

€(458,671,037) Sold for £393,440,824 (expires 05.06.19) (12,980) (1.23)

$13,955,404 Bought for £10,879,570 (expires 05.06.19) 213 0.02

$(628,877,778) Sold for £480,978,371 (expires 05.06.19) (18,880) (1.78)


CASH EQUIVALENTS 66,773 6.31 4.16 ‘AAA’ rated money market funds [d] 66,773 6.31 4.16 66,773,000 Northern Trust Global Fund - Sterling 66,773 6.31

SHARE CLASS HEDGING 0 0.00 (0.01) Forward currency contracts for share class hedging 0 0.00 (0.01)

Total portfolio (notes 2c & 2d on page 7) 1,024,808 96.80 98.00Net other assets / (liabilities) 33,827 3.20 2.00

Net assets attributable to shareholders 1,058,635 100.00 100.00


[a] Unquoted/unlisted.

[b] Defaulted bond.

[c] The comparative sector weightings have been re-analysed to reflect changes to

the sector classifications.

[d] Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the





as at 31 May 2019 2019 2018Holding £’000 % %

Investments

Fund performance


The following charts and tables show the performance for two of thefund’s share classes – Sterling Class ‘A’ (Accumulation) shares andSterling Class ‘I’ (Accumulation) shares.


• The performance of the Sterling Class ‘A’ (Accumulation) share is what most individuals investing directly with M&G have received.It has the highest ongoing charge of all the sterling share classes.Performance is shown after deduction of this charge. All UKinvestors in the fund therefore received this performance or better.





2019 2018 2017as at 31 May £’000 £’000 £’000

Fund net asset value (NAV) 1,058,635 1,172,791 1,185,263




Distribution

The charts below show the annual distribution of Sterling Class ‘A’(Income) shares over ten years and Sterling Class ‘I’ (Income) sharessince launch.

0.0

0.5

1.5

2.0

1.0

2.5

3.0

2018 201920112010 2012 2013 2014 2015 2016 2017

Annual distributions over ten years Chart date 3 June 2019

Sterling Class ‘A’ (Income) shares

Year ending May

Dis

trib

utio

n (p

ence

per

sha

re)

Source: M&G

100

110

130

150

180

210

250

300

9598 99 00 01 02 03 0504 06 07 08 09 10 11 12 13 14 15 16 17 18 19

October 1998 = 100, plotted monthly Chart date 3 June 2019



Morningstar (IA) £ High Yield sector average*



M&G Global High Yield Bond Fund Financial highlights

To give an indication of the performance of the fund, the following table shows the compound rate of return, per annum, over the period to 9 November 2018 for non-sterling share classes and 3 June 2019 for sterling share classes. Calculated on a price to pricebasis with income reinvested.


From From From Since 01.06.18 03.06.16 03.06.14 launch % [a] % p.a. % p.a. % p.a.

Euro [b] Class ‘A-H’ -0.8 +3.2 +1.9 +4.6 [c]

Class ‘B-H’ -1.0 +2.7 +1.4 +2.9 [d]

Class ‘C-H’ -0.6 +3.8 +2.5 +5.2 [c]

Sterling [e] Class ‘A’ +1.5 +3.9 +2.4 +5.5 [f]

Class ‘I’ +2.1 +4.5 +3.0 +5.1 [g]

Class ‘PP’ n/a n/a n/a -0.6 [h]

Class ‘R’ +1.7 +4.2 +2.6 +4.8 [g]

Class ‘X’ +1.5 +3.9 +2.4 +4.9 [i]

Swiss franc [b] Class ‘A-H’ -1.0 +2.8 n/a +3.2 [j]

Class ‘C-H’ -0.7 +3.4 n/a +3.8 [j]

US dollar [b] Class ‘A-H’ +0.5 +5.5 +3.3 +5.6 [c]

Class ‘C-H’ +0.7 +6.4 +4.2 +6.4 [c]

[a] Absolute basis.

[b] Price to price with gross income reinvested.

[c] 10 December 2010, the launch date of the share class.

[d] 26 July 2013, the launch date of the share class.

[e] Price to price with income reinvested.

[f] 1 October 2002, the launch date of the share class.

[g] 3 August 2012, the launch date of the share class.

[h] 8 April 2019, the launch date of the share class. Not annualised.

[i] 16 October 1998, the end of the initial offer period of the predecessor unit trust.

[j] 25 September 2015, the launch date of the share class.

0.0

10.0

30.0

20.0

50.0

40.0

60.0

2013* 2014 2015 2016 2017 20192018

Annual distributions since launch of the share class Chart date 3 June 2019

Sterling Class ‘I’ (Income) shares

Year ending May

Dis

trib

utio

n (p

ence

per

sha

re)

* Partial fund financial year distributions Source: M&G



Operating charges




• Share class hedging: Charge paid to M&G for currency hedgingservices to minimise exchange rate risk for the share class.








Fund performance

Distribution (continued)






To protect existing investors, portfolio transaction costs incurred as aresult of investors buying and selling shares in the fund are recoveredfrom those investors through a ‘dilution adjustment’ to the price theypay or receive. As the fund invests mainly in fixed interest securities,the direct transaction costs paid on other investments are too small tobe reflected in the table below. To give an indication of the indirectportfolio dealing costs the table shows the average portfolio dealingspread.









The non-sterling share classes were merged into the equivalent shareclasses of M&G (Lux) Global High Yield Bond Fund on 9 November2018. The distribution yields for the current year for the non-sterlingshare classes were calculated at the merger date.

Euro Class ‘A-H’ Income share performanceThe share class was launched on 12 July 2013.

for the year to 31 May 2019 2018 2017Change in NAV per share Euro ¢ Euro ¢ Euro ¢

Opening NAV 1,138.33 1,201.13 1,149.55

Return before operating charges and after directportfolio transaction costs 11.35 11.25 126.88



Distributions (25.11) (57.03) (58.32)

Return to shareholder as a result of share classclosure (1,117.33) n/a n/a

Closing NAV 0.00 1,138.33 1,201.13

Direct portfolio transaction costs Euro ¢ Euro ¢ Euro ¢










Other information

Closing NAV (£’000) 0 5,226 2,597


Number of shares 0 523,902 247,564

Highest share price (Euro ¢) 1,151.04 1,211.34 1,214.59

Lowest share price (Euro ¢) 1,112.88 1,149.90 1,136.70



Fund performance


Euro Class ‘A-H’ Accumulation share performanceThe share class was launched on 10 December 2010.


Opening NAV 1,428.12 1,436.33 1,309.19




Distributions (22.72) (49.11) (54.79)



Closing NAV 0.00 1,428.12 1,436.33











Other information

Closing NAV (£’000) 0 5,814 4,681





Euro Class ‘B-H’ Income share performanceThe share class was launched on 11 September 2015.


Opening NAV 959.59 1,019.40 976.74




Distributions (21.13) (48.22) (47.89)

Return to shareholder as a result of share classclosure (939.91) n/a n/a

Closing NAV 0.00 959.59 1,019.40











Other information

Closing NAV (£’000) 0 902 492



Highest share price (Euro ¢) 970.23 1,026.44 1,029.24

Lowest share price (Euro ¢) 936.21 969.36 965.50

Euro Class ‘B-H’ Accumulation share performanceThe share class was launched on 26 July 2013.


Opening NAV 1,164.22 1,177.11 1,078.17




Distributions (15.90) (34.22) (39.34)



Closing NAV 0.00 1,164.22 1,177.11











Other information

Closing NAV (£’000) 0 1,174 1,308








Euro Class ‘C-H’ Income share performanceThe share class was launched on 8 August 2014.


Opening NAV 1,232.00 1,292.92 1,232.73



Return after operating charges 7.82 0.75 125.26

Distributions (27.21) (61.67) (65.07)


Closing NAV 0.00 1,232.00 1,292.92








Return after operating charges +0.63 +0.06 +10.16



Other information

Closing NAV (£’000) 0 2,895 13





Euro Class ‘C-H’ Accumulation share performanceThe share class was launched on 10 December 2010.


Opening NAV 1,492.55 1,492.79 1,351.63




Distributions (27.78) (60.25) (65.35)



Closing NAV 0.00 1,492.55 1,492.79











Other information

Closing NAV (£’000) 0 8,150 9,127





Sterling Class ‘A’ Income share performanceThe share class was launched on 1 October 2002.


Opening NAV 49.25 51.46 48.73




Distributions (2.46) (2.46) (2.52)

Closing NAV 48.04 49.25 51.46











Other information

Closing NAV (£’000) 60,257 88,585 107,731


Number of shares 125,436,058 179,851,159 209,367,545






Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 1 October 2002.


Opening NAV 130.02 129.44 117.38




Distributions (4.81) (4.48) (5.00)


Closing NAV 133.40 130.02 129.44











Other information

Closing NAV (£’000) 250,671 259,871 247,752


Number of shares 187,906,510 199,863,410 191,398,631





Opening NAV 1,050.92 1,091.29 1,029.25




Distributions (52.70) (52.35) (55.33)

Closing NAV 1,031.08 1,050.92 1,091.29











Other information

Closing NAV (£’000) 108,981 125,311 126,452


Number of shares 10,569,588 11,923,918 11,587,355


Lowest share price (UK p) 992.00 1,061.50 1,016.73



Opening NAV 1,365.39 1,351.18 1,219.04




Distributions (58.99) (55.22) (59.83)


Closing NAV 1,409.31 1,365.39 1,351.18











Other information

Closing NAV (£’000) 116,584 121,298 102,614


Number of shares 8,272,395 8,883,780 7,594,372



Sterling Class ‘PP’ Accumulation share performanceThe share class was launched on 8 April 2019.


Opening NAV 100.00 n/a n/a

Return before operating charges and after directportfolio transaction costs (0.22) n/a n/a

Operating charges (0.11) n/a n/a

Return after operating charges (0.33) n/a n/a

Distributions (0.77) n/a n/a

Retained distributions 0.77 n/a n/a

Closing NAV 99.67 n/a n/a


Costs before dilution adjustments 0.00 n/a n/a

Dilution adjustments [a] 0.00 n/a n/a

Total direct portfolio transaction costs 0.00 n/a n/a


Direct portfolio transaction costs [b] 0.00 n/a n/a

Operating charges 0.66* n/a n/a

Return after operating charges -0.33 n/a n/a

Distribution yield 4.54 n/a n/a

Effect on yield of charges offset against capital 0.00 n/a n/a

Other information

Closing NAV (£’000) 223 n/a n/a

Closing NAV percentage of total fund NAV (%) 0.02 n/a n/a

Number of shares 223,386 n/a n/a

Highest share price (UK p) 101.07 n/a n/a

Lowest share price (UK p) 99.67 n/a n/a

* The operating charge shown is an estimate of the charges, as the share class

has not been in existence for a full financial year.




Sterling Class ‘R’ Income share performanceThe share class was launched on 3 August 2012.


Opening NAV 104.49 108.88 102.93




Distributions (5.21) (5.21) (5.41)

Closing NAV 102.17 104.49 108.88











Other information

Closing NAV (£’000) 15,721 13,273 1,932


Number of shares 15,386,912 12,703,313 1,774,478



Sterling Class ‘R’ Accumulation share performanceThe share class was launched on 3 August 2012.


Opening NAV 134.16 133.23 120.56




Distributions (5.30) (4.96) (5.46)


Closing NAV 137.99 134.16 133.23











Other information

Closing NAV (£’000) 15,754 13,233 177


Number of shares 11,416,874 9,863,114 132,883



Sterling Class ‘X’ Income share performanceThe share class was launched on 16 October 1998.


Opening NAV 49.27 51.47 48.74




Distributions (2.46) (2.46) (2.52)

Closing NAV 48.06 49.27 51.47











Other information

Closing NAV (£’000) 368,257 397,647 475,069


Number of shares 766,322,488 807,032,081 922,936,923



Sterling Class ‘X’ Accumulation share performanceThe share class was launched on 16 October 1998.


Opening NAV 130.12 129.54 117.46




Distributions (4.81) (4.49) (5.02)


Closing NAV 133.50 130.12 129.54











Other information

Closing NAV (£’000) 122,187 94,493 69,764


Number of shares 91,524,756 72,618,561 53,854,389






Swiss franc Class ‘A-H’ Accumulation share performanceThe share class was launched on 25 September 2015.

for the year to 31 May 2019 2018 2017Change in NAV per share Swiss ¢ Swiss ¢ Swiss ¢

Opening NAV 1,104.10 1,114.44 1,021.19




Distributions (17.59) (38.31) (42.58)



Closing NAV 0.00 1,104.10 1,114.44

Direct portfolio transaction costs Swiss ¢ Swiss ¢ Swiss ¢










Other information

Closing NAV (£’000) 0 25 27



Highest share price (Swiss ¢) 1,118.92 1,141.58 1,121.69

Lowest share price (Swiss ¢) 1,095.45 1,109.39 1,009.48

Swiss franc Class ‘C-H’ Accumulation share performanceThe share class was launched on 25 September 2015.

for the year to 31 May 2019 2018 2017Change in NAV per share Swiss ¢ Swiss ¢ Swiss ¢

Opening NAV 1,122.48 1,126.22 1,024.94




Distributions (20.90) (45.69) (49.37)



Closing NAV 0.00 1,122.48 1,126.22

Direct portfolio transaction costs Swiss ¢ Swiss ¢ Swiss ¢










Other information

Closing NAV (£’000) 0 26 27



Highest share price (Swiss ¢) 1,139.33 1,158.44 1,133.53

Lowest share price (Swiss ¢) 1,114.27 1,122.11 1,014.51

US dollar Class ‘A-H’ Income share performanceThe share class was launched on 8 August 2014.

for the year to 31 May 2019 2018 2017Change in NAV per share US ¢ US ¢ US ¢

Opening NAV 1,277.44 1,315.16 1,238.31




Distributions (28.50) (63.32) (63.07)


Closing NAV 0.00 1,277.44 1,315.16

Direct portfolio transaction costs US ¢ US ¢ US ¢










Other information

Closing NAV (£’000) 0 470 474



Highest share price (US ¢) 1,293.99 1,337.68 1,329.97

Lowest share price (US ¢) 1,263.78 1,289.84 1,226.22




US dollar Class ‘A-H’ Accumulation share performanceThe share class was launched on 10 December 2010.


Opening NAV 1,516.51 1,488.21 1,336.10




Distributions (24.44) (51.61) (55.80)



Closing NAV 0.00 1,516.51 1,488.21











Other information

Closing NAV (£’000) 0 1,723 1,974





US dollar Class ‘C-H’ Income share performanceThe share class was launched on 8 August 2014.


Opening NAV 1,318.09 1,349.19 1,265.98Return before operating charges and after directportfolio transaction costs 30.31 45.31 161.49



Distributions (29.46) (65.14) (67.28)


Closing NAV 0.00 1,318.09 1,349.19


Costs before dilution adjustments 0.01 0.01 0.00Dilution adjustments [a] 0.00 0.00 0.00



Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.83 0.83 0.83Return after operating charges +1.93 +2.52 +11.89Distribution yield 4.95 4.93 4.61Effect on yield of charges offset against capital 0.82 0.82 0.82

Other information

Closing NAV (£’000) 0 115 122Closing NAV percentage of total fund NAV (%) 0.00 0.01 0.01Number of shares 0 11,599 11,599Highest share price (US ¢) 1,337.12 1,375.65 1,364.36Lowest share price (US ¢) 1,307.04 1,329.89 1,254.19

US dollar Class ‘C-H’ Accumulation share performanceThe share class was launched on 10 December 2010.





Distributions (30.27) (64.20) 66.70

Retained distributions 30.27 64.20 (66.70)


Closing NAV 0.00 1,606.60 1,568.21





Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.83 0.83 0.84Return after operating charges +1.94 +2.45 +12.98Distribution yield 4.14 4.11 3.81Effect on yield of charges offset against capital 0.00 0.00 0.00

Other information

Closing NAV (£’000) 0 32,560 32,930Closing NAV percentage of total fund NAV (%) 0.00 2.78 2.78Number of shares 0 2,700,750 2,695,872Highest share price (US ¢) 1,644.95 1,640.64 1,578.39Lowest share price (US ¢) 1,599.53 1,567.07 1,373.68






Financial statements



Income

Net capital gains / (losses) 3 (12,245) (36,405)

Revenue 5 57,021 57,037


Taxation 7 (42) (191) ______ ______Net revenue / (expense) aftertaxation 42,775 41,919

Total return before distributions 30,530 5,514Distributions 8 (50,201) (50,754)

Change in net assets attributableto shareholders from investmentactivities (19,671) (45,240)



Opening net assets attributable toshareholders 1,172,791 1,185,263Amounts received on issue of shares 123,761 180,611

Amounts paid on cancellation of shares (183,485) (166,274)

Transfer to M&G (Lux)Global High Yield Bond Fund (56,010) 0

______ ______ (115,734) 14,337


Change in net assets attributable toshareholders from investment activities(see above) (19,671) (45,240)



Closing net assets attributable toshareholders 1,058,635 1,172,791

Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets

Fixed assets Investments 991,001 1,103,628


Cash and bank balances 10 40,386 2,796

Cash equivalents 66,773 48,772

Total assets 1,112,397 1,190,489

Liabilities Investment liabilities (32,966) (3,046)

Creditors Bank overdrafts (1,141) (2,358)

Overdrawn positions at futures clearing houses andcollateral manager (486) 0

Distribution payable (2,702) (2,932)

Other creditors 11 (16,467) (9,362)


Net assets attributable to shareholders 1,058,635 1,172,791



The financial statements have been prepared in accordance with the‘Summary of significant accounting policies’ set out on pages 7 and 8.


In determining the amount available for distribution to Income shares,the annual management charge, administration charge and shareclass hedging charge are offset against capital, increasing the amountavailable for distribution whilst restraining capital performance to anequivalent extent.



Non-derivative securities 30,262 (49,598)Derivative contracts (50,292) (9,900)Currency gains / (losses) 7,797 23,105Transaction charges (12) (12)

Net capital gains / (losses) (12,245) (36,405)


The following tables show portfolio transactions and their associatedtransaction costs. For more information about the nature of the costsplease see the section on ‘Operating charges and portfolio transactioncosts’ on pages 30 and 31.

2019 % of 2018 % offor the year to 31 May £’000 transaction £’000 transaction

a) Purchases Equities 0 2,847

Debt securities [a] 487,619 469,447

Total purchases 487,619 472,294

b) Sales Equities 0 1,885

Equities before transaction costs 0 1,886 Commissions 0 0.00 (1) 0.05

Equities after transaction costs 0 1,885


Other transaction types Corporate actions 2,383 52,547

Total sales 581,903 452,116


Commissions paid Equities 0 0.00 1 0.00Derivatives 3 0.00 5 0.00

Total commissions paid 3 0.00 6 0.00

Taxes paid Derivatives 2 0.00 0 0.00

Total taxes paid 2 0.00 0 0.00

Total direct portfolio transactioncosts 5 0.00 6 0.00






M&G Global High Yield Bond Fund Financial statements and notes


Bank interest 74 43

Derivative revenue 3,664 3,300

Dividends from equity investments: non-taxable 1 1






Administration charge 1,684 1,768

Share class hedging charge 5 11

14,041 14,761



Interest payable 42 54

Legal fees 13 0


105 107




Withholding tax 42 191


Total taxation 42 191


______ ______Corporation tax at 20% 8,563 8,422

Effects of:

Interest distributions (8,563) (8,423)


Additional created income generated from conversions 0 1





The fund does not have an unrecognised deferred tax asset at the year end

(2018: same).



First interim 2,528 1,673 2,764 1,362

Second interim 2,776 1,884 2,896 1,448

Third interim 2,593 1,932 3,054 1,575

Fourth interim 2,188 1,604 2,262 1,079

Fifth interim 2,787 2,121 2,971 1,545

Sixth interim 2,398 1,650 2,638 1,364

Seventh interim 2,460 1,686 2,690 1,452

Eighth interim 2,196 1,437 2,684 1,420

Ninth interim 2,181 1,511 2,728 1,613

Tenth interim 2,339 1,638 2,482 1,449

Eleventh interim 2,301 1,513 2,820 1,678

Final 2,702 1,895 2,932 1,896






Expenses offset against capital 7,425 8,835

Undistributed income brought forward 1 1

Undistributed income carried forward 0 (1)




9 Debtors 2019 2018as at 31 May £’000 £’000

Amounts receivable on issues of shares 621 3,062

Currency deals outstanding 0 103


Derivative revenue receivable 617 699


Sales awaiting settlement 611 17,110

Withholding tax recoverable 51 88



Amounts held at futures clearing houses and collateral manager 30,184 1,806


Total cash and bank balances 40,386 2,796




Amounts payable on cancellation of shares 1,238 1,563

Currency deals outstanding 0 103

Derivative expense payable 0 41


Purchases awaiting settlement 14,786 7,227

Payable to M&G (Lux) Global High Yield Bond Fund 2 0

Total other creditors 16,467 9,362






13 Shares in issue



Euro Class ‘A-H’ Income 523,902 59,144 (583,046) 0

Class ‘A-H’ Accumulation 464,564 17,330 (481,894) 0

Class ‘B-H’ Income 107,312 31,857 (139,169) 0

Class ‘B-H’ Accumulation 115,046 5,553 (120,599) 0

Class ‘C-H’ Income 268,213 3,200 (271,413) 0

Class ‘C-H’ Accumulation 623,147 35,970 (659,117) 0



Class ‘I’ Income 11,923,918 264,098 (1,618,428) 10,569,588

Class ‘I’ Accumulation 8,883,780 1,958,983 (2,570,368) 8,272,395

Class ‘PP’ Accumulation 0 287,000 (63,614) 223,386

Class ‘R’ Income 12,703,313 3,503,030 (819,431) 15,386,912

Class ‘R’ Accumulation 9,863,114 2,369,858 (816,098) 11,416,874

Class ‘X’ Income 807,032,081 26,079,894 (66,789,487) 766,322,488

Class ‘X’ Accumulation 72,618,561 25,827,613 (6,921,418) 91,524,756

Swiss francClass ‘A-H’ Accumulation 3,000 2,200 (5,200) 0


US dollar Class ‘A-H’ Income 49,071 2,000 (51,071) 0

Class ‘A-H’ Accumulation 151,383 15,097 (166,480) 0

Class ‘C-H’ Income 11,599 2,000 (13,599) 0

Class ‘C-H’ Accumulation 2,700,750 2,579 (2,703,329) 0


The table below sets out the charging structure for each class of share.The charging structure is the same for both Income and Accumulationshares of each class. Annual Share class Entry Exit management hedging charge charge charge chargeShare class % % % %

Euro Class ‘A-H’ 4.00 n/a 1.25 [a]

Class ‘B-H’ nil n/a 1.75 [a]

Class ‘C-H’ 1.25 n/a 0.65 [a]

Sterling Class ‘A’ nil n/a 1.25 n/a

Class ‘I’ nil n/a 0.65 n/a

Class ‘PP’ nil n/a up to 0.65 n/a

Class ‘R’ nil n/a 1.00 n/a

Class ‘X’ nil n/a 1.25 n/a

Swiss franc Class ‘A-H’ 4.00 n/a 1.25 [a]

Class ‘C-H’ 1.25 n/a 0.65 [a]

US dollar Class ‘A-H’ 4.00 n/a 1.25 [a]

Class ‘C-H’ 1.25 n/a 0.65 [a]

[a] This charge may vary between 0.01% and 0.055%.

15 Related parties


Amounts paid to M&G Securities Limited in respect of the ACD’sannual management charge, administration charge and share classhedging charge are disclosed in note 6. Amounts due at the year endin respect of the ACD’s annual management charge, administrationcharge and share class hedging charge are disclosed in note 11.














This refers to instruments which have been valued using models withunobservable data inputs. This includes single broker-pricedinstruments, suspended/unquoted securities, private equity, unlistedclosed-ended funds and open-ended funds with restrictions onredemption rights.


Level 1 52,203 (742) 73,471 (1,012)

Level 2 938,792 (32,224) 1,029,728 (2,034)

Level 3 6 0 429 0

991,001 (32,966) 1,103,628 (3,046)










Lowest 0.90 7.48 2.47 20.59

Highest 2.78 23.14 3.82 31.80

Average 1.56 12.97 2.97 24.77


20 Credit risk



Below investment grade securities 781,478 827,470


Other investments (26,181) 12,412

Total 958,035 1,100,582

The tables below show the exposure to counterparties. Collateral isposted daily, in the form of cash or high-quality government bonds, tominimise this exposure. Forward contracts Swaps currency Futuresas at 31 May 2019 £’000 £’000 £’000

Bank of America Merrill Lynch (127) 0 (742)

Barclays (191) 0 0

Citigroup 1,040 0 0

Goldman Sachs 1,484 0 0

HSBC 0 (68) 0

JPMorgan 1,350 (31,771) 0

Standard Chartered Bank 0 192 0

State Street Bank 0 239 0

Total 3,556 (31,408) (742)

Forward contracts Swaps currency Futuresas at 31 May 2018 £’000 £’000 £’000

Bank of America Merrill Lynch (63) 0 (1,012)

BNP Paribas 683 0 0

Citigroup 965 (58) 0

Goldman Sachs 838 0 0

HSBC 0 28 0

JPMorgan 3,493 0 0

State Street Bank 0 (100) 0

UBS 0 31 0

Total 5,916 (99) (1,012)




21 Leverage risk




2019 [a] 2019 [a] 2018 [a] 2018 [a]


Lowest 961,030 88 1,023,257 85

Highest 3,121,153 271 3,016,179 255

Average 1,215,370 108 1,180,004 100



physical holdings.


22 Exchange rate risk for hedged share classes

Hedged share classes operated currency hedges designed to reducethe impact of exchange rates in certain circumstances. As a result,profit and loss on the currency hedges may impact the liquidity of theoverall fund. On a day to day basis this was monitored using reportingfrom the outsourced provider of the hedged share class service. Onan ongoing basis the size of the hedged share classes was monitoredto ensure that unforeseen exchange rate volatility can be adequatelymanaged without significantly impacting all shareholders.


This fund pays monthly interest distributions and the following tablesets out the distribution periods.

Monthly distribution periods Start End Xd Payment

First interim 01.06.18 30.06.18 02.07.18 31.07.18

Second interim 01.07.18 31.07.18 01.08.18 31.08.18

Third interim 01.08.18 31.08.18 03.09.18 30.09.18

Fourth interim 01.09.18 30.09.18 01.10.18 31.10.18

Fifth interim [a] 01.10.18 31.10.18 01.11.18 30.11.18

Sixth interim 01.11.18 30.11.18 03.12.18 31.12.18

Seventh interim 01.12.18 31.12.18 01.01.19 31.01.19

Eighth interim 01.01.19 31.01.19 01.02.19 28.02.19

Ninth interim 01.02.19 28.02.19 01.03.19 31.03.19

Tenth interim 01.03.19 31.03.19 01.04.19 30.04.19

Eleventh interim 01.04.19 30.04.19 01.05.19 31.05.19

Final 01.05.19 31.05.19 03.06.19 30.06.19

[a] As a result of the merger of M&G Global High Yield Bond Fund into M&G (Lux)

Global High Yield Bond Fund on 9 November 2018 (‘the effective date’), any

income available for distribution to non-sterling share classes from the start of the

period on 1 October 2018 to the effective date of the merger was distributed to

shareholders on 30 November 2018.




Euro Class ‘A-H’ Income shares


¢ ¢ ¢ ¢First interim 1.3634 3.2122 4.5756 4.4823

Second interim 1.2319 3.7728 5.0047 4.9903

Third interim 1.4756 3.3999 4.8755 5.1209

Fourth interim 1.8090 2.3556 4.1646 3.9181

Fifth interim 3.2809 3.2067 6.4876 5.1702

Sixth interim n/a n/a n/a 4.5489

Seventh interim n/a n/a n/a 4.6701

Eighth interim n/a n/a n/a 4.6948

Ninth interim n/a n/a n/a 4.7440

Tenth interim n/a n/a n/a 4.4178

Eleventh interim n/a n/a n/a 5.0446

Final n/a n/a n/a 5.2329

Euro Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.6092 2.5514 4.1606 3.8743

Second interim 2.4275 2.1002 4.5277 4.1195

Third interim 2.3735 2.0610 4.4345 4.4243

Fourth interim 1.1430 2.5650 3.7080 3.0974

Fifth interim 2.6276 3.2588 5.8864 4.4618











Euro Class ‘B-H’ Income shares


¢ ¢ ¢ ¢First interim 2.4749 1.3762 3.8511 3.8633

Second interim 1.8116 2.4051 4.2167 4.1736

Third interim 1.6547 2.4510 4.1057 4.3317

Fourth interim 1.8207 1.6846 3.5053 3.3168

Fifth interim 0.8792 4.5747 5.4539 4.3752








Euro Class ‘B-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 2.9376 0.0000 2.9376 2.7015

Second interim 3.1790 0.0000 3.1790 2.8720

Third interim 2.1106 1.0042 3.1148 3.1147

Fourth interim 2.5660 0.0000 2.5660 2.0609

Fifth interim 2.9853 1.1208 4.1061 3.1292








Euro Class ‘C-H’ Income shares


¢ ¢ ¢ ¢First interim 4.9537 0.0000 4.9537 4.7332

Second interim 5.4204 0.0000 5.4204 5.5086

Third interim 3.9481 1.3350 5.2831 5.5696

Fourth interim 4.5140 0.0000 4.5140 4.2548

Fifth interim 7.0362 0.0000 7.0362 5.5769








Euro Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.3125 3.7372 5.0497 4.7450

Second interim 2.6491 2.8715 5.5206 5.0462

Third interim 2.7624 2.6452 5.4076 5.3666

Fourth interim 0.4175 4.1637 4.5812 3.9498

Fifth interim 2.4307 4.7877 7.2184 5.4478











Second interim 0.0632 0.1549 0.2181 0.2108

Third interim 0.0818 0.1312 0.2130 0.2233

Fourth interim 0.0893 0.0912 0.1805 0.1663

Fifth interim 0.0830 0.1481 0.2311 0.2200

Sixth interim 0.0760 0.1279 0.2039 0.1968

Seventh interim 0.0904 0.1196 0.2100 0.2007

Eighth interim 0.0275 0.1582 0.1857 0.2015

Ninth interim 0.0889 0.0973 0.1862 0.2068

Tenth interim 0.0660 0.1348 0.2008 0.1896

Eleventh interim 0.0898 0.1090 0.1988 0.2172

Final 0.1076 0.1260 0.2336 0.2278




Second interim 0.3586 0.0594 0.4180 0.3773

Third interim 0.1064 0.3043 0.4107 0.4107

Fourth interim 0.1057 0.2347 0.3404 0.2771

Fifth interim 0.2193 0.2348 0.4541 0.4001

Sixth interim 0.3328 0.0667 0.3995 0.3529

Seventh interim 0.1866 0.2299 0.4165 0.3695

Eighth interim 0.2363 0.1218 0.3581 0.3525

Ninth interim 0.1397 0.2272 0.3669 0.3946

Tenth interim 0.1246 0.2782 0.4028 0.3481


Final 0.1786 0.3043 0.4829 0.4379








Second interim 2.3862 2.2725 4.6587 4.4744

Third interim 2.4426 2.1098 4.5524 4.7429

Fourth interim 1.9240 1.9341 3.8581 3.5343

Fifth interim 2.4283 2.5125 4.9408 4.6759

Sixth interim 1.8621 2.4996 4.3617 4.1881

Seventh interim 2.1901 2.3061 4.4962 4.2698

Eighth interim 1.4979 2.5360 4.0339 4.2858

Ninth interim 1.9851 2.0011 3.9862 4.4061

Tenth interim 1.8411 2.4647 4.3058 4.0422


Final 3.1007 1.9265 5.0272 4.8549




Second interim 3.1625 1.9517 5.1142 4.6356

Third interim 2.0552 2.9680 5.0232 4.9889

Fourth interim 2.2362 1.9850 4.2212 3.5550

Fifth interim 2.7001 2.8266 5.5267 4.9107

Sixth interim 2.2320 2.6530 4.8850 4.3771

Seventh interim 2.6964 2.3781 5.0745 4.5307

Eighth interim 1.7099 2.7653 4.4752 4.4462

Ninth interim 1.5284 2.9790 4.5074 4.7769

Tenth interim 1.8418 3.0752 4.9170 4.3081


Final 3.2029 2.6402 5.8431 5.3149

Sterling Class ‘PP’ Accumulation shares


p p p pFirst interim n/a n/a n/a n/a

Second interim n/a n/a n/a n/a

Third interim n/a n/a n/a n/a

Fourth interim n/a n/a n/a n/a

Fifth interim n/a n/a n/a n/a

Sixth interim n/a n/a n/a n/a

Seventh interim n/a n/a n/a n/a

Eighth interim n/a n/a n/a n/a

Ninth interim n/a n/a n/a n/a

Tenth interim n/a n/a n/a n/a

Eleventh interim 0.1900 0.1581 0.3481 n/a

Final 0.2738 0.1526 0.4264 n/a

Sterling Class ‘R’ Income shares



Second interim 0.1744 0.2885 0.4629 0.4463

Third interim 0.2270 0.2253 0.4523 0.4729

Fourth interim 0.2185 0.1647 0.3832 0.3522

Fifth interim 0.3317 0.1589 0.4906 0.4658

Sixth interim 0.2705 0.1623 0.4328 0.4172

Seventh interim 0.2844 0.1618 0.4462 0.4252

Eighth interim 0.0520 0.3321 0.3841 0.4266

Ninth interim 0.1631 0.2317 0.3948 0.4385

Tenth interim 0.0932 0.3338 0.4270 0.4022


Final 0.2378 0.2608 0.4986 0.4828

Sterling Class ‘R’ Accumulation shares



Second interim 0.2075 0.2535 0.4610 0.4173

Third interim 0.1692 0.2836 0.4528 0.4515

Fourth interim 0.2623 0.1154 0.3777 0.3125

Fifth interim 0.3292 0.1704 0.4996 0.4419

Sixth interim 0.1372 0.3033 0.4405 0.3917

Seventh interim 0.2341 0.2243 0.4584 0.4080

Eighth interim 0.0413 0.3441 0.3854 0.3941

Ninth interim 0.0946 0.3097 0.4043 0.4330

Tenth interim 0.2298 0.2138 0.4436 0.3860


Final 0.1896 0.3403 0.5299 0.4811

Sterling Class ‘X’ Income shares



Second interim 0.0109 0.2073 0.2182 0.2109

Third interim 0.0213 0.1919 0.2132 0.2234

Fourth interim 0.0090 0.1716 0.1806 0.1664

Fifth interim 0.0137 0.2174 0.2311 0.2200

Sixth interim 0.0061 0.1977 0.2038 0.1969

Seventh interim 0.0055 0.2045 0.2100 0.2008

Eighth interim 0.0158 0.1694 0.1852 0.2017

Ninth interim 0.0175 0.1684 0.1859 0.2069

Tenth interim 0.0084 0.1925 0.2009 0.1898


Final 0.0165 0.2185 0.2350 0.2277





Sterling Class ‘X’ Accumulation shares



Second interim 0.2721 0.1463 0.4184 0.3778

Third interim 0.1367 0.2743 0.4110 0.4110

Fourth interim 0.1105 0.2303 0.3408 0.2774

Fifth interim 0.2554 0.1990 0.4544 0.4004

Sixth interim 0.2186 0.1814 0.4000 0.3532

Seventh interim 0.1987 0.2182 0.4169 0.3698

Eighth interim 0.1417 0.2175 0.3592 0.3529

Ninth interim 0.2944 0.0713 0.3657 0.3950

Tenth interim 0.0585 0.3445 0.4030 0.3485


Final 0.4048 0.0785 0.4833 0.4378

Swiss franc Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 3.2166 0.0000 3.2166 2.9941

Second interim 3.5301 0.0000 3.5301 3.2574

Third interim 2.5532 0.8645 3.4177 3.5257

Fourth interim 2.8663 0.0000 2.8663 2.4300

Fifth interim 4.5566 0.0000 4.5566 3.4870








Swiss franc Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 3.7890 0.0000 3.7890 3.5684

Second interim 4.1724 0.0000 4.1724 3.8750

Third interim 3.0292 1.0274 4.0566 4.1438

Fourth interim 3.4504 0.0000 3.4504 3.0019

Fifth interim 5.4342 0.0000 5.4342 4.1425








US dollar Class ‘A-H’ Income shares


¢ ¢ ¢ ¢First interim 5.1286 0.0000 5.1286 4.9256

Second interim 5.6824 0.0000 5.6824 5.6188

Third interim 4.8473 0.7059 5.5532 5.6942

Fourth interim 4.8136 0.0000 4.8136 4.3120

Fifth interim 2.9170 4.4079 7.3249 5.6627








US dollar Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 4.4125 0.0000 4.4125 4.0273

Second interim 4.8757 0.0000 4.8757 4.4094

Third interim 4.6321 0.1531 4.7852 4.6816

Fourth interim 4.0846 0.0000 4.0846 3.2314

Fifth interim 3.7495 2.5280 6.2775 4.5994








US dollar Class ‘C-H’ Income shares


¢ ¢ ¢ ¢First interim 5.2965 0.0000 5.2965 5.1200

Second interim 5.8703 0.0000 5.8703 5.6958

Third interim 4.2827 1.4561 5.7388 5.8480

Fourth interim 4.9754 0.0000 4.9754 4.4313

Fifth interim 7.5775 0.0000 7.5775 5.8204












US dollar Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 5.4295 0.0000 5.4295 5.0013

Second interim 6.0185 0.0000 6.0185 5.4586

Third interim 4.4110 1.5004 5.9114 5.7464

Fourth interim 5.0978 0.0000 5.0978 4.1739

Fifth interim 7.8175 0.0000 7.8175 5.7093














Investment policy

At least 70% of the fund is invested in index-linked debt instrumentswhich may be government and public securities or corporate debtinstruments. Non-sterling denominated securities may be held and, ifdeemed appropriate by the investment manager, the associatedcurrency risks hedged. The fund’s exposure to index-linked,government and public securities or corporate debt may be gainedthrough the use of derivatives. Derivatives may also be used for efficientportfolio management. The fund may also invest in collective investmentschemes, other transferable securities, cash, near cash, other moneymarket securities, warrants and other derivative instruments.

Investment approach

The fund manager’s investment approach is driven primarily bymacroeconomic factors such as views on interest rates, inflation andeconomic growth. As different factors dominate returns at differentstages of the economic cycle, the manager applies a dynamicinvestment approach.

Risk profile

The fund invests mainly in fixed interest assets that would be expectedto perform well in an inflationary environment, such as inflation-linkedbonds issued by companies and governments. It is therefore subjectto the price volatility of the global bond market as well as theperformance of individual issuers.

The fund’s focus is on investment grade, or high-quality, debt securitiesthat are normally traded with relative ease. The fund’s exposure toindex-linked bonds may be achieved either directly or throughderivatives. In association with the use of derivatives, including thoseinstruments not traded through an exchange, collateral is deposited inorder to mitigate the risk that a counterparty may default on itsobligations or become insolvent.



The above number:

• is based on the rate at which the value of the fund has moved up and down in thepast and is based on historical data so may not be a reliable indicator of the futurerisk profile of the fund.

• is not guaranteed and may change over time and the lowest risk number does notmean risk free.


Low risk High risk


1 2 3 4 5 6 7

Investment review



Between 1 June 2018 (the start of the review period) and 3 June 2019,the M&G Index-Linked Bond Fund’s Sterling Class ‘A and ‘I’ sharesdelivered a total return (the combination of income and growth ofcapital) of 9.0% and 9.1%, respectively. This was behind the averagereturn from the fund’s peer group, the IA UK Index Linked Gilts sector,which was 10.0% over the same period.

Over this reporting period, the fund has met its objective of providingincome and capital growth. The fund has also met its objective overthree and five years and since launch.*




UK government bonds (also known as gilts) were favoured duringperiods of increased uncertainty with regard to the country’s Brexitdiscussions, in particular fears of a disorderly or ‘hard’ Brexit, asinvestors turned to the perceived safety of government bonds. Giltswere also supported at times of heightened international tradetensions. (Bonds are loans in the form of a security, usually issued bya government (government bonds) or a company (corporate bonds),which normally pay a fixed rate of interest over a given period, at theend of which the initial amount borrowed is repaid.)

A variety of factors weighed on investor sentiment throughout thesecond half of 2018, including concerns about the negative impact ofrising US interest rates, escalating trade war tensions between the USand China, and political turmoil in Europe and several emergingmarkets. The mood then changed in early 2019, as investors tookcomfort from statements by the US Federal Reserve that it wouldmoderate its strategy of raising interest rates, due to the globaleconomic slowdown, lower oil prices and muted domestic inflation.However, a deterioration in US-China trade developments as well asevents in UK domestic politics led to a pronounced ‘risk-off’ mood atthe end of the period under review, which led to strong returns forindex-linked gilts in May 2019. (Index-linked bonds refer to bondswhere both the value of the loan and the interest payments areadjusted in line with inflation over the life of the security.)

In terms of political developments, Brexit talks continued to dominatethe headlines in the UK over the period under review. Prime MinisterTheresa May secured a withdrawal treaty with the European Union (EU),but members of parliament have rejected the treaty three times. Theoriginal date for Brexit came and went and a new deadline of 31 October 2019 has been agreed. However, the UK was compelledto hold elections to the European Parliament in May. Theresa Mayresigned, paving the way for a new prime minister and potentiallyincreasing the possibility of a ‘no deal’.

The UK economy has held up fairly well, with interest rates relativelylow and record high employment levels, while UK companies’ balancesheets are well capitalised. In general terms, domestic growth appearsto have been hampered as firms delay investment decisions due toBrexit-related uncertainty. However, a surge in business activity inspring 2019 appears to reflect companies’ preparation for potentialBrexit-related difficulties.


M&G Index-Linked Bond Fund Authorised Corporate Director’s Report

The Bank of England raised interest rates by a quarter of a percentagepoint in August 2018, taking them to 0.75%. However, further increasesare likely to be closely linked to Brexit developments and prospects forthe domestic economy. In the current uncertain environment, changesto interest rates are likely to be limited and gradual. UK inflation, asmeasured by the Consumer Prices Index, stood at 2.0% in May,compared with a five-year high of 3.1% in November 2017. In bondmarkets, actual or expected rises in inflation or interest rates typicallydampen sentiment towards conventional bonds but also, to someextent, towards index-linked government bonds.

In the US market, the Federal Reserve (Fed) increased interest rates three times during the review period − in June, September andDecember 2018 – each time by a quarter of a percentage point.Meanwhile, after some weakness in early 2019, the news from Europehas been more positive recently with stronger-than-expected economicgrowth, although it remains lacklustre.

The fund’s performance reflected the gains in both conventional andindex-linked government bonds over the 12 months under review,buoyed by investor demand for safe-haven assets amid the economicand geopolitical uncertainties.


The fund’s performance is affected by its ‘duration’, which refers to theportfolio’s sensitivity to changes in interest rates.

The portfolio was positioned to be slightly less sensitive to thepossibility of rising interest rates for most of the period under review.Government bonds with a short time until repayment are often lesssensitive to interest rate movements than bonds with a longer maturitydate. We see value in index-linked gilts maturing in less than 5 yearsas well as very long-dated index-linked gilts (maturing in more than 40 years), where we see compelling value. Meanwhile, we have asmaller allocation to index-linked gilts maturing in 10-40 years,compared to the wider index-linked market.

We continued to find ‘relative value’ opportunities within the index-linked gilt market, focusing on buying the gilts that appearedmost attractively priced. For example, in February, we participated inthe newly issued UK Gilt index bond maturing in 2041 due to itsattractive valuations. At the same time, we sold down index-linked giltsmaturing in 2035, 2040 and 2068.

Outlook

At the time of writing, the outlook remains relatively uncertain due toa lack of clarity about Brexit, while global economic growth appearsto be easing and international trade wars continue. Despite a lack ofany meaningful progress regarding Brexit, the UK economy is stillgrowing, albeit at a modest pace with a lack of business investmentand slower economic activity among the UK’s main trading partnersacting as a drag. Recent data suggest that UK manufacturing andconstruction declined in May 2019, while growth continues in theimportant services sector, but remains modest.

Following Theresa May’s resignation, a multi-candidate leadershipcontest is expected to see a new prime minister in place by the end ofJuly, with the outcome likely to affect the course of the Brexitnegotiations. This in turn will have a significant influence on prospectsfor the UK economic and political backdrop. Leaving the EU without adeal would probably depress sterling, which could lead to higher importcosts and potentially higher inflation. In contrast, a more orderly exitmay prove supportive to sterling.

Conventional gilts and index-linked gilts tend to be favoured byinvestors during volatile periods due to their perceived status as lower-risk assets. We therefore feel that UK government bonds shouldprove attractive to investors in the current uncertain climate.

Ben LordFund manager









Investment review

Investments

Portfolio statement

as at 31 May 2019 2019 2018Holding £’000 % %

FIXED INCOME 286,835 99.68 98.73 Debt securities 286,835 99.68 98.73 ‘AA’ credit rated bonds 282,993 98.35 98.03 £1,000,000 Network Rail Infrastructure Finance IL 1.9618% 01/12/2025 1,970 0.68

£6,350,000 UK Treasury 2.25% 07/09/2023 6,790 2.36

£36,500,000 UK Treasury IL 0.125% 22/03/2024 49,166 17.09

£2,350,000 UK Treasury IL 0.125% 22/03/2029 3,639 1.26

£7,813,000 UK Treasury IL 0.125% 10/08/2041 13,030 4.53

£4,300,000 UK Treasury IL 0.125% 22/03/2044 8,594 2.99

£5,540,000 UK Treasury IL 0.125% 22/03/2046 10,751 3.74

£2,110,000 UK Treasury IL 0.125% 10/08/2048 4,021 1.40

£8,730,000 UK Treasury IL 0.125% 22/03/2058 21,290 7.40

£910,000 UK Treasury IL 0.125% 22/03/2068 2,818 0.98

£26,003,000 UK Treasury IL 0.375% 22/03/2062 79,517 27.63

£4,075,000 UK Treasury IL 0.5% 22/03/2050 11,211 3.90

£2,580,000 UK Treasury IL 0.75% 22/11/2047 7,284 2.53

£3,410,000 UK Treasury IL 1.25% 22/11/2027 6,848 2.38

£8,700,000 UK Treasury IL 1.875% 22/11/2022 14,157 4.92

£665,500 UK Treasury IL 2.5% 16/04/2020 2,372 0.82

£9,388,000 UK Treasury IL 2.5% 17/07/2024 34,646 12.04

£1,275,000 UK Treasury IL 4.125% 22/07/2030 4,889 1.70

‘A’ credit rated bonds 497 0.17 0.46 £200,000 National Grid Electricity Transmission IL 2.817% 08/07/2032 497 0.17

‘BB’ credit rated bonds 0 0.00 0.24

Bonds with no credit rating 3,345 1.16 0.00 £2,722,000 University of Cambridge IL 0.25% 27/06/2068 3,345 1.16


CASH EQUIVALENTS 0 0.00 1.14 ‘AAA’ rated money market funds [a] 0 0.00 1.14

Total portfolio (notes 2c & 2d on page 7) 286,835 99.68 99.87Net other assets / (liabilities) 918 0.32 0.13







Fund performance


The following chart and tables show the performance for two of thefund’s share classes – Sterling Class ‘A’ (Accumulation) shares andSterling Class ‘I’ (Accumulation) shares.



• The performance of the Sterling Class ‘I’ (Accumulation) share isthe most appropriate to compare with the average performance ofthe fund’s comparative sector. It is the share class used by theInvestment Association in the calculation of the comparativesector’s average performance. This share class is available for direct investment with M&G subject to minimum investmentcriteria, or via third parties who may charge additional fees. Theperformance shown takes the deduction of the ongoing charge forthis share class into account but it does not take account of chargesapplied by any other party through which you may have invested.




2019 2018 2017as at 31 May £’000 £’000 £’000





To give an indication of the performance of the fund, the following tableshows the compound rate of return, per annum, over the period.Calculated on a price to price basis with income reinvested.



Sterling [b] Class ‘A’ +9.0 +8.8 +9.0 +6.6 [c]

Class ‘I’ +9.1 +8.9 +9.1 +7.6 [d]

[a] Absolute basis.


[c] 4 October 1999, the end of the initial offer period of the predecessor unit trust.

[d] 3 August 2012, the launch date of the share class.

120

140

170

200

250

300

350

400

10099 00 01 02 03 04 05 06 07 08 09 10 11 12 14 15 1613 17 1918

October 1999 = 100, plotted monthly Chart date 3 June 2019



Morningstar (IA) UK Index Linked Gilts sector average*




M&G Index-Linked Bond Fund Financial highlights



Operating charges























Fund performance





Opening NAV 141.16 144.31 117.96




Distributions 0.00 0.00 0.00

Closing NAV 155.40 141.16 144.31











Other information

Closing NAV (£’000) 15,929 18,080 26,078


Number of shares 10,250,393 12,807,899 18,071,199



Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 4 October 1999.


Opening NAV 162.16 165.78 135.52






Closing NAV 178.53 162.16 165.78











Other information

Closing NAV (£’000) 44,350 47,960 65,606


Number of shares 24,841,658 29,574,772 39,573,071





Opening NAV 1,512.24 1,544.44 1,261.18





Closing NAV 1,666.49 1,512.24 1,544.44











Other information

Closing NAV (£’000) 86,709 86,869 106,652


Number of shares 5,203,124 5,744,397 6,905,591







Opening NAV 1,514.22 1,546.46 1,262.85






Closing NAV 1,668.67 1,514.22 1,546.46











Other information

Closing NAV (£’000) 140,765 161,185 201,775


Number of shares 8,435,781 10,644,776 13,047,558











Income

Net capital gains / (losses) 3 25,391 (14,348)

Revenue 5 3,727 6,513


Taxation 7 0 0 ______ ______Net revenue / (expense) aftertaxation 2,020 4,447

Total return before equalisation 27,411 (9,901)Equalisation 8 531 800

Change in net assets attributableto shareholders from investmentactivities 27,942 (9,101)






Change in net assets attributable toshareholders from investment activities(see above) 27,942 (9,101)


Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets


Current assets Debtors 9 440 453

Cash and bank balances 10 798 17

Cash equivalents 0 3,588

Total assets 288,073 314,154

Liabilities

Creditors Other creditors 11 (320) (60)

Total liabilities (320) (60)







In determining the amount available for distribution, a transfer has been made between revenue and capital to disregard the changein the Retail Price Index during the period in respect of interest from index-linked gilt-edged securities. This is to contribute to thepreservation of the share value in real terms.




Currency gains / (losses) 0 (1)


Net capital gains / (losses) 25,391 (14,348)






c) Indirect portfolio transaction costs % %





Bank interest 3 0





M&G Index-Linked Bond Fund Financial statements and notes




1,672 2,028





13 12





Total taxation 0 0


______ ______Corporation tax at 20% 404 890

Effects of:

Relief for indexation on UK gilts (1,620) (2,326)

Current year expenses not utilised 1,216 1,436





The fund has not recognised a deferred tax asset of £6,505,000 (2018: £5,289,000)

arising as a result of having excess management expenses and interest distributions.

We do not expect this asset to be utilised in the foreseeable future.



Interim nil nil nil nil

Final nil nil nil nil

Total net distributions nil nil


Income deducted on cancellation of shares (631) (951)

Income received on issue of shares 100 151

Equalisation (531) (800)


Expenses offset against capital 576 687

Effective yield adjustment not distributed (8,096) (11,634)

Income deficit transferred to capital 4,969 5,700

Equalisation (531) (800)



9 Debtors 2019 2018as at 31 May £’000 £’000


Debt security interest receivable 415 452


Total debtors 440 453


Cash held as bank balances 798 17

Total cash and bank balances 798 17









13 Shares in issue



Sterling Class ‘A’ Income 12,807,899 454,910 (3,012,416) 10,250,393

Class ‘A’ Accumulation 29,574,772 758,159 (5,491,273) 24,841,658

Class ‘I’ Income 5,744,397 412,283 (953,556) 5,203,124

Class ‘I’ Accumulation 10,644,776 225,367 (2,434,362) 8,435,781








15 Related parties


Amounts paid to M&G Securities Limited in respect of rebatearrangements for the ACD’s annual management charge andadministration charge are disclosed in note 6. Amounts due at the yearend from the ACD’s management charge and administration chargeare disclosed in note 11.











This refers to instruments which have been valued using models withunobservable data inputs. This includes single broker-pricedinstruments, suspended/unquoted securities, private equity, unlistedclosed-ended funds and open-ended funds with restrictions onredemption rights. However no such financial instruments were held.


Level 1 281,023 0 306,021 0

Level 2 5,812 0 4,075 0

Level 3 0 0 0 0

286,835 0 310,096 0



The general risk management policies for the fund are set out in note 3 to the financial statements on pages 8 and 9.







Lowest 6.60 33.00 9.31 46.54

Highest 12.28 61.38 11.53 57.65

Average 10.18 50.91 10.26 51.32


20 Credit risk 2019 2018as at 31 May £’000 £’000


Below investment grade securities 0 743

Unrated securities 3,345 0

Total 286,835 310,096




21 Leverage risk




2019 [a] 2019 [a] 2018 [a] 2018 [a]


Lowest 0 0 0 0

Highest 0 0 23 0

Average 0 0 0 0



physical holdings.

[b] Expressed as a percentage over net asset.


This fund pays semi-annual interest distributions and the followingtable sets out the distribution periods.

Semi-annual distribution periods Start End Xd Payment

Interim 01.06.18 30.11.18 03.12.18 31.01.19

Final 01.12.18 31.05.19 03.06.19 31.07.19






p p p pInterim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000



p p p pInterim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000



p p p pInterim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000



p p p pInterim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000







Investment objective and policy

The fund is designed to track the FTSE All-Share Index. The fundmanager has full discretionary investment management powers withinthe confines of this investment objective of the fund.

Investment approach

The M&G Index Tracker Fund is a UK fund that broadly replicates theFTSE All-Share Index*. The fund holds nearly all of the companies inthe index and closely matches the weight that each represents in theFTSE All-Share Index.

* FTSE® International. FTSE is a joint trademark of the London Stock Exchange

Limited and the Financial Times Limited and is used by FTSE International Limited

under licence. The FTSE All-Share Index is calculated by FTSE International

Limited. FTSE International Limited does not sponsor, endorse or promote these

products. All copyright in the index values and constituent lists rests with FTSE

International Limited. M&G Securities Limited has obtained full licence from FTSE

International Limited to use such copyright in the creation of this product.

Risk profile

The fund is designed to track the performance of the FTSE All-ShareIndex, which represents a broad spread of UK company shares. Its performance, therefore, reflects the price volatility of the UKstockmarket and the performance of individual companies.The fundholds nearly all of the companies in the index and closely matchesthe weight that each represents in the FTSE All-Share Index. Thefund’s risks are measured and managed as an integral part of theinvestment process.


The above number:





mean risk free.


Low risk High risk


1 2 3 4 5 6 7

Investment review



The M&G Index Tracker Fund is designed to track the FTSE All-ShareIndex. Between 1 June 2018 (the start of the review period) and 3 June 2019, the fund’s Sterling Class ‘A’ and ‘C’ shares produced atotal return (the combination of income and growth of capital) of -4.7%and -4.5% respectively in sterling terms. Meanwhile, the FTSE All-Share Index produced a total return of -3.3% over the same period.

The majority of the fund’s underperformance was due to a timingdifference between the pricing of the fund and the index. The index is priced at the end of the day while the fund is priced at midday. To illustrate this point, if we revalue the fund using closing prices itwould give a better comparison of performance. Using end of dayprices for 1 June 2018 and 3 June 2019, the total return (gross ofcharges) of the fund would be -3.3%, compared with the FTSE All-Share Index’s return of -3.3%.*




As the fund tracks the index, its overall performance can largely beexplained by market developments over the period under review. It isworth noting that, in a global economy, the fates of individual marketsare often closely connected to each other. As a result, the performanceand prospects of the UK stockmarket tend to be affected bydevelopments around the world.

The UK stockmarket was volatile over the 12 months under review.Like other major stockmarkets, the UK market fell sharply duringOctober 2018 due to a greater-than-expected increase in borrowingcosts, driven by the US fixed income (bond) market. The strength ofthe US economy and possible inflationary pressures drove investors’fears that the US may raise interest rates more quickly in 2019. In late2018, investors also became concerned that the US economy wasslowing, just as the effect of tax cuts was beginning to wane.Sentiment was also hurt due to the ongoing trade war between the USand China, despite some encouraging signs that some form ofagreement was imminent in the spring.

Investors’ risk appetite improved significantly in the new year after theUS Federal Reserve indicated a slower approach to interest rate hikes,due to the global economic slowdown, lower oil prices and muteddomestic inflation. However, heightened trade tensions between theUS and China led to stockmarket weakness towards the end of theperiod under review. Against this backdrop, the UK stockmarket andthe fund fell over the 12 months.

In terms of political developments, the Brexit talks continued todominate the headlines over the period under review. Prime MinisterTheresa May secured a withdrawal treaty with the European Union(EU), but members of parliament rejected the treaty three times. Theoriginal date for Brexit came and went after the EU agreed to extendthe process. With the aim of avoiding a ’no deal’ exit on 12 April, thePrime Minister agreed a new deadline of 31 October 2019. However,the UK was compelled to hold elections to the European Parliament


M&G Index Tracker Fund Authorised Corporate Director’s Report

in May, resulting in significant losses for the Conservative and LabourParties in the UK. In other developments, Theresa May announcedher resignation the same month, triggering a multi-candidateleadership contest, with a new prime minister expected to be in placeby the end of July.

Turning to the domestic economy, UK activity expanded by anestimated 0.5% in the first quarter of 2019, compared with a sluggish0.2% in the final three months of 2018. However, a surge in businessactivity in spring 2019 appears to reflect companies’ preparations forpotential Brexit-related difficulties, which is likely to have supportedeconomic activity.

In other data, domestic interest rates stand at 0.75%, after the Bankof England raised levels by a quarter of a percentage point inAugust 2018. Future changes are likely to be closely connected todevelopments in the Brexit negotiations and prospects for economicactivity.

Inflation, as measured by the Consumer Prices Index (CPI), stood at2.0% in May, compared with a five-year high of 3.1% in November2017. In other economic data, wage growth continues to be solid, while unemployment remains low, standing at 3.8% in the threemonths to April.

At a sector level, performance was mixed, with no clear trend betweendefensive industries, which tend to be relatively resilient in uncertaintimes, and sectors that are more closely linked to economic cycles.For example, sectors that outperformed the broader market over the12 months included certain defensive holdings, such as beveragesand personal goods, as well as some cyclical sectors like computerservices & software and industrial metals & mining. Similarly, industriesthat lagged the broader market included defensives tobacco andelectricity as well as automobiles & components and generalindustrials, which are generally viewed as cyclical stocks.

In terms of individual stocks, leading contributors included consumergoods company Unilever, as well as pharmaceutical firmsAstraZeneca and GlaxoSmithKline. Meanwhile, British AmericanTobacco, telecommunications company Vodafone and minerGlencore lagged behind.


There was considerable merger and acquisition activity over the periodunder review, resulting in some departures from the portfolio. Certaincompanies were bought by overseas firms, rendering them ineligiblefor inclusion in the portfolio and we subsequently sold the positions.For example, pharmaceutical company Shire was bought by Japan’sTakeda Pharmaceutical; telecommunications firm Sky was acquiredby Comcast from the US; and NEX Group, which is focused onelectronic markets, was bought by US firm CME Group. Meanwhile,gold miner Randgold Resources merged with Canada’s Barrick Gold.

We undertook some sales and purchases in certain stocks held in theportfolio to reflect movements in their relative weighting in the index.For example, the relative weightings of Diageo and Rio Tinto declinedin March 2019 and we therefore reduced the holdings to ensure ourpositions were broadly in line with the index. Similarly, BP’s relativeweighting increased in the same month and we bought more sharesto reflect this change.

Certain stocks floated on the FTSE All-Share Index during the periodand we subsequently started holdings in the portfolio. Examples ofcompanies launching on the London Stock Exchange includedSmithson Investment Trust and manufacturer of luxury cars AstonMartin Lagonda Global Holding.

Elsewhere, other entrants to the portfolio included financial servicesfirm Quilter following its demerger from Old Mutual. We sold ourposition in Old Mutual when it delisted from the UK indices and movedsolely to a listing in South Africa.

Other purchases involved RELX, a provider of information-basedanalytics and decision tools. The company simplified its corporatestructure by merging its UK and Netherlands lines and we boughtsome more of the stock to reflect this move. Meanwhile, tradingservices firm Plus500 moved to the main index from AIM, the LondonStock Exchange’s Alternative Investment Market for smallercompanies, and we initiated a holding. We also bought shares ininternational sales, marketing and support services group DCC, whichissued new shares via a primary placing.

Outlook

Despite the absence of any meaningful progress in the Brexitnegotiations, the UK economy is still growing, albeit at a modest pace,with a lack of business investment and slower economic activityamong the UK’s main trading partners acting as a drag.

Recent data suggest that UK manufacturing declined in May 2019, incontrast to the robust growth in the sector seen earlier in the year. Itappears that the slowdown indicates weaker demand as well as areversal of earlier Brexit-related stockpiling that took place ahead ofthe original Brexit date of 29 March. Elsewhere, the construction sectorcontracted in May, led by lower volumes of commercial work and civilengineering activity. Meanwhile, growth in the important servicessector reached a three-month high but remains modest.

In other data, inflation is in line with the Bank of England’s 2.0% target.Employment is at record highs and wage growth remains solid.Meanwhile, interest rates are still reasonably low, which should supportbusinesses. Moreover, UK companies’ balance sheets are wellcapitalised, and earnings and dividend growth are supportive.Meanwhile, the UK continues to be attractive to overseas buyers asevidenced by ongoing merger and acquisition activity.

At the time of writing, the outlook remains relatively uncertain due toa lack of clarity about Brexit, while the global economy appears to bedecelerating amid a continuation of international trade wars. Thesefactors may weigh on the UK economy, in the short term at least.Nevertheless, it is encouraging that corporate earnings have so farheld up well and company shares remain favourably valued.

Richard O’Connor Fund manager









Investment review

Investments

Portfolio statement

as at 31 May 2019 2019 2018 [a]

Holding £’000 % %

EQUITIES 506,502 99.10 100.12 Software & computer services 5,579 1.09 0.88 90,562 Avast 279 0.05

16,000 AVEVA 586 0.11

18,923 Computacenter 234 0.05

21,635 FDM 208 0.04

80,039 Micro Focus International 1,522 0.30

84,545 NCC 138 0.03

245,468 Sage 1,826 0.36

24,806 SDL 134 0.03

36,554 Softcat 332 0.06

77,410 Sophos 320 0.06

Technology hardware & equipment 257 0.05 0.07 162,534 Spirent Communications 257 0.05

Telecommunication service providers 12,610 2.47 2.91 1,877,479 BT 3,660 0.72

109,175 Inmarsat 598 0.12

132,444 KCOM 128 0.02

151,871 TalkTalk Telecom 179 0.04

13,585 Telecom Plus 205 0.04

5,999,650 Vodafone 7,840 1.53

Health care providers 1,731 0.34 0.50 334,284 ConvaTec 470 0.09

15,000 Georgia Healthcare 37 0.01

87,523 Mediclinical International 269 0.05

19,068 NMC Health 437 0.09

83,002 Spire Healthcare 101 0.02

58,560 UDG Healthcare 417 0.08

Medical equipment & services 3,319 0.65 0.48 198,468 Smith & Nephew 3,319 0.65

Pharmaceuticals & biotechnology 36,775 7.19 7.79 296,322 AstraZeneca 17,252 3.38

87,799 BTG 732 0.14

12,913 Consort Medical 118 0.02

24,862 Dechra Pharmaceuticals 680 0.13

17,209 Genus 454 0.09

1,104,290 GlaxoSmithKline 16,818 3.29

33,399 Hikma Pharmaceuticals 524 0.10

161,108 Indivior 72 0.01

155,968 Vectura 125 0.03

Banks 52,320 10.24 10.59 9,871 Bank of Georgia 161 0.03

3,852,938 Barclays 5,768 1.13

35,678 Close Brothers 492 0.10

296,153 CYBG 538 0.10

4,549,610 HSBC 29,413 5.75

16,206,242 Lloyds Banking 9,286 1.82

36,424 Metro Bank 261 0.05

1,017,049 Royal Bank of Scotland 2,179 0.43

618,474 Standard Chartered 4,222 0.83

Finance & credit services 5,239 1.02 0.83 61,570 International Personal Finance 99 0.02

116,125 John Laing 454 0.09

70,798 London Stock Exchange 3,691 0.72

62,963 OneSavings Bank 252 0.05

72,188 Paragon Banking 311 0.06

26,655 Plus500 169 0.03

58,983 Provident Financial 263 0.05

Investment banking & brokerage services 11,616 2.26 2.21 217,101 3i 2,283 0.45

37,399 AJ Bell 156 0.03

87,249 Allied Minds 69 0.01

91,792 Ashmore 433 0.09

69,960 Brewin Dolphin 214 0.04

12,000 City of London Investment 50 0.01

9,871 Georgia Capital 96 0.02

60,827 Hargreaves Lansdown 1,365 0.27

88,277 IG 482 0.09

49,313 IntegraFin 194 0.04

69,264 Intermediate Capital 907 0.18

154,172 Investec 701 0.14

261,778 IP 214 0.04

102,819 Jupiter Fund Management 377 0.07

366,314 Man Jersey 535 0.10

445,500 Quilter 583 0.11

12,825 Rathbone Brothers 277 0.05

26,270 Schroders 760 0.15

18,864 Sole Realisation Company [b] 1 0.00

577,155 Standard Life Aberdeen 1,544 0.30

137,097 TP ICAP 375 0.07

Equity investment instruments 26,536 5.19 4.61 124,193 3i Infrastructure 357 0.07

49,232 Aberdeen Asian Income Fund 101 0.02

116,749 Aberdeen Diversified Income and Growth Trust 123 0.02

35,696 Aberdeen New Dawn Investment Trust 85 0.02

11,497 Aberdeen New India Investment Trust 57 0.01

14,869 Aberdeen Standard Asia Focus 155 0.03

13,252 Aberdeen Standard Equity Income Trust 54 0.01

23,204 Aberforth Smaller Companies Trust 288 0.06

76,474 Alliance Trust 576 0.11

7,763 Allianz Technology Trust 120 0.02

11,508 Artemis Alpha Trust 31 0.01

20,401 Baillie Gifford Japan Trust 156 0.03

54,320 Baillie Gifford Shin Nippon 96 0.02

32,730 Baillie Gifford UK Growth Fund 61 0.01

27,330 Bankers Investment Trust 240 0.05

134,428 BBGI SICAV 206 0.04

7,235 BH Global 104 0.02

3,165 BH Macro 77 0.01

19,019 Biotech Growth Trust 132 0.03

59,047 BlackRock Frontier Investment Trust 77 0.01

9,332 BlackRock Latin American Investment Trust 43 0.01

10,751 BlackRock Smaller Companies Trust 152 0.03

19,967 BlackRock Throgmorton Trust 106 0.02

44,057 BlackRock World Mining Trust 147 0.03

81,569 Bluefield Solar Income Fund 106 0.02

27,330 British Empire Securities & General Trust 200 0.04

7,952 Brunner Investment Trust 62 0.01

9,571 Caledonia Investments 280 0.05

2,642 Capital Gearing Trust 112 0.02

48,759 City Merchants High Yield Trust 90 0.02

81,719 City of London Investment Trust 333 0.06

70,000 Diverse Income Trust 63 0.01

51,879 Dragon Capital Vietnam Enterprise Investments 229 0.04

36,288 Dunedin Income Growth Investment Trust 97 0.02




as at 31 May 2019 2019 2018 [a]


52,621 Ecofin Global Utilities and Infrastructure Trust 70 0.01

28,499 Edinburgh Dragon Trust 109 0.02

48,494 Edinburgh Investment Trust 285 0.06

60,095 Edinburgh Worldwide Investment Trust 108 0.02

5,282 Electra Private Equity 19 0.00

14,371 EP Global Opportunities Trust 42 0.01

13,277 European Investment Trust 103 0.02

21,354 F&C Capital & Income Investment Trust 68 0.01

17,778 F&C Global Smaller Companies 233 0.05

26,956 F&C Private Equity Trust 89 0.02

15,537 Fidelity Asian Values 66 0.01

112,110 Fidelity China Special Situations 233 0.05

105,890 Fidelity European Values 247 0.05

64,515 Fidelity Special Values 162 0.03

42,142 Finsbury Growth & Income Trust 374 0.07

123,226 Foreign & Colonial Investment Trust 838 0.16

152,497 Foresight Solar Fund 180 0.03

6,000 Fundsmith Emerging Equities Trust 71 0.01

195,921 GCP Infrastructure 253 0.05

27,825 Genesis Emerging Markets 196 0.04

289,182 Greencoat UK Wind 389 0.08

1,000 Hansa Trust 10 0.00

18,219 Harbourvest Global Private Equity 290 0.06

12,144 Henderson Alternative Strategies Trust 33 0.01

96,266 Henderson Diversified Income Trust 86 0.02

7,185 Henderson European Focus Trust 83 0.02

4,288 Henderson EuroTrust 45 0.01

22,794 Henderson Far East Income 79 0.01

28,474 Henderson High Income Trust 49 0.01

20,599 Henderson Smaller Companies Investment Trust 176 0.03

20,371 Herald Investment Trust 268 0.05

96,840 HgCapital Trust 207 0.04

410,102 HICL Infrastructure 664 0.13

18,845 IGG Enterprise Trust 165 0.03

64,010 Impax Environmental Markets 182 0.04

13,560 International Biotechnology Trust 83 0.02

335,647 International Public Partnerships 507 0.10

14,914 Invesco Asia Trust 41 0.01

13,876 Invesco Income Growth Trust 36 0.01

64,465 JPMorgan American Investment Trust 281 0.05

24,860 JPMorgan Asian Investment Trust 86 0.02

19,298 JPMorgan Chinese Investment Trust 49 0.01

14,381 JPMorgan Claverhouse Investment Trust 98 0.02

31,308 JPMorgan Emerging Markets Investment Trust 292 0.06

30,134 JPMorgan European Growth Investment Trust 82 0.02

41,600 JPMorgan European Smaller Companies Trust 144 0.03

84,000 JPMorgan Global Convertibles Income Fund 72 0.01

70,540 JPMorgan Global Emerging Markets Income Trust 91 0.02

43,965 JPMorgan Global Growth & Income 140 0.03

30,674 JPMorgan Indian Investment Trust 234 0.05

9,427 JPMorgan Japan Smaller Companies Trust 35 0.01

37,340 JPMorgan Japanese Investment Trust 157 0.03

5,749 JPMorgan Mid Cap Investment Trust 60 0.01

13,206 JPMorgan Russian Securities 80 0.02

26,765 JPMorgan Smaller Companies Investment Trust 58 0.01

24,614 Jupiter European Opportunities Trust 200 0.04

4,455 Jupiter US Smaller Companies 45 0.01

4,407 Keystone Investment Trust 68 0.01

28,440 Law Debenture 167 0.03

9,558 Lowland Investment 129 0.02

6,893 Majedie Investments 17 0.00

26,477 Martin Currie Asia Unconstrained Trust 98 0.02

30,524 Martin Currie Global Portfolio Trust 84 0.02

193,700 Mercantile Investment Trust 394 0.08

22,619 Merchants Trust 106 0.02

44,162 Middlefield Canadian Income Trusts 42 0.01

49,929 Monks Investment Trust 426 0.08

45,360 Montanaro UK Smaller Companies Investment Trust 51 0.01

15,376 Murray Income Trust 125 0.02

29,533 Murray International Trust 334 0.07

250,550 NB Global Floating Rate Income Fund 225 0.04

149,376 NextEnergy Solar Fund 174 0.03

8,548 North American Income Trust 121 0.02

2,919 North Atlantic Smaller Companies Investment Trust 88 0.02

20,848 P2P Global Investments 178 0.03

28,753 Pacific Assets Trust 84 0.02

10,174 Pacific Horizon Investment Trust 32 0.01

13,513 Pantheon International 299 0.06

57,585 Perpetual Income & Growth Investment Trust 179 0.04

51,232 Pershing Square 668 0.13

496 Personal Assets Trust 204 0.04

23,952 Polar Capital Global Healthcare Trust 49 0.01

32,466 Polar Capital Technology Trust 418 0.08

15,475 Princess Private Equity 132 0.03

29,616 RIT Capital Partners 592 0.12

12,710 Riverstone Energy 109 0.02

33,743 Ruffer Investment Company (Preference shares) 71 0.01

36,469 Schroder Asia Pacific Fund 156 0.03

18,284 Schroder Asian Total Return Investment Company 63 0.01

18,236 Schroder Income Growth Fund 51 0.01

19,162 Schroder Japan Growth Fund 34 0.01

58,397 Schroder Oriental Income Fund 144 0.03

7,670 Schroder UK Mid Cap Fund 40 0.01

31,306 Scottish American Investment 119 0.02

22,562 Scottish Investment Trust 174 0.03

332,833 Scottish Mortgage Investment Trust 1,661 0.32

8,864 Scottish Oriental Small Companies Trust 90 0.02

20,541 Securities Trust of Scotland 35 0.01

241,112 Sequoia Economic Infrastructure Income Fund 269 0.05

17,907 Smithson Investment Trust 208 0.04




as at 31 May 2019 2019 2018 [a]


Equity investment instruments (continued)


as at 31 May 2019 2019 2018 [a]



19,011 Standard Life European Private Equity Trust 66 0.01 40,740 Standard Life UK Smaller Companies Trust 202 0.04 86,235 Syncona 207 0.04 14,154 Temple Bar Investment Trust 174 0.03 60,759 Templeton Emerging Markets Investment Trust 448 0.09 285,123 The Renewables Infrastructure 359 0.07 11,318 Third Point Offshore Investors 131 0.03 12,510 TR European Growth Trust 105 0.02 72,712 TR Property Investment Trust 296 0.06 45,234 Troy Income & Growth Trust 36 0.01 96,355 TwentyFour Income Fund 110 0.02 63,982 Utilico Emerging Markets Trust 142 0.03 17,183 Value & Income Trust 42 0.01 44,009 VinaCapital Vietnam Opportunity Fund 152 0.03 196,695 Witan Investment Trust 400 0.08 17,102 Witan Pacific Investment Trust 54 0.01 193,141 Woodford Patient Capital Trust 147 0.03 11,654 Worldwide Healthcare Trust 298 0.06

Life insurance 18,736 3.67 4.29 889,878 Aviva 3,623 0.71 38,408 Chesnara 143 0.03 218,857 Just 106 0.02 1,357,597 Legal & General 3,503 0.68 129,937 Phoenix 871 0.17 586,885 Prudential [c] 9,284 1.82 116,214 St. James’s Place 1,206 0.24

Non-life insurance 5,550 1.09 1.11 45,337 Admiral 935 0.18 119,317 Beazley 662 0.13 309,668 Direct Line Insurance 979 0.19 70,851 Hastings 127 0.03 63,772 Hiscox 1,044 0.20 48,530 Lancashire 343 0.07 230,842 RSA Insurance 1,274 0.25 71,306 Sabre Insurance 186 0.04

Real estate investment & services 1,947 0.39 0.39 165,535 Capital & Counties Properties 353 0.07 53,320 CLS 118 0.02 195,108 Countrywide 8 0.00 1,313 Daejan 76 0.01 123,795 F&C Commercial Property Trust 150 0.03 55,000 Foxtons 31 0.01 136,737 Grainger 341 0.07 29,362 Helical 107 0.02 23,460 LSL Property Services 53 0.01 92,644 Raven Property 37 0.01 31,732 Savills 265 0.05 209,809 Sirius Real Estate 132 0.03 43,703 St. Modwen Properties 191 0.04 54,660 U and I 85 0.02

Real estate investment trusts 11,274 2.20 2.11 544,855 Assura 349 0.07 35,178 Big Yellow 357 0.07 229,655 British Land 1,221 0.24 212,669 Capital & Regional 40 0.01 60,121 Civitas Social Housing 51 0.01

23,360 Derwent London 743 0.15

95,000 Ediston Property Investment Company 93 0.02

132,584 Empiric Student Property 121 0.02

104,655 F&C UK Real Estate Investments 98 0.02

92,924 GCP Student Living 151 0.03

67,357 Great Portland Estates 478 0.09

178,883 Hammerson 476 0.09

142,661 Hansteen 134 0.03

210,191 Intu Properties 192 0.04

161,856 Land Securities 1,338 0.26

160,824 LondonMetric Property 328 0.06

71,394 NewRiver 151 0.03

127,327 Picton Property Income 121 0.02

303,281 Primary Health Properties 412 0.08

74,686 RDI 82 0.02

59,451 Safestore 378 0.07

120,865 Schroder Real Estate Investment Trust 68 0.01

253,274 Segro 1,753 0.34

57,483 Shaftesbury 470 0.09

92,278 Standard Life Investment Property Income Trust 85 0.02

22,910 Town Centre Securities 47 0.01

379,009 Tritax Big Box 558 0.11

147,517 UK Commercial Property Trust 135 0.03

60,966 UNITE 575 0.11

30,462 Workspace 269 0.05

Automobiles & parts 131 0.03 0.00 15,094 Aston Martin Lagonda Global 131 0.03

Household goods & home construction 16,182 3.16 3.03 225,384 Barratt Developments 1,264 0.25

27,827 Bellway 764 0.15

27,061 Berkeley 947 0.19

32,574 Bovis Homes 318 0.06

100,328 Countryside Properties 305 0.06

60,000 Crest Nicholson 224 0.04

24,525 Galliford Try 152 0.03

70,212 McBride 58 0.01

138,605 McCarthy & Stone 181 0.04

19,105 MJ Gleeson 165 0.03

71,271 Persimmon 1,397 0.27

141,927 Reckitt Benckiser 8,968 1.75

48,770 Redrow 266 0.05

710,147 Taylor Wimpey 1,173 0.23

Leisure goods 368 0.07 0.04 6,752 Games Workshop 301 0.06

73,700 Photo-Me International 67 0.01

Personal goods 13,870 2.72 2.37 92,822 Burberry 1,578 0.31

52,316 PZ Cussons 105 0.02

11,827 Superdry 54 0.01

6,838 Ted Baker 93 0.02

248,867 Unilever 12,040 2.36

Media 19,530 3.83 3.50 9,581 4imprint 251 0.05

88,547 Ascential 348 0.07

210,893 Auto Trader 1,251 0.24

11,581 Bloomsbury Publishing 26 0.01

80,363 Entertainment One 344 0.07

23,121 Euromoney Institutional Investor 312 0.06

70,989 Gocompare.com 59 0.01




as at 31 May 2019 2019 2018 [a]




as at 31 May 2019 2019 2018 [a]


Real estate investment trusts (continued)

281,656 Informa 2,182 0.43

179,555 ITE 141 0.03

826,715 ITV 879 0.17

117,735 Moneysupermarket.com 430 0.08

174,005 Pearson 1,382 0.27

58,726 Reach 46 0.01

434,670 RELX 8,007 1.57

209,140 Rightmove 1,210 0.24

282,326 WPP 2,662 0.52

Retailers 8,503 1.65 1.78 199,283 B&M European Value Retail 703 0.14

81,886 Card Factory 153 0.03

142,318 Carpetright 33 0.01

43,153 DFS Furniture 104 0.02

9,796 Dignity 67 0.01

230,640 Dixons Carphone 269 0.05

22,551 Dunelm 199 0.04

21,315 Findel 40 0.01

48,578 Halfords 109 0.02

94,687 Inchcape 560 0.11

95,780 JD Sports Fashion 588 0.12

132,394 Just Eat 789 0.15

481,393 Kingfisher 1,036 0.20

81,746 Lookers 71 0.01

366,238 Marks & Spencer 838 0.16

73,247 Marks & Spencer Rights 12/06/2019 32 0.01

48,869 N Brown 71 0.01

30,274 Next 1,737 0.34

337,904 Pendragon 77 0.02

110,480 Pets at Home 207 0.04

268,345 Saga 113 0.02

60,566 Sports Direct International 177 0.03

34,479 Topps Tiles 25 0.00

25,642 WH Smith 505 0.10

Travel & leisure 22,856 4.46 4.80 37,185 Carnival 1,455 0.28

238,688 Cineworld 707 0.14

359,564 Compass 6,481 1.27

128,343 Domino’s Pizza 299 0.06

55,555 easyJet 482 0.09

122,704 EI 260 0.05

280,496 FirstGroup 326 0.06

18,438 Flutter Entertainment 1,030 0.20

8,404 Fuller Smith & Turner 88 0.02

9,796 Go-Ahead 183 0.04

71,211 Greene King 455 0.09

128,026 GVC 766 0.15

24,530 Hostelworld 51 0.01

41,109 InterContinental Hotels 2,088 0.41

363,597 International Consolidated Airlines 1,645 0.32

22,361 J.D.Wetherspoon 299 0.06

143,101 Marston’s 154 0.03

166,782 Merlin Entertainment 628 0.12

38,526 Millennium & Copthorne Hotels 191 0.04

66,119 Mitchells & Butlers 183 0.04

99,357 National Express 394 0.08

66,572 Playtech 270 0.05

64,084 Rank 97 0.02

115,910 Restaurant 156 0.03

101,534 SSP 683 0.13

102,684 Stagecoach 129 0.03

349,133 Thomas Cook 61 0.01

99,012 TUI 728 0.14

41,107 Whitbread 1,909 0.37

210,230 William Hill 279 0.05

12,523 Wizz Air 379 0.07

Beverages 20,017 3.92 3.02 20,044 A.G. Barr 190 0.04

59,718 Britvic 532 0.10

44,626 Coca-Cola HBC 1,262 0.25

538,468 Diageo 17,880 3.50

65,456 Stock Spirits 153 0.03

Food producers 3,667 0.73 0.73 77,605 Associated British Foods 1,922 0.38

12,559 Cranswick 344 0.07

58,284 Devro 125 0.02

87,730 Greencore 179 0.04

14,452 Hilton Food 140 0.03

266,618 Premier Foods 95 0.02

28,460 PureCircle 77 0.02

108,201 Tate & Lyle 785 0.15

Tobacco 18,547 3.63 4.58 516,470 British American Tobacco 14,399 2.82

215,078 Imperial Brands 4,148 0.81

Personal care, drug & grocery stores 8,352 1.64 1.62 24,944 Greggs 547 0.11

363,891 J Sainsbury 729 0.14

100,002 Ocado 1,176 0.23

2,189,185 Tesco 4,932 0.97

491,187 Wm Morrison Supermarkets 968 0.19

Construction & materials 8,214 1.61 1.78 154,114 Balfour Beatty 364 0.07

32,276 Costain 102 0.02

187,076 CRH 4,634 0.91

28,988 Henry Boot 71 0.01

88,734 Ibstock 211 0.04

18,581 Keller 129 0.03

34,008 Kier 97 0.02

48,210 Marshalls 312 0.06

1,116,238 Melrose Industries 1,816 0.36

9,357 Morgan Sindall 120 0.02

25,215 Norcros 49 0.01

46,055 Polypipe 198 0.04

45,817 Tyman 111 0.02

Aerospace & defence 9,485 1.87 2.03 6,707 Avon Rubber 89 0.02

118,009 Babcock International 532 0.10

728,853 BAE Systems 3,231 0.63

69,509 Chemring 109 0.02

547,065 Cobham 537 0.11

173,723 Meggitt 848 0.17

135,024 QinetiQ 401 0.08

379,534 Rolls-Royce 3,232 0.63

26,946,914 Rolls-Royce (Preference shares) 27 0.01

100,908 Senior 231 0.05

16,139 Ultra Electronics 248 0.05




as at 31 May 2019 2019 2018 [a]


Media (continued)


as at 31 May 2019 2019 2018 [a]


Travel & leisure (continued)

Electronic & electrical equipment 3,145 0.61 0.54 7,665 Dialight 40 0.01

85,497 Halma 1,554 0.30

69,363 Morgan Advanced Materials 171 0.03

13,436 Oxford Instruments 158 0.03

7,823 Renishaw 309 0.06

26,949 Spectris 673 0.13

55,780 TT electronics 142 0.03

17,246 Xaar 14 0.00

3,641 XP Power 84 0.02

General industrials 4,624 0.90 1.03 325,197 Coats 256 0.05

281,576 DS Smith 882 0.17

191,475 Low & Bonar 18 0.00

99,409 RPC 784 0.15

88,393 Smiths 1,266 0.25

54,051 Smurfit Kappa 1,169 0.23

50,382 Vesuvius 249 0.05

Industrial engineering 4,593 0.89 0.90 46,912 Bodycote 366 0.07

18,805 Hill & Smith 225 0.04

61,398 IMI 557 0.11

7,911 RHI Magnesita 378 0.08

204,200 Rotork 577 0.11

69,710 Severfield 50 0.01

17,449 Spirax-Sarco Engineering 1,445 0.28

10,123 Vitec 113 0.02

60,088 Weir 882 0.17

Industrial support services 25,588 5.01 4.71 146,475 AA 80 0.02

55,051 Aggreko 431 0.08

108,490 Ashtead 2,036 0.40

171,815 BCA Marketplace 315 0.06

76,581 Bunzl 1,627 0.32

397,024 Capita 439 0.09

15,367 Charles Taylor 35 0.01

58,424 Connect 22 0.00

22,604 DCC 1,497 0.29

23,584 De La Rue 73 0.01

25,288 Diploma 375 0.07

104,642 Electrocomponents 641 0.13

69,865 Equiniti 155 0.03

59,501 Essentra 238 0.05

206,764 Experian 4,900 0.96

52,571 Ferguson 2,687 0.53

352,754 G4S 737 0.14

50,047 Grafton 428 0.08

304,704 Hays 450 0.09

62,536 HomeServe 755 0.15

132,991 Howden Joinery 673 0.13

35,947 Interserve [b] 0 0.00

36,470 Intertek 1,926 0.38

151,024 IWG 506 0.10

22,348 John Menzies 101 0.02

25,681 Mears 66 0.01

85,169 Mitie 125 0.02

31,624 Northgate 102 0.02

70,973 Pagegroup 363 0.07

15,904 PayPoint 175 0.03

143,021 Renewi 49 0.01

418,674 Rentokil Initial 1,571 0.31

13,784 Ricardo 105 0.02

16,475 Robert Walters 104 0.02

55,347 RPS 99 0.02

32,202 Sanne 225 0.04

272,532 Serco 359 0.07

150,196 SIG 195 0.04

136,075 Speedy Hire 85 0.02

29,569 SThree 88 0.02

58,242 Travis Perkins 723 0.14

3,773 Vp 27 0.01

Industrial transportation 1,547 0.30 0.44 227,328 BBA Aviation 587 0.11

7,359 Clarkson 178 0.03

10,291 James Fisher & Sons 200 0.04

201,124 Royal Mail 411 0.08

74,400 Stobart 89 0.02

30,574 Wincanton 82 0.02

Industrial materials 1,344 0.26 0.31 82,226 Mondi 1,344 0.26

Industrial metals & mining 32,346 6.33 6.31 225,421 Anglo American 4,258 0.83

77,439 Antofagasta 602 0.12

471,042 BHP 8,379 1.64

114,349 Evraz 666 0.13

68,390 Ferrexpo 158 0.03

2,587,408 Glencore 6,582 1.29

53,149 KAZ Minerals 270 0.05

3,132 Kenmare Resources 6 0.00

56 Kenmare Resources wts. 2019 0 0.00

253,129 Rio Tinto 11,425 2.24

Precious metals & mining 1,304 0.26 0.51 36,524 Acacia Mining 57 0.01

260,758 Centamin 224 0.04

40,289 Fresnillo 304 0.06

29,397 Gem Diamonds 26 0.01

56,453 Hochschild Mining 89 0.02

61,648 Lonmin 43 0.01

336,193 Petra Diamonds 74 0.01

58,095 Polymetal International 487 0.10

Chemicals 3,737 0.73 0.79 27,909 Croda International 1,401 0.27

136,270 Elementis 198 0.04

44,755 Johnson Matthey 1,359 0.27

1,004,939 Sirius Minerals 160 0.03

69,318 Synthomer 253 0.05

18,711 Victrex 366 0.07

Non-renewable energy 71,956 14.08 13.90 4,492,331 BP 24,137 4.72

124,311 Cairn Energy 197 0.04

548,470 EnQuest 106 0.02

32,704 Hunting 164 0.03

147,983 John Wood 588 0.12

75,272 Lamprell 50 0.01

56,655 Petrofac 232 0.05

192,924 Premier Oil 153 0.03

1,008,772 Royal Dutch Shell ‘A’ 24,745 4.84

848,806 Royal Dutch Shell ‘B’ 20,876 4.08

57,952 Soco International 38 0.01

339,874 Tullow Oil 670 0.13




as at 31 May 2019 2019 2018 [a]



as at 31 May 2019 2019 2018 [a]


Industrial support services (continued)

Electricity 2,848 0.56 0.63 105,432 Drax 310 0.06

236,505 SSE 2,538 0.50

Gas, water & multi-utilities 10,259 2.00 2.00 1,276,476 Centrica 1,194 0.23

776,495 National Grid 6,106 1.19

95,307 Pennon 699 0.14

52,788 Severn Trent 1,043 0.20

152,516 United Utilities 1,217 0.24

Unquoted / unlisted [b] 0 0.00 0.00 10,204 Bioscience Investment Trust 0 0.00

21,000 Dexion Equity Alternative 0 0.00

12,707 Electric & General Investment Trust 0 0.00

EQUITY DERIVATIVES (69) (0.01) 0.07 Equity futures contracts (69) (0.01) 0.07 169 FTSE 100 Index Jun 2019 (69) (0.01)



Total portfolio (notes 2c & 2d on page 7) 514,527 100.67 100.91Net other assets / (liabilities) (3,442) (0.67) (0.91)



[a] The portfolio has been reclassified to more appropriately reflect how the fund is

managed. 2018 comparatives have been restated to reflect this.

[b] Unquoted / unlisted.

[c] Related party to the fund.



Top ten portfolio transactions

for the year to 31 May 2019

Largest purchases £’000

RELX 3,346

BP 1,570

AstraZeneca 910

Royal Bank of Scotland 837

HSBC 775

GlaxoSmithKline 518

National Grid 492

Royal Dutch Shell ‘B’ 395

Plus500 374

Softcat 277

Other purchases 10,787

Total purchases 20,281

Largest sales £’000

Shire 8,934

Sky 4,107

Old Mutual 1,631

Randgold Resources 1,370

NEX Group 846

Royal Dutch Shell ‘A’ 754

BP 576

Jardine Lloyd Thompson 547

Unilever 507

Fidessa 447

Other sales 8,059

Total sales 27,778

Purchases and sales exclude the cost and proceeds of ‘AAA’ rated money market

funds.




as at 31 May 2019 2019 2018 [a]


Investments

Fund performance


The following chart and tables reflect the key financial information ofa representative share class, Sterling Class ‘A’ (Accumulation) shares.As different share classes have different attributes, for examplecharging structures and minimum investments, please be aware thattheir performance may be different. Please refer to the Prospectus forM&G Investment Funds (2), which is available free of charge eitherfrom our website at www.mandg.co.uk/prospectuses or by calling M&G Customer Relations.

Index tracking

The tracking difference between the fund’s investment return and thatof the FTSE All-Share Index for the 12 month period ending 31 May2019 was +0.02% (31 May 2018: +0.06%). The investment returnsare calculated gross of fees using end of day pricing in order to becomparable with the index.

The historic tracking error of the investment return of the fund relativeto the FTSE All-Share Index for the period ending 31 May 2019 was+0.12% (31 May 2018: +0.12%), which falls within the predictedtracking error range of 0.00% to 0.30%. Historic tracking error is ameasure of the monthly volatility of the investment returns relative tothe index over a 36 month period.

The differences are due to the fund not fully replicating the FTSE All-Share Index.



2019 2018 2017as at 31 May £’000 £’000 £’000



To give an indication of how the fund has performed since launch, thechart below shows total return of Sterling Class ‘A’ (Accumulation)shares.




Sterling [b] Class ‘A’ -4.7 +8.1 +4.9 +4.8 [c]

Class ‘C’ -4.5 +8.5 +5.2 +7.4 [d]

[a] Absolute basis.


[c] 27 February 1998, the launch date of the predecessor unit trust.

[d] 16 February 2012, the launch date of the share class.

80

70

90

100

120

140

160

180

200

260

350

300

230

98 99 0100 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 1918

February 1998 = 100, plotted monthly Chart date 3 June 2019

FTSE All-Share Index




M&G Index Tracker Fund Financial highlights



Operating charges














To protect existing investors, portfolio transaction costs incurred as aresult of investors buying and selling shares in the fund are recoveredfrom those investors through a ‘dilution adjustment’ to the price theypay or receive. The table below shows direct portfolio transaction costspaid by the fund before and after that part of the dilution adjustmentrelating to direct portfolio transaction costs. To give an indication of theindirect portfolio dealing costs the table also shows the averageportfolio dealing spread.



for the year to 31 May 2019 2018 2017 Average [a]

Direct portfolio transaction costs [b] % % % %

Broker commission 0.00 0.00 0.00 0.00

Taxes 0.02 0.01 0.01 0.01

Costs before dilution adjustments 0.02 0.01 0.01 0.01

Dilution adjustments [c] (0.01) (0.01) (0.01) (0.01)

Total direct portfolio transaction costs 0.01 0.00 0.00 0.00






[c] In respect of direct portfolio transaction costs. Please see the section above this

table for an explanation of dilution adjustments.



Fund performance



Historic yields for the current year are calculated as at 14 June 2019.

Sterling Class ‘A’ Income share performanceThe share class was launched on 27 February 1998.


Opening NAV 78.32 76.82 63.91

Return before operating charges and after directportfolio transaction costs (2.79) 4.86 15.87


Return after operating charges (3.18) 4.47 15.54

Distributions (3.12) (2.97) (2.63)

Closing NAV 72.02 78.32 76.82



Dilution adjustments [a] (0.01) (0.01) (0.01)





Return after operating charges -4.06 +5.82 +24.32

Historic yield 4.24 3.80 3.59


Other information

Closing NAV (£’000) 278,978 317,266 355,226


Number of shares 387,350,474 405,091,821 462,417,555



Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 27 February 1998.


Opening NAV 140.68 132.78 106.54




Distributions (5.06) (4.59) (4.06)


Closing NAV 135.04 140.68 132.78











Other information

Closing NAV (£’000) 188,380 187,084 143,147


Number of shares 139,499,585 132,985,401 107,808,878



Sterling Class ‘C’ Income share performanceSterling Class ‘C’ shares are not generally available to all investors.

The share class was launched on 16 February 2012.


Opening NAV 79.05 77.30 64.18




Distributions (3.16) (2.99) (2.72)

Closing NAV 72.92 79.05 77.30











Other information

Closing NAV (£’000) 43,727 50,956 52,447


Number of shares 59,968,236 64,457,378 67,845,339










Income

Net capital gains / (losses) 3 (42,145) 13,070

Revenue 5 22,292 21,322



Total return before distributions (22,285) 31,939Distributions 8 (21,259) (20,449)

Change in net assets attributableto shareholders from investmentactivities (43,544) 11,490






Change in net assets attributable toshareholders from investment activities(see above) (43,544) 11,490




Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets





Total assets 519,390 563,736

Liabilities Investment liabilities (69) 0

Creditors Overdrawn positions at futures clearing houses andcollateral manager 0 (105)


Other creditors 11 (761) (949)










Non-derivative securities (41,976) 12,340

Derivative contracts (90) 780

Currency gains / (losses) (74) (40)


Net capital gains / (losses) (42,145) 13,070


M&G Index Tracker Fund Financial statements and notes




a) Purchases Equities Equities before transaction costs 19,417 17,232

Commissions 5 0.02 3 0.01

Taxes 84 0.40 64 0.36

Equities after transaction costs 19,506 17,299

Other transaction types Corporate actions 775 736

Total purchases after transactioncosts 20,281 18,035

b) Sales Equities Equities before transaction costs 22,875 28,547

Commissions (5) 0.02 (7) 0.03


Other transaction types Corporate actions 4,908 730

Total sales after transaction costs 27,778 29,270


Commissions paid Equities 10 0.00 10 0.00

Derivatives 0 0.00 1 0.00

Total commissions paid 10 0.00 11 0.00

Taxes paid Equities 84 0.02 64 0.01

Total taxes paid 84 0.02 64 0.01

Total direct portfolio transactioncosts [a] 94 0.02 75 0.01



[a] Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section

for the effect of dilution adjustments.



Bank interest 2 3

Dividends from equity investments: non-taxable 20,383 18,924

Dividends from equity investments: taxable 423 368


Stock dividends 1,449 2,020

Underwriting commission 4 0





2,219 2,289





12 13





Prior year adjustment 1 1





Effects of:

Dividends from equity investments: non-taxable (4,076) (3,785)

Stock dividends not taxable (290) (404)

Current year expenses not utilised 361 392


Prior year adjustment 1 1






arising as a result of having excess management expenses. We do not expect this

asset to be utilised in the foreseeable future.


Dividend distributions £’000 £’000 £’000 £’000

Interim 6,675 3,132 7,057 2,521

Final 7,475 3,838 7,376 3,263













9 Debtors 2019 2018as at 31 May £’000 £’000


Debt security interest receivable 3 2


Dividends receivable 3,162 3,012

Sales awaiting settlement 147 0

Tax recoverable 4 5




Amounts held at futures clearing houses and collateral manager 503 0








Purchases awaiting settlement 112 82




13 Shares in issue





Class ‘C’ Income 64,457,378 3,403,181 (7,892,323) 59,968,236




Class ‘C’ nil n/a nil

15 Related parties



During the year, there were transactions with Prudential plc, a relatedparty of M&G Securities Limited with a total value of £191,000 (2018: £253,000).

At the balance sheet date, the fund held shares in related parties of M&G Securities Limited with a value of £9,284,000 (2018: £10,562,000).














This refers to instruments which have been valued using models withunobservable data inputs. This includes single broker-pricedinstruments, suspended/unquoted securities, private equity, unlistedclosed-ended funds and open-ended funds with restrictions onredemption rights.


Level 1 506,474 (69) 556,381 0

Level 2 27 0 0 0

Level 3 1 0 1 0

506,502 (69) 556,382 0




19 Market risk sensitivity

A five per cent increase in the value of the fund’s investment portfoliowould have the effect of increasing the return and net assets by£25,322,000 (2018: £27,819,000). A five per cent decrease wouldhave an equal and opposite effect.

20 Currency risk sensitivity and exposure

Currency risk is not considered significant for the fund and is thereforenot disclosed.

21 Interest rate risk sensitivity and exposure

As the majority of the fund’s financial assets are non-interest bearing,the risk is not considered significant and is therefore not disclosed.

22 Credit risk

The table below shows the exposure to counterparties. Collateral isposted daily, in the form of cash or high-quality government bonds, tominimise this exposure. Futuresas at 31 May 2019 £’000


Total (69)

Futuresas at 31 May 2018 £’000

Bank of America Merrill Lynch 407

Total 407




23 Dividend distribution tables

This fund pays semi-annual ordinary distributions and the followingtable sets out the distribution periods.


Interim 01.06.18 30.11.18 03.12.18 31.01.19

Final 01.12.18 31.05.19 03.06.19 31.07.19





Ordinary distributions Group 2 Group 1 & 2for the year Income Equalisation Distributionto 31 May 2019 2019 2019 2018

p p p pInterim 0.8358 0.6194 1.4552 1.4021

Final 1.1321 0.5364 1.6685 1.5690



p p p pInterim 1.0094 1.3033 2.3127 2.1318

Final 1.6626 1.0884 2.7510 2.4532

Sterling Class ‘C’ Income shares


p p p pInterim 1.1460 0.3239 1.4699 1.4120

Final 1.5709 0.1174 1.6883 1.5827





The fund aims to provide a total return (the combination of capitalgrowth and income).

Investment policy

At least 80% of the fund is invested in investment grade corporatebonds (including variable rate securities and fixed income securities).The fund invests in securities which on aggregate produce a lowportfolio duration, in order to limit the effect of interest rate movementson the fund’s capital value. These securities may be issued anywherein the world. The fund aims to hedge any non-GBP assets to GBP.

Derivatives can be used to meet the fund’s investment objective andfor efficient portfolio management.

The fund may also invest in other debt securities (includinggovernment and public securities denominated in any currency),collective investment schemes, other transferable securities, cash,near cash, other money market securities, warrants, and otherderivative instruments.

Investment approach

The fund manager combines a top-down assessment ofmacroeconomic factors with a bottom-up approach to individual stockselection.

Duration is a measure of a bond’s or a bond fund’s sensitivity tochanges in interest rates. Consequently, having a low portfolio durationmeans that the fund will be less affected by changes in interest ratesthan a corporate bond fund with a higher portfolio duration.

An in-house team of credit analysts assists the fund manager withindividual credit selection along with the monitoring of the companiesthat issue the bonds held by the fund.

Risk profile

The fund invests in a range of typically low-risk debt instruments, orbonds, that are typically repaid over three years. It is, therefore, subjectto the price volatility of the global bond market as well as theperformance of individual issuers. In addition, the fund is subject tofluctuations in currency exchange rates.

Debt securities with a short time until their final repayment date tendto be highly liquid, meaning that they can be easily bought or sold. Thefund’s exposure to debt securities may be gained through the use ofderivatives. In association with the use of derivatives, including thoseinstruments not traded through an exchange, collateral is deposited inorder to mitigate the risk that a counterparty may default on itsobligations or become insolvent.



The above number:





mean risk free.


Investment review



Between 1 June 2018 (the start of the review period) and 3 June 2019,the M&G Short Dated Corporate Bond Fund delivered a small positivetotal return (the combination of income and growth of capital) in itssterling share classes.

The fund’s US dollar shares delivered a small positive return, but itseuro and Swiss franc shares posted negative returns between 1 June 2018 and 26 October 2018. On 26 October 2018, the fund’snon-sterling share classes merged into the M&G (Lux) Short DatedCorporate Bond Fund, a Luxembourg-authorised SICAV whichlaunched on that date.

The fund’s objective is to provide a total return. Since launch, it hasdelivered a positive total return across all of its share classes.*




Volatility returned to financial markets in 2018, as a result of a rangeof factors that included higher interest rates and inflation, politicaluncertainty and global trade tensions.

The US Federal Reserve (Fed) raised interest rates in September andDecember, making it a total of nine times US rates have risen sincethe great financial crisis about a decade ago. In the UK, muchuncertainty remained about the eventual terms of the country’s Brexitdeal with the European Union (EU). This contributed to times ofadverse sentiment towards UK bonds. Investors in Europe becameconcerned in the latter stages of 2018 about Italian proposals toincrease the country’s budget deficit. The plans, which met withopposition from the EU, were drafted after an anti-establishment partygained a strong presence in Italy’s new coalition government.

Bonds are loans that are extended by an investor to an issuing entity– such as a company or government – in exchange for regular interestpayments. The initial amount borrowed by the entity is usually repaidat the end of the loan’s life. Bonds issued by companies are referredto as ‘corporate bonds’, while those issued by governments are called‘government bonds’.

Low risk High risk


1 2 3 4 5 6 7


M&G Short Dated Corporate Bond Fund Authorised Corporate Director’s Report

Sentiment towards corporate bonds – and international stockmarkets– was increasingly affected by concerns of a trade war developingbetween the US and China. In addition, during the latter months of2018, global economic growth forecasts began to moderate, whichcontributed to some weaker confidence in the outlook for corporatebonds and emerging markets.

Sentiment then changed once again in early 2019, as investors tookcomfort from statements by the Fed that it would moderate its strategyaround raising interest rates. Indeed, investors’ mood changed sodramatically that markets now expect the next move by the Fed will beto cut, rather than raise, interest rates. However, the more optimisticmood was somewhat dampened in May, as renewed fears over theprospects for global trade, caused mainly by heightened tensionsbetween the US and China over tariffs, caused investors to prefer saferassets once again.

While the second half of 2018 was challenging for corporate bonds,the overall strong start to 2019 helped them to deliver positive returnsacross the 12-month period as a whole. Corporate bonds denominatedin US dollars generally outperformed those denominated in sterlingand euros.

The M&G Short Dated Corporate Bond Fund is, by its very nature,less sensitive to changes in interest rates than many of its peers. Ittherefore typically performs well relative to funds which invest in longerdated corporate bonds (issues which are due to be repaid overrelatively long periods) in an environment of rising interest rates, whiletending to benefit less from falling rates than such funds.

The fund’s lack of sensitivity to interest rate changes was particularlybeneficial in the second half of 2018, when it was protected from someof the worst of the volatility. It then benefited less than its peers duringthe more risk-friendly start to 2019.


In order to ensure that the fund’s value and ability to provide an incomestream does not fluctuate significantly with changes in the economiccycle, we closely monitor the amount of interest rate risk and creditrisk that we take.

Interest rate risk reflects the fact that when interest rates rise, theinterest payments on conventional fixed rate bonds become lessattractive to investors, causing their prices to fall. Bonds with less timeuntil their maturity date (that is, short-dated bonds) tend to be lesssensitive to changes in interest rates than longer dated bonds.

Credit risk refers to a borrower’s creditworthiness, that is, the likelihoodof a borrower failing to service a loan, or default. As with rising interestrates, if investors perceive that a bond issuer’s credit risk hasincreased, this would also tend to weigh on corporate bond prices.

Broadly, we retain a positive outlook on corporate bonds. Aftercorporate bonds experienced considerable weakness in the latterstages of 2018, we started to see greater value in these assets onceagain, and looked to add credit risk back into the portfolio on a name-by-name basis. We were active in the new issue market whenopportunities presented themselves: for example, in early May therewas a flurry of new bonds issued and we bought a number of these,mainly with credit ratings of A and above.

We have kept a sizeable exposure to asset-backed securities (ABS)over the period, although this ended the reporting period somewhatlower than it started (around 19% versus 25%). ABS are bonds backedby assets including credit card receivables, car loans or mortgages,whose creditworthiness is based on the underlying assets, rather thanon the company that issued the bonds. Furthermore, most ABSholdings are floating rate in nature and stand to benefit from risinginterest rates through their variable rate coupons.

Our positive outlook for global growth is reflected in a small above-index position in financials – financials stand to benefit from arising interest rate environment that helps their margins, while a strongeconomic backdrop means that corporate default levels should remain low.

Outlook

The biggest story in financial markets in recent months continues tobe the likelihood of the US economy entering recession. From amacroeconomic perspective, we expect both US and Europeaneconomies to continue growing as we head into the second half of2019, albeit at a potentially slower pace than in 2018. In the US,President Trump may well unveil some form of fiscal stimulus this year,as this will need to be done early enough to have an impact before hefaces re-election the following year. Should this happen, it will likelyextend the current economic cycle still further. However, politicalnewsflow – from the US in particular – may cause further volatility, aswe have seen during the escalating trade tensions between the USand China.

Meanwhile, Europe feels like it is slowly repairing itself, and while theEuropean Central Bank is ending its substantial bond-buyingprogramme (referred to as quantitative easing), its effects are stillbeing felt.

In the UK, while a number of potential outcomes to the Brexitconundrum remain in play, the majority of these should, in our view,result in bond yields being pushed higher. (Bond yield refers to theinterest received from a fixed income security and is usually expressedannually as a percentage based on the investment’s cost, its currentmarket value or its face value.)

In our opinion, the biggest risk currently facing bond investors is adegree of complacency that they are invested in a ‘safe’ asset classwhen, in reality, an environment of sharply rising interest rates/yieldswill hurt traditional government and investment grade corporate bondfunds. Investors therefore need to pay close attention to the interestrate risk they are running in their portfolios.

One way to protect against this risk is by buying shorter datedcorporate bonds, which carry less interest rate risk, while still allowinginvestors to achieve the extra pick-up on offer for buying corporate overgovernment bonds. Floating rate notes offer a similar approach, astheir coupons increase in line with the underlying interest rate – as isalso the case with many asset-backed securities. If, as we do, youbelieve in an improving global economy, then this should provesupportive for corporate issuers.

Matthew RussellFund manager


Please note that the views expressed in this Report should not be taken as arecommendation or advice on how the fund or any holding mentioned in the Reportis likely to perform. If you wish to obtain financial advice as to whether an investmentis suitable for your needs, you should consult a Financial Adviser.




Investment review

Investments

Portfolio statement

as at 31 May 2019 2019 2018Holding £’000 % %

FIXED INCOME 325,474 100.72 100.17 Debt securities 325,548 100.74 100.09 ‘AAA’ credit rated bonds 44,202 13.68 16.49 £1,466,270 Alba 2005-1 FRN 0.9845% 25/11/2042 1,387 0.43

£342,593 Alba 2006-1 FRN 0.97425% 21/11/2037 326 0.10

€21,286,500 Germany (Federal Republic of) 0% 08/10/2021 19,166 5.93

£704,578 Hawksmoor Mortgages 2016-1 FRN 2.1945% 25/05/2053 706 0.22

£1,509,000 Lanark Master Issuer FRN 1.61888% 22/12/2069 1,516 0.47

$748,745 Paragon Mortgages No.14 FRN 2.81088% 15/09/2039 564 0.17

$182,127 Paragon Mortgages No.15 FRN 2.83088% 15/12/2039 137 0.04

£76,458 Precise Mortgage Funding 2014-1 FRN 1.645% 12/09/2047 76 0.02

£280,718 Precise Mortgage Funding 2015-1 FRN 1.738% 12/03/2048 282 0.09

£1,531,744 Residential Mortgage Securities No. 26 FRN 3.05463% 14/02/2041 1,543 0.48

£1,335,775 Residential Mortgage Securities No. 28 FRN 1.99463% 15/06/2046 1,341 0.42

£704,891 Residential Mortgage Securities No. 30 FRN 1.63713% 20/03/2050 704 0.22

£3,325,852 Ripon Mortgages FRN 1.60425% 20/08/2056 3,322 1.03

£4,257,000 Silverstone Master Issuer FRN 1.1965% 21/01/2070 4,210 1.30

£645,941 Slate No. 1 FRN 1.82163% 24/01/2051 647 0.20

£559,181 Slate No. 2 FRN 1.92163% 24/10/2044 560 0.17

£1,690,080 THRONES 2015-1 FRN 2.046% 18/03/2050 1,696 0.53

£1,281,975 Trinity Square 2015-1 FRN 1.97088% 15/07/2051 1,292 0.40

£4,687,816 Warwick Finance Residential Mortgage No. 2 FRN 2.33871% 21/09/2049 4,727 1.46

‘AA’ credit rated bonds 50,973 15.77 13.74 $5,960,000 Amazon.com 2.4% 22/02/2023 4,705 1.46

€4,000,000 Apple 1% 10/11/2022 3,674 1.14

£4,257,000 Metropolitan Life Global Funding I 1.125% 15/12/2021 4,240 1.31

£1,492,000 National Westminster Bank FRN 1.3241% 22/03/2023 1,499 0.46

£4,256,000 New York Life Global Funding 1% 15/12/2021 4,234 1.31

£1,191,000 New York Life Global Funding 1.625% 15/12/2023 1,204 0.37

$2,235,000 New York Life Global Funding 1.95% 11/02/2020 1,768 0.55

£354,457 Paragon Mortgages No.13 FRN 1.06088% 15/01/2039 333 0.10

$2,126,838 Paragon Mortgages No.13 FRN A2C 2.77675% 15/01/2039 1,586 0.49

£1,939,000 Slate No. 1 FRN 2.67163% 24/01/2051 1,945 0.60

£5,000,000 UK Treasury 1.75% 22/07/2019 5,007 1.55

£20,000,000 UK Treasury 3.75% 07/09/2020 20,778 6.43

‘A’ credit rated bonds 86,415 26.74 24.17 $2,980,000 ABN AMRO Bank 2.65% 19/01/2021 2,366 0.73

$2,669,000 ABN AMRO Bank FRN 3.0015% 19/01/2021 2,123 0.66

£1,033,923 Alba 2006-2 FRN 1.01463% 15/12/2038 980 0.30

$1,000,000 Banco Santander FRN 3.7235% 12/04/2023 789 0.24

£2,550,000 Bank of America 6.125% 15/09/2021 2,809 0.87

$3,406,000 Bank of America FRN 3.33513% 05/02/2026 2,649 0.82

$5,109,000 Banque Federative du Credit Mutuel 2.7% 20/07/2022 4,046 1.25

$5,000,000 BNP Paribas 3.5% 01/03/2023 4,021 1.24

€4,300,000 BPCE FRN 0.191% 23/03/2023 3,777 1.17

$3,333,000 Bristol-Myers Squibb 2.55% 14/05/2021 2,656 0.82

$5,000,000 Citibank Var. Rate 2.844% 20/05/2022 3,980 1.23

$5,109,000 Comcast FRN 3.03175% 01/10/2021 4,054 1.25

$1,703,000 Crédit Agricole FRN 3.60113% 24/04/2023 1,345 0.42

$4,257,000 Daimler Finance North America 2.7% 03/08/2020 3,380 1.05

$1,501,405 Great Hall Mortgages No. 1 FRN 2.74463% 18/06/2039 1,161 0.36

£4,000,000 HSBC Var. Rate 2.175% 27/06/2023 4,003 1.24

€2,300,000 ING FRN 0.54% 20/09/2023 2,048 0.63

$4,257,000 ING FRN 3.751% 29/03/2022 3,399 1.05

$5,000,000 International Business Machines 2.8% 13/05/2021 3,993 1.24

$4,257,000 JPMorgan Chase FRN 3.48025% 25/04/2023 3,393 1.05

$4,257,000 JPMorgan Chase FRN 3.81113% 24/10/2023 3,431 1.06

€1,466,000 Medtronic Global 0.375% 07/03/2023 1,308 0.40

£1,293,852 Mitchells & Butlers Finance FRN 1.29463% 15/12/2030 1,196 0.37

£3,400,000 Munich Re Finance Var. Rate 6.625% 26/05/2042 3,823 1.18

$6,000,000 NatWest Markets 3.625% 29/09/2022 4,810 1.49

£252,860 Newgate Funding FRN 1.01088% 01/12/2050 242 0.08

£2,500,961 Newgate Funding FRN A3 0.95263% 01/12/2050 2,379 0.74

£546,176 Newgate Funding FRN A4 0.98263% 01/12/2050 523 0.16

€2,466,617 Paragon Mortgages No.13 FRN 0.07% 15/01/2039 2,022 0.63

€3,219,000 UBS Group Funding FRN 0.39% 20/09/2022 2,864 0.89

$5,960,000 United Parcel Service FRN 3.04175% 01/04/2023 4,753 1.47

$2,554,000 US Bancorp 3.375% 05/02/2024 2,092 0.65

‘BBB’ credit rated bonds 90,592 28.03 29.24 £5,109,000 AA Bond Company 2.875% 31/01/2022 4,861 1.50

€2,583,000 Altria 1% 15/02/2023 2,311 0.71

€1,100,000 American International Var. Rate 1.42% 15/03/2037 742 0.23

€4,468,000 Arion Bank 1% 20/03/2023 3,921 1.21

$6,000,000 AT&T FRN 3.61575% 12/06/2024 4,786 1.48

€1,400,000 AtoS 0.75% 07/05/2022 1,260 0.39

£3,406,000 AXA Var. Rate 6.772% Perpetual 3,419 1.06

€4,600,000 Banco De Sabadell 0.875% 05/03/2023 4,068 1.26

€700,000 Banco de Sabadell 1.75% 10/05/2024 617 0.19

€2,129,000 Channel Link Enterprises Finance Var. Rate 1.761% 30/06/2050 1,890 0.58

£1,302,000 Citigroup 2.75% 24/01/2024 1,338 0.41




as at 31 May 2019 2019 2018Holding £’000 % %

$5,109,000 Credit Suisse Group Funding Guernsey 3.8% 15/09/2022 4,160 1.29 €1,032,000 Fidelity National Information Services 0.75% 21/05/2023 923 0.29 £5,000,000 Ford Motor Credit 4.535% 06/03/2025 5,187 1.60 €1,838,000 General Motors Financial 2.2% 01/04/2024 1,683 0.52 $1,703,000 General Motors Financial FRN 4.14675% 14/01/2022 1,364 0.42 €3,406,000 Goldman Sachs Group FRN 0.311% 26/09/2023 2,990 0.92 $1,703,000 Goldman Sachs Group FRN 3.5285% 05/06/2023 1,355 0.42 £3,199,816 Greene King Finance FRN 3.34463% 15/12/2033 3,201 0.99 €979,000 Heimstaden Bostad 2.125% 05/09/2023 891 0.28 £2,737,000 Hiscox 2% 14/12/2022 2,731 0.84 $5,109,000 Imperial Brands Finance 2.95% 21/07/2020 4,058 1.26 £4,000,000 Lloyds Banking 2.25% 16/10/2024 3,960 1.23 £1,149,000 Mitchells & Butlers Finance FRN 1.44463% 15/12/2033 944 0.29 $5,000,000 Mondelez International 3% 07/05/2020 3,986 1.23 $5,000,000 Morgan Stanley FRN 3.77988% 08/05/2024 4,007 1.24 $2,129,000 Nationwide Building Society Var. Rate 3.766% 08/03/2024 1,699 0.53 €887,000 Santander UK Group Holdings FRN 0.468% 18/05/2023 768 0.24 €4,418,000 Santander UK Group Holdings FRN 0.54% 27/03/2024 3,803 1.18 $4,257,000 Société Générale 4.25% 14/09/2023 3,494 1.08 $1,192,000 UniCredit 6.572% 14/01/2022 988 0.31 $8,515,000 Verizon Communications FRN 3.618% 15/05/2025 6,804 2.11 €2,679,000 Volkswagen Financial Services 0.625% 01/04/2022 2,383 0.74

‘BB’ credit rated bonds 9,265 2.87 2.47 $2,908,000 Inretail Pharma 5.375% 02/05/2023 2,410 0.75 €5,100,000 Telefónica Europe Var. Rate 3% Perpetual 4,403 1.36 £1,700,000 Tesco 6.125% 24/02/2022 1,886 0.58 £568,000 Tesco Corporate Treasury Services 2.5% 02/05/2025 566 0.18

‘B’ credit rated bonds 0 0.00 1.23

Bonds with no credit rating 44,101 13.65 12.75 $663,152 AASET Trust 2017-1 3.967% 16/05/2042 531 0.16 €2,285,000 Banca Monte dei Paschi di Siena 2% 29/01/2024 2,073 0.64 £1,784,895 Brass No. 7 FRN 1.42175% 16/10/2059 1,789 0.55 £4,257,000 Coventry Building Society 1.875% 24/10/2023 4,289 1.33 £2,802,450 Finsbury Square 2017-2 FRN 1.468% 12/09/2065 2,801 0.87 £3,160,000 Gosforth Funding 2017-1 FRN 1.33963% 19/12/2059 3,154 0.98 £1,506,835 London Wall Mortgage Capital FRN 1.65638% 15/11/2049 1,507 0.47 £4,257,000 Newday Partnership Funding 2017-1 FRN 1.48125% 15/12/2027 4,208 1.30

£3,708,555 Oat Hill No.1 FRN 1.4445% 25/03/2046 3,697 1.14

£63,272 Orbita Funding 2016-1 FRN 1.68113% 14/07/2023 63 0.02

£1,953,000 PCL Funding II FRN 1.48125% 15/06/2022 1,956 0.61

€1,900,000 Safran FRN 0.261% 28/06/2021 1,680 0.52

£4,257,000 Skipton Building Society 1.75% 30/06/2022 4,206 1.30

£1,641,000 Skipton Building Society FRN 1.3891% 22/02/2024 1,648 0.51

£2,720,349 Together Asset Backed Securitisation No. 1 FRN 1.79275% 12/03/2049 2,729 0.85

£1,585,000 Tower Bridge Funding No. 3 FRN 2.03713% 20/12/2061 1,591 0.49

£3,216,000 Virgin Money FRN 1.4254% 22/03/2024 3,232 1.00

£2,953,000 Westfield Stratford FRN 1.669% 04/11/2024 2,947 0.91

Debt derivatives (74) (0.02) 0.08 Credit default swaps (74) (0.02) 0.08 $(5,000,000) General Electric Dec 2023 17 0.01


€(4,257,000) Markit iTraxx Europe Series 29 5 Year Jun 2023 71 0.02

€(8,515,000) Markit iTraxx Europe Snr Fin Series 28 5 Year Dec 2022 113 0.04

€(4,000,000) Markit iTraxx Europe Snr Fin Series 31 5 Year Jun 2024 19 0.00

€(5,000,000) Telecom Italia Jun 2024 (390) (0.12)

CURRENCY (6,554) (2.03) (1.45) Forward currency contracts (6,554) (2.03) (1.45) €(80,197,536) Sold for £68,779,593 (expires 05.06.19) (2,282) (0.71)

$12,919,608 Bought for £10,176,204 (expires 05.06.19) 93 0.03

$(147,715,920) Sold for £113,045,683 (expires 05.06.19) (4,365) (1.35)


CASH EQUIVALENTS 12,190 3.77 1.57 ‘AAA’ rated money market funds [a] 12,190 3.77 1.57 12,190,000 Northern Trust Global Fund - Sterling 12,190 3.77

SHARE CLASS HEDGING 0 0.00 (0.06) Forward currency contracts for share class hedging 0 0.00 (0.06)









as at 31 May 2019 2019 2018Holding £’000 % %



as at 31 May 2019 2019 2018Holding £’000 % %

Bonds with no credit rating (continued)

Fund performance


The following chart and tables show the performance for two of thefund’s share classes – Sterling Class ‘A’ (Income) shares and SterlingClass ‘I’ (Income) shares.


• The performance of the Sterling Class ‘A’ (Income) share is whatmost individuals investing directly with M&G have received. It hasthe highest ongoing charge of all the sterling share classes.Performance is shown after deduction of this charge. All UKinvestors in the fund therefore received this performance or better.

• The performance of the Sterling Class ‘I’ (Income) share is the mostappropriate to compare with the average performance of the fund’scomparative sector. It is the share class used by the InvestmentAssociation in the calculation of the comparative sector’s averageperformance. This share class is available for direct investment withM&G subject to minimum investment criteria, or via third parties whomay charge additional fees. The performance shown takes thededuction of the ongoing charge for this share class into accountbut it does not take account of charges applied by any other partythrough which you may have invested.

The fund is available for investment in different share classes, each withvarying levels of charges and minimum investments; please refer to theProspectus for M&G Investment Funds (2), which is available free ofcharge either from our website at www.mandg.co.uk/prospectuses or bycalling M&G Customer Relations.



2019 2018 2017as at 31 May £’000 £’000 £’000



To give an indication of how the fund has performed since launch, thechart below shows total return of Sterling Class ‘A’ (Income) sharesand Sterling Class ‘I’ (Income) shares.

The fund’s Sterling Class ‘I’ (Income) shares were launched on 9 November 2012. Performance data shown prior to this date is thatof the fund’s Sterling Class ‘A’ (Income) shares.

To give an indication of the performance of the fund, the following tableshows the compound rate of return, over the period to 26 October2018 for non-sterling share classes and 31 May 2019 for sterling shareclasses. Calculated on a price to price basis with income reinvested.


From From From Since 01.06.18 03.06.16 03.06.14 launch % [a] % p.a. % p.a. % p.a.

Euro [b] Class ‘A-H’ -0.8 +0.5 +0.5 +0.9 [c]

Class ‘C-H’ -0.6 +1.0 +0.9 +1.4 [c]

Sterling [d] Class ‘A’ +1.4 +2.0 +1.7 +3.1 [e]

Class ‘I’ +1.5 +2.1 +1.8 +2.0 [f]

Class ‘PP’ n/a n/a n/a +0.2 [g]

Swiss franc [b] Class ‘A-H’ -1.0 +0.1 -0.1 +0.4 [c]

Class ‘C-H’ -0.9 +0.6 +0.5 +0.9 [c]

US dollar [b] Class ‘A-H’ +0.3 +2.7 +1.9 +2.1 [c]

Class ‘C-H’ +0.5 +3.1 +2.4 +2.6 [c]

[a] Absolute basis.

[b] Price to price with gross income reinvested.

[c] 26 July 2013, the launch date of the share class.

[d] Price to price with income reinvested.

[e] 29 January 1993, the end of the initial offer period of the predecessor unit trust.

[f] 9 November 2012, the launch date of the share class.

[g] 8 April 2019, the launch date of the share class. Not annualised.

Sterling Class ‘I’ (Income) shares*

120

140

170

200

250

300

350

400

10093 94 9695 98 99 00 01 02 03 04 05 06 07 08 09 10 13 15 161411 12 17 18 1997

January 1993 = 100, plotted monthly Chart date 3 June 2019

Sterling Class ‘I’ (Income) shares*

Sterling Class ‘A’ (Income) shares*

Morningstar (IA) £ Corporate Bond sector average*



M&G Short Dated Corporate Bond Fund Financial highlights



Operating charges




• Share class hedging: Charge paid to M&G for currency hedgingservices to minimise exchange rate risk for the share class.




















Fund performance



The non-sterling share classes were merged into the equivalent share classes of the M&G (Lux) Short Dated Corporate Bond Fundon 26 October 2018. The distribution yields for the current year for the non-sterling share classes were calculated at the merger date.

Euro Class ‘A-H’ Income share performanceThe share class was launched on 26 July 2013.


Opening NAV 975.69 998.53 988.29



Return after operating charges (3.65) (6.91) 25.50

Distributions (8.03) (15.93) (15.26)


Closing NAV 0.00 975.69 998.53







Operating charges 0.83 1.02* 1.08

Return after operating charges -0.37 -0.69 +2.58



Other information

Closing NAV (£’000) 0 4,604 2,320



Highest share price (Euro ¢) 978.65 1,003.52 1,006.21

Lowest share price (Euro ¢) 965.15 980.16 988.43

* As the annual management charge had been discounted during the period, 0.83%

is a more reliable estimate of the operating charges for the period to 31.05.18.

Euro Class ‘A-H’ Accumulation share performanceThe share class was launched on 26 July 2013.

for the year to 31 May 2019 2018 2017Change in NAV per share Euro ¢ Euro ¢ Euro ¢Opening NAV 1,051.86 1,059.30 1,032.41Return before operating charges and after directportfolio transaction costs (0.27) 3.33 38.43



Distributions (5.18) (6.28) (8.56)



Closing NAV 0.00 1,051.86 1,059.30

Direct portfolio transaction costs Euro ¢ Euro ¢ Euro ¢Costs before dilution adjustments 0.00 0.00 0.01Dilution adjustments [a] 0.00 0.00 0.00


Performance and charges % % %Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.83 1.01* 1.08Return after operating charges -0.36 -0.70 +2.60Distribution yield 1.21 0.80 0.50Effect on yield of charges offset against capital 0.00 0.00 0.00

Other information Closing NAV (£’000) 0 39,771 14,865Closing NAV percentage of total fund NAV (%) 0.00 8.42 3.27Number of shares 0 4,315,036 1,606,684Highest share price (Euro ¢) 1,054.90 1,064.35 1,062.50Lowest share price (Euro ¢) 1,045.72 1,051.84 1,032.36

* As the annual management charge had been discounted during the period, 0.83%is a more reliable estimate of the operating charges for the period to 31.05.18.

Euro Class ‘C-H’ Income share performanceThe share class was launched on 26 July 2013.


Opening NAV 983.63 1,001.99 988.18Return before operating charges and after directportfolio transaction costs (0.20) 3.15 36.61



Distributions (8.12) (16.08) (17.03)


Closing NAV 0.00 983.63 1,001.99





Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.43 0.54* 0.58Return after operating charges -0.20 -0.23 +3.12Distribution yield 2.02 1.88 1.56Effect on yield of charges offset against capital 0.42 0.54 0.57

Other information

Closing NAV (£’000) 0 21 21Closing NAV percentage of total fund NAV (%) 0.00 0.00 0.01Number of shares 0 2,428 2,428Highest share price (Euro ¢) 987.43 1,007.87 1,009.20Lowest share price (Euro ¢) 974.66 987.42 988.64




Euro Class ‘C-H’ Accumulation share performanceThe share class was launched on 26 July 2013.


Opening NAV 1,076.77 1,079.32 1,047.37




Distributions (7.24) (11.59) (14.01)



Closing NAV 0.00 1,076.77 1,079.32








Return after operating charges -0.14 -0.24 +3.05



Other information

Closing NAV (£’000) 0 41,695 47,540


Number of shares 0 4,419,061 5,042,933





Sterling Class ‘A’ Income share performanceThe share class was launched on 29 January 1993.


Opening NAV 25.63 25.86 25.27




Distributions (0.56) (0.42) (0.43)

Closing NAV 25.47 25.63 25.86











Other information

Closing NAV (£’000) 60,701 100,587 142,455


Number of shares 238,287,578 392,452,306 550,814,268





Sterling Class ‘I’ Income share performanceThe share class was launched on 9 November 2012.


Opening NAV 1,029.30 1,037.56 1,013.17




Distributions (22.66) (16.72) (17.73)

Closing NAV 1,024.06 1,029.30 1,037.56











Other information

Closing NAV (£’000) 262,435 273,833 244,668


Number of shares 25,626,979 26,603,691 23,580,994








Sterling Class ‘PP’ Accumulation share performanceThe share class was launched on 8 April 2019.


Opening NAV 100.00 n/a n/a

Return before operating charges and after directportfolio transaction costs 0.18 n/a n/a

Operating charges (0.05) n/a n/a

Return after operating charges 0.13 n/a n/a

Distributions (0.57) n/a n/a

Retained distributions 0.57 n/a n/a

Closing NAV 100.13 n/a n/a


Costs before dilution adjustments 0.00 n/a n/a

Dilution adjustments [a] 0.00 n/a n/a

Total direct portfolio transaction costs 0.00 n/a n/a


Direct portfolio transaction costs [b] 0.00 n/a n/a

Operating charges 0.30* n/a n/a

Return after operating charges +0.13 n/a n/a

Distribution yield 1.95 n/a n/a

Effect on yield of charges offset against capital 0.00 n/a n/a

Other information

Closing NAV (£’000) 20 n/a n/a

Closing NAV percentage of total fund NAV (%) 0.01 n/a n/a

Number of shares 20,000 n/a n/a

Highest share price (UK p) 100.36 n/a n/a

Lowest share price (UK p) 99.67 n/a n/a

* The operating charge shown is an estimate of the charges, as the share class

has not been in existence for a full financial year.

Swiss franc Class ‘A-H’ Accumulation share performanceThe share class was launched on 26 July 2013.

for the year to 31 May 2019 2018 2017Change in NAV per share Swiss ¢ Swiss ¢ Swiss ¢Opening NAV 1,029.09 1,041.00 1,019.53Return before operating charges and after directportfolio transaction costs (1.89) (1.04) 32.81



Distributions (5.09) (6.20) (8.39)



Closing NAV 0.00 1,029.09 1,041.00

Direct portfolio transaction costs Swiss ¢ Swiss ¢ Swiss ¢Costs before dilution adjustments 0.00 0.00 0.01Dilution adjustments [a] 0.00 0.00 0.00



Other information Closing NAV (£’000) 0 42 89Closing NAV percentage of total fund NAV (%) 0.00 0.01 0.02Number of shares 0 5,400 10,700Highest share price (Swiss ¢) 1,032.02 1,045.08 1,044.20Lowest share price (Swiss ¢) 1,021.61 1,029.84 1,019.52


Swiss franc Class ‘C-H’ Accumulation share performanceThe share class was launched on 26 July 2013.

for the year to 31 May 2019 2018 2017Change in NAV per share Swiss ¢ Swiss ¢ Swiss ¢Opening NAV 1,056.06 1,062.33 1,034.60Return before operating charges and after directportfolio transaction costs (2.37) (1.05) 33.44



Distributions (6.63) (11.79) (14.20)



Closing NAV 0.00 1,056.06 1,062.33

Direct portfolio transaction costs Swiss ¢ Swiss ¢ Swiss ¢Costs before dilution adjustments 0.00 0.00 0.01Dilution adjustments [a] 0.00 0.00 0.00



Other information Closing NAV (£’000) 0 578 9Closing NAV percentage of total fund NAV (%) 0.00 0.12 0.00Number of shares 0 71,907 1,000Highest share price (Swiss ¢) 1,059.08 1,068.01 1,065.58Lowest share price (Swiss ¢) 1,049.53 1,055.84 1,035.06





US dollar Class ‘A-H’ Income share performanceThe share class was launched on 8 August 2014.


Opening NAV 1,041.89 1,040.98 1,014.07




Distributions (8.69) (16.88) (15.78)


Closing NAV 0.00 1,041.89 1,040.98











Other information

Closing NAV (£’000) 0 545 338







US dollar Class ‘A-H’ Accumulation share performanceThe share class was launched on 26 July 2013





Distributions (5.54) (6.59) (8.67)



Closing NAV 0.00 1,106.95 1,088.35





Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.83 0.95* 1.08Return after operating charges +0.78 +1.71 +4.28Distribution yield 1.19 0.79 0.50Effect on yield of charges offset against capital 0.00 0.00 0.00

Other information

Closing NAV (£’000) 0 10,706 588Closing NAV percentage of total fund NAV (%) 0.00 2.27 0.13Number of shares 0 1,288,783 69,324Highest share price (US ¢) 1,116.72 1,110.82 1,091.68Lowest share price (US ¢) 1,105.72 1,089.05 1,044.19


US dollar Class ‘C-H’ Income share performanceThe share class was launched on 8 August 2014.





Distributions (8.79) (17.10) (17.54)


Closing NAV 0.00 1,053.77 1,048.67





Direct portfolio transaction costs [b] 0.00 0.00 0.00Operating charges 0.44 0.56* 0.58Return after operating charges +0.96 +2.12 +4.73Distribution yield 2.00 1.86 1.56Effect on yield of charges offset against capital 0.42 0.56 0.57

Other information

Closing NAV (£’000) 0 11 12Closing NAV percentage of total fund NAV (%) 0.00 0.00 0.00Number of shares 0 1,454 1,454Highest share price (US ¢) 1,063.62 1,062.23 1,056.26Lowest share price (US ¢) 1,052.73 1,049.57 1,018.63





US dollar Class ‘C-H’ Accumulation share performanceThe share class was launched on 26 July 2013.


Opening NAV 1,134.42 1,110.75 1,060.37




Distributions (7.53) (12.12) (14.16)



Closing NAV 0.00 1,134.42 1,110.75











Other information

Closing NAV (£’000) 0 255 1,478















Income

Net capital gains / (losses) 3 (320) (2,092)

Revenue 5 8,573 7,680


Taxation 7 (5) 2 ______ ______Net revenue / (expense) aftertaxation 6,771 4,844

Total return before distributions 6,451 2,752Distributions 8 (8,267) (6,988)





Amounts paid on cancellation of shares (136,495) (154,930)

Transfer to M&G (Lux) Short Dated Corporate Bond Fund (62,094) 0

______ ______ (148,368) 21,458



Retained distributions on Accumulationshares 441 745



Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets



Cash and bank balances 10 157 57


Total assets 340,077 498,902

Liabilities Investment liabilities (7,037) (7,546)

Creditors Bank overdrafts (7,295) 0


Other creditors 11 (603) (16,970)







In determining the amount available for distribution to Income shares,the annual management charge, administration charge and shareclass hedging charge are offset against capital, increasing the amountavailable for distribution whilst restraining capital performance to anequivalent extent.




Derivative contracts (8,578) (2,939)

Currency gains / (losses) 306 5,502


Net capital gains / (losses) (320) (2,092)








c) Indirect portfolio transaction costs % %





Bank interest 8 7

Derivative revenue 254 567





M&G Short Dated Corporate Bond Fund Financial statements and notes




Share class hedging charge 7 16

1,739 2,762





30 43




Withholding tax 5 (2)


Total taxation 5 (2)


______ ______Corporation tax at 20% 1,355 968

Effects of:

Interest distributions (1,355) (968)

Withholding tax 5 (2)

Total tax charge (note 7a) 5 (2)




The fund has not recognised a deferred tax asset in the current financial year

(2018: same).



First interim 1,759 322 1,510 138

Second interim 1,917 119 1,399 160

Third interim 1,878 n/a 1,548 182

Final 1,986 0 1,738 265










9 Debtors 2019 2018as at 31 May £’000 £’000


Currency deals outstanding 0 2,184


Derivative revenue receivable 62 51


Sales awaiting settlement 13 12,649





Total cash and bank balances 157 57





Currency deals outstanding 0 2,188


Purchases awaiting settlement 0 14,495

Total other creditors 603 16,970



13 Shares in issue



Euro Class ‘A-H’ Income 538,564 38,930 (577,494) 0

Class ‘A-H’ Accumulation 4,315,036 446,665 (4,761,701) 0

Class ‘C-H’ Income 2,428 3,100 (5,528) 0

Class ‘C-H’ Accumulation 4,419,061 2,936 (4,421,997) 0


Class ‘I’ Income 26,603,691 3,020,306 (3,997,018) 25,626,979

Class ‘PP’ Accumulation 0 20,000 0 20,000

Swiss franc Class ‘A-H’ Accumulation 5,400 1,300 (6,700) 0


US dollar Class ‘A-H’ Income 69,642 3,776 (73,418) 0

Class ‘A-H’ Accumulation 1,288,783 800,971 (2,089,754) 0

Class ‘C-H’ Income 1,454 2,700 (4,154) 0






The table below sets out the charging structure for each class of share.The charging structure is the same for both Income and Accumulationshares of each class. Annual Share class Entry Exit management hedging charge charge charge chargeShare class % % % %

Euro Class ‘A-H’ 3.25 n/a 0.65 [a]

Class ‘C-H’ 1.25 n/a 0.25 [a]

Sterling Class ‘A’ nil n/a 0.35 n/a

Class ‘I’ nil n/a 0.25 n/a

Class ‘PP’ nil n/a up to 0.25 n/a

Swiss franc Class ‘A-H’ 3.25 n/a 0.65 [a]

Class ‘C-H’ 1.25 n/a 0.25 [a]

US dollar Class ‘A-H’ 3.25 n/a 0.65 [a]

Class ‘C-H’ 1.25 n/a 0.25 [a]

[a] This charge may vary between 0.01% and 0.055%.

15 Related parties















Level 1 25,785 0 50,572 0

Level 2 300,172 (7,037) 420,940 (7,546)

Level 3 0 0 2,305 0

325,957 (7,037) 473,817 (7,546)








2019 2018 Utilisation Utilisation 2019 of VaR [a] 2018 of VaR [a]

for the year to 31 May % of VaR 3% % of VaR 3%

Lowest 0.37 12.37 0.49 16.20

Highest 0.61 20.31 0.83 27.76

Average 0.46 15.33 0.61 20.36





20 Credit risk



Below investment grade securities 9,265 17,491


Other investments (6,628) (6,799)

Total 318,920 466,271

The tables below show the exposure to counterparties. Collateral isposted daily, in the form of cash or high-quality government bonds, tominimise this exposure. Forward currency Swaps contractsas at 31 May 2019 £’000 £’000

Barclays Bank 96 (10)

BNP Paribas (372) (204)

Goldman Sachs 19 0

HSBC 0 (2,228)

JPMorgan 183 (4,147)

State Street Bank 0 35

Total (74) (6,554)

Forward currency Swaps contractsas at 31 May 2018 £’000 £’000

BNP Paribas 0 (175)

Goldman Sachs 152 0

HSBC 0 (6,196)

JPMorgan 157 0

National Australia Bank 0 1

Royal Bank of Canada 0 (86)

Standard Chartered Bank 0 (24)

State Street Bank 0 12

UBS 0 (707)

Total 309 (7,175)

21 Leverage risk




2019 [a] 2019 [a] 2018 [a] 2018 [a]


Lowest 194,433 58 271,867 57

Highest 860,911 186 785,212 165

Average 278,471 72 321,234 68



physical holdings.


22 Exchange rate risk for hedged share classes

Hedged share classes operated currency hedges designed to reducethe impact of exchange rates in certain circumstances. As a result,profit and loss on the currency hedges may impact the liquidity of theoverall fund. On a day to day basis this was monitored using reportingfrom the outsourced provider of the hedged share class service. Onan ongoing basis the size of the hedged share classes was monitoredto ensure that unforeseen exchange rate volatility can be adequatelymanaged without significantly impacting all shareholders.





This fund pays quarterly interest distributions and the following tablesets out the distribution periods.


First interim 01.06.18 31.08.18 03.09.18 31.10.18

Second interim [a] 01.09.18 30.11.18 03.12.18 31.01.19

Third interim 01.12.18 28.02.19 01.03.19 30.04.19

Final 01.03.19 31.05.19 03.06.19 31.07.19

[a] As a result of the merger of M&G Short Dated Corporate Bond Fund into M&G

(Lux) Short Dated Corporate Bond Fund on 26 October 2018 (‘the effective date’),

any income available for distribution to non-sterling share classes from the start

of the period on 1 September 2018 to the effective date of the merger was

distributed to shareholders on 20 December 2018.




Euro Class ‘A-H’ Income shares


¢ ¢ ¢ ¢First interim 3.3425 1.3991 4.7416 3.7329

Second interim 1.5708 1.7152 3.2860 3.7254

Third interim n/a n/a n/a 3.9857


Euro Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.3618 1.6356 2.9974 1.2005

Second interim 1.2075 0.9722 2.1797 1.1378



Euro Class ‘C-H’ Income shares


¢ ¢ ¢ ¢First interim 1.2102 3.5951 4.8053 3.7581

Second interim 3.3164 0.0000 3.3164 3.7659



Euro Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.2879 2.8417 4.1296 2.5467

Second interim 3.1073 0.0000 3.1073 2.5147






Second interim 0.0635 0.0744 0.1379 0.0964

Third interim 0.0734 0.0708 0.1442 0.1043

Final 0.1076 0.0491 0.1567 0.1174




Second interim 3.6272 1.9114 5.5386 3.8681

Third interim 2.9721 2.8293 5.8014 4.1824

Final 3.9658 2.3286 6.2944 4.7108

Sterling Class ‘PP’ Accumulation shares


p p p pFirst interim n/a n/a n/a n/a

Second interim n/a n/a n/a n/a

Third interim n/a n/a n/a n/a

Final 0.5700 0.0000 0.5700 n/a

Swiss franc Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 0.7623 2.1697 2.9320 1.2038

Second interim 2.1540 0.0000 2.1540 1.1256






Swiss franc Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.0391 2.7146 3.7537 2.6797

Second interim 2.8811 0.0000 2.8811 2.6458



US dollar Class ‘A-H’ Income shares


¢ ¢ ¢ ¢First interim 1.3043 3.8052 5.1095 3.9937

Second interim 0.3038 3.2814 3.5852 3.8998



US dollar Class ‘A-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.3567 1.8339 3.1906 1.2889

Second interim 1.0141 1.3348 2.3489 1.1727



US dollar Class ‘C-H’ Income shares


¢ ¢ ¢ ¢First interim 1.3219 3.8406 5.1625 4.0358

Second interim 3.6293 0.0000 3.6293 3.9697



US dollar Class ‘C-H’ Accumulation shares


¢ ¢ ¢ ¢First interim 1.1355 3.2476 4.3831 2.6862

Second interim 3.1490 0.0000 3.1490 2.6036











The fund aims to increase income distributions over time and targetsa yield greater than that of the FTSE All-Share Index. Although incomewill be the primary consideration, the investment manager will also aimfor capital growth.

Investment policy

At least 70% of the fund will be invested in UK equities. Exposure toUK equities may be gained by investing in other collective investmentschemes.

The fund focuses on good-quality but undervalued stocks that offer ahigher income than the FTSE All-Share Index by identifying thosecompanies that exhibit the following qualities: strong businessoperations, good cash flows and attractive dividend growth prospects.The fund may also invest in sterling-denominated fixed incomesecurities.

Cash and near cash may be held for ancillary purposes and derivativesmay be used for efficient portfolio management and hedging purposes.

Investment approach

The M&G UK Income Distribution Fund is managed to provideinvestors with a high income through a portfolio of UK equities andhigh quality corporate bonds (in order to aid income generation). Thefund targets a yield that is higher than that of the FTSE All-ShareIndex. Although this gives the fund a bias towards the higher yieldingsectors of the market, it aims to have a broadly diversified portfoliowithin these yield constraints.

The equity component of the fund has a bias towards good value, outof favour stocks. Good quality investments are selected from theavailable universe of higher yielding equities by identifying thosecompanies that exhibit the following qualities: strong businessfranchise, good cashflow characteristics and attractive dividend growth prospects.

Stocks will generally be sold if these criteria no longer apply, but thespecific sell discipline is triggered by over-valuation, falling yield orbetter opportunities elsewhere.

The fixed income exposure will be comprised of issues chosen for highquality and broad diversification. Corporate bonds are typicallyfavoured versus the risk-free rate (as proxied by gilts in the long term)in pursuit of income.

Risk profile

The fund invests mainly in the shares of UK-listed companies. It is alsoinvested in high-quality, sterling-denominated fixed income securities,or bonds. The fund is, therefore, subject to the price volatility of theglobal bond and stockmarkets as well as the performance of individualcompanies. The fund is also subject to fluctuations in currencyexchange rates. The fund has a bias towards the higher yieldingsectors of the market, although it seeks to have a broadly diversifiedportfolio at the same time. Income distributions from the fund’sholdings, however, are not guaranteed and may vary.

Diversification across industries and company sizes is therefore keyin managing liquidity risk and reducing market risk. The fund’s risksare measured and managed as an integral part of the investmentprocess.


The above number:





mean risk free.


Investment review



The fund achieved the objective of growing its income over the 12-month review period. In addition, as at 3 June 2019, the 5.08%yield on the fund’s Sterling Class ‘A’ (Income) shares was 18% abovethe broad market FTSE All-Share Index yield of 4.31%, meeting thefund’s target to exceed the index yield.

Two quarterly distributions of 6.40p per Sterling Class ‘A’ (Income)share were declared in respect of the first half of the review period,followed by a third quarterly distribution of 6.40p and a final quarterlydistribution of 17.91p in respect of the second half of the reviewperiod. The fund’s total distribution over the year of 37.11p representsan increase of 5.2% on the corresponding period last year. The latestannual inflation rate, as measured by the Retail Prices Index (RPI),was 3.0% in May, while on the Consumer Prices Index (CPI) measureit was 2.1%.

For details of the fund’s historic yields for your specific share class,please refer to the ‘Specific share class performance’ tables in the‘Financial highlights’ section of this report.

Between 1 June 2018 (the start of the review period) and 3 June 2019,the fund delivered a negative total return (the combination of incomeand growth of capital) across all its share classes*, driven by a declinein capital value. Accordingly, over this time frame, the fund did not growits capital, which is a secondary consideration after the income growthrequirement. The fund’s performance reflected the overall negativetrend in share markets, while fixed income recorded modest gains,resulting in the fund trailing the -0.7% return by a comparablecomposite index that comprises 70% the FTSE All-Share Index and30% the FTSE UK Conventional Gilts All Stocks Index.



Low risk High risk


1 2 3 4 5 6 7


M&G UK Income Distribution Fund Authorised Corporate Director’s Report


The 12 months under review was a period of contrasts, with markeddeclines in UK and many global stockmarkets in the second half of2018, before a significant rally in the early months of 2019. Thesemoves resulted in the UK stockmarket recording a modest decline overthe period as the FTSE All-Share Index returned -3.3%.

Late 2018 saw a continuation of previous weakness on concernsabout a slowing US economy, just as the effect of President Trump’stax cuts was beginning to wane, as well as US protectionism and theprospect of higher interest rates. Risk appetite improved dramaticallyin the new year, however, after the US Federal Reserve indicated apause in interest rate hikes due to concerns about their economicimpact, the sharp increase in market volatility and muted domesticinflation. In addition, investors were encouraged by some better-than-expected corporate results, signs of progress in the US-China tradetalks, and news that China’s central bank was boosting lending in theChinese economy in response to slowing growth. There was a briefsetback in March when some business sentiment data in the US andEurope disappointed, before stockmarkets, the UK included, resumedtheir upward trajectory, with the US reaching a new all-time high.However, in the final month of the fund’s year, investor sentimentdeteriorated sharply as the US president surprised everyone byescalating his disputes over trade, initially with China but later takingaim at Mexico and India.

In the UK, Brexit increasingly dominated the headlines. Prime MinisterTheresa May secured a withdrawal agreement with the EuropeanUnion (EU), but members of parliament (MPs) rejected the deal threetimes, along with a number of indicative votes on alternative optionsput forward by MPs. The original 29 March 2019 deadline for Brexitcame and went after the EU agreed to extend the process. With theaim of avoiding a departure with no deal in place on 12 April, the PrimeMinister secured agreement to a new deadline of 31 October 2019,before announcing that she would step down as party leader on 7 Junewhen she accepted that she had insufficient support for her deal inParliament. This effectively put Brexit on hold until the outcome of thecontest to find her replacement and new prime minister.

Sterling experienced a volatile 12 months, mainly as the currencyresponded to Brexit developments. The currency stood at aroundUS$1.33 at the start of the period, and passed lows of aroundUS$1.25 in December as investors contemplated the possibility of amessy outcome or a general election. It then recovered to US$1.33as ‘no deal’ appeared less likely in February, before settling at US$1.26by the end of May 2019 in the wake of the Prime Minister’s resignation.

All company size categories declined over the 12 months, reflectingthe market sell-off in 2018. Larger companies were more resilientoverall, assisted by sterling weakness in 2018. However, medium-sizedcompanies have outperformed so far in 2019. Currency has been abig driver, with sterling weakness last year boosting the overseasrevenues of UK multinationals, while sterling strength since the startof 2019 has brought down import costs for more domestically focusedmedium-sized and smaller companies.

Sector performance was mixed, reflecting the mid-term market volte-face, with mining, oil & gas producers, consumer staples,pharmaceuticals, media, fixed line telecoms, water utilities, non-lifeinsurance and technology companies outperforming, while oilservices, chemicals, industrials, tobacco, healthcare equipment,consumer services, mobile telecoms, financials and electricitygenerators underperformed. Notably, consumer staples (excludingtobacco) companies attracted support, reflecting their steady earningsgrowth characteristics. Technology was helped by the strength of theUS sector, but it is a very small part of the UK market. The energysector was lacklustre, as the oil price ended the 12-month period downslightly at US$66 per barrel, although this disguised a rise to aboveUS$86 in October, followed by a steep fall to US$50 by the end of 2018, before supply constraints and US sanctions caused the trendto reverse.

In the UK sterling bond, or fixed income market, the FTSE UKConventional Gilts All Stocks Index returned 5.1%, while the MerrillLynch Non-Gilts Sterling Bond Index returned 4.8%. In addition, longerdated government bonds significantly outperformed their shorter datedcounterparts as they benefited from ongoing support from investorswith long-term liabilities to match, such as pension funds andinsurance companies. (Bonds are loans in the form of a security,usually issued by a government (government bonds) or company(corporate bonds), which normally pay a fixed rate of interest over agiven time period, at the end of which the initial amount borrowed isrepaid.) Within corporate bonds, lower quality issues outperformed,reflecting investors’ search for yield.

The fund lagged the comparable composite index over the 12 months,partly as a result of timing differences between the fund’s middaypricing and market close at the start and end of the period, but also because there was a larger weighting in UK company shares(equities) than the composite index, at 71%, as these underperformedthe sterling bond market. However, the equity segment of the portfolio outperformed the FTSE All-Share Index, largely because of stock selection.

The fund’s bond holdings, representing approximately 28% of theportfolio, produced a modest single-digit return, lagging the FTSE UKConventional Gilts All Stocks Index. This reflected a defensive stancewithin the fund against a fall in prices, as well as its exposure tocorporate bonds.

Within the equity segment, while the fund’s sector allocation stancehad a neutral effect, at the stock level, value was added across themarket capitalisation spectrum, but primarily within the fund’s holdingsin medium-sized companies. The common denominator was thepublication of good results.

Amongst larger companies, the main contributors included softwarefirms Micro Focus International and Sage, drugmakers AstraZenecaand GlaxoSmithKline, Anglo-Australian miner Rio Tinto and watercompany United Utilities. Micro Focus recovered from a sharp sell-offin the spring of 2018 when the market overreacted to a profit warningrelated to its purchase of the software arm of Hewlett-Packard – theshares were added to the portfolio on an opportunistic basis afterhalving in value. AstraZeneca’s drugs pipeline has begun to improve,which is having a positive impact on revenue growth. Rio Tintobenefited from disruptions to production in Brazil and Australia thathave pushed up the price of iron ore, contrary to trends elsewhere incommodity markets. United Utilities, along with Pennon and SevernTrent, have been awarded fast-track status on the new 5-year pricingplan by Ofwat, thereby avoiding an extended period of negotiation withthe regulator.



Investment review

Within the fund’s medium-sized company holdings, the main sourcesof added value included emerging market debt fund managerAshmore, rail and bus operator Go-Ahead, brewer plus pub operatorGreene King, and homewares chain Dunelm. Ashmore hasexperienced continued inflows from its blue-chip client base ofgovernments, central banks, sovereign wealth funds and pension plansdespite a weak background for emerging markets and currencies. Go-Ahead, which is an attractive yielder, appears to be putting itstroubles behind it as GTR has been delivering an improved operationalperformance. The company also announced a deal with theDepartment for Transport to continue the GTR franchise until its 2021 expiry.

Amongst the main individual detractors were bookmaker William Hill,housebuilder Bovis Homes, insurer Aviva, cigarette manufacturersBritish American Tobacco plus Imperial Brands, and telecoms groupVodafone. Notably, William Hill was adversely affected by thegovernment clampdown on fixed-odds betting terminals. Bovis isrecovering from a build quality scandal in 2016/2017, as well as missedproduction targets; however, the company is well on the way torecovery under a new chief executive. Cigarette manufacturers remainunder pressure from the authorities in the US and the UK over theirvaping products, added to which there was an adverse court ruling inCanada in a class action earlier this year; nevertheless, yields areattractive and cashflow is strong. Vodafone announced a 40% dividendcut to help meet the cost of servicing debt taken on to assist in thepurchase of Liberty Global’s cable networks in Germany and EasternEurope, as well as participating in the 5G spectrum auctions.


The broad thrust of the fund was unchanged over the 12 months underreview. Most of the portfolio’s weighting remains above index in themore defensive and higher income-earning sectors of the market,while generally avoiding the lower-quality areas. In this regard, therewas a preference for adding to holdings or establishing new positionsin the resources, telecoms, utilities and financial sectors.

Amongst the new positions established were TP ICAP, a globalintermediary firm operating in financial, energy and commoditymarkets, car insurer Hastings, Paypoint, the point-of-sale paymentservices provider, Global Ports Holding, the world’s largest cruise portoperator, St James’s Place, the wealth manager, The RestaurantGroup which owns Frankie & Benny’s, Garfunkel’s and Wagamama –the latter, a recent acquisition – and Warehouse REIT (real estateinvestment trust). The latter formed part of a reorganisation of thefund’s exposure to the real estate sector to pick up yield. The commondenominator was a solid balance sheet with strong cashflow and anattractive and growing dividend. We also took advantage of the marketweakness to add to good dividend payers held in the portfolio on moreattractive valuations, including packaging business DS Smith,specialist closed life fund manager Phoenix, telecoms firm BT, oil majorBP, along with two utility companies, National Grid and United Utilities.

To help fund these purchases, some holdings were sold as their yields had become less attractive from an income standpoint after along period of outperformance. These included one smaller company, camera equipment manufacturer Vitec, and several largercompanies – alcoholic drinks producer Diageo, speciality chemicals

manufacturer Johnson Matthey, water utility Severn Trent and financialservices group Old Mutual. The latter was also sold as it had becomea rump holding after rebranding and splitting into several smallercompanies. In addition, one medium-sized company, pavingmanufacturer Marshalls, was sold, while another, media group UBM,exited the portfolio after it was taken over by larger rival Informa.Elsewhere, profits were realised in several holdings, includingpharmaceutical firms AstraZeneca and GlaxoSmithKline, contractcaterer Compass, wealth manager Close Brothers, homewares firmDunelm and retailer WH Smith.

Finally, in a move towards streamlining its business, technology firmMicro Focus implemented a return of capital and share reduction,following the sale to a Swedish private equity house of its Suseoperation. Micro Focus had acquired the open source softwarespecialist last year when it bought another technology company,Attachmate, and sold Suse for more than it paid for the wholeAttachmate acquisition.

There was limited trading activity within the fixed income portion of theportfolio, which mainly revolved around recycling the proceeds frommaturing bonds back into the market. This was achieved by purchasingbonds on the secondary market and by participating in new bondissues on the primary market that were offered at attractive levels –the latter included issues from Santander, Deutsche Telekom, UNITE,banking groups BPCE and ING, Ford Motor Credit, Next and Tesco.Meanwhile, this portion of the fund continues to be defensivelypositioned from a quality perspective, and at a sector level through anemphasis on more defensive areas such as utilities, telecoms andconsumer goods.

Outlook

The UK equity market has proved to be remarkably sanguine so farthis year, notwithstanding a deterioration in the economic outlook athome and abroad, an increase in trade tensions between the US andits major trading partners, and concerns around Brexit, which iseffectively on hold until the Conservative Party finds a new leader andprime minister.

The main reasons behind the market’s support have been the Bankof England’s maintenance of a low interest rate policy together withthe low level of bond yields. Another factor, however, has been aremarkably resilient consumer, helped by unemployment at a 44-yearlow and wage growth that has finally overtaken inflation. In addition,UK equities began 2019 looking relatively cheap as investors reactedto the increased uncertainty over Brexit. Despite this year’s rally,though, the UK equity market still represents fair value compared toother equity markets, but it is likely to remain at a discount to them untilthe Brexit imbroglio has run its course.

Sterling has tended to be more immediately reflective of the Brexitoutlook and it is expected to rally strongly if ‘no deal’ is avoided, butsell off sharply in the wake of a hard Brexit. A deal would also supportthe equity market, especially domestic stocks, and may potentiallyreduce the risk of a Labour government, worries about which havealso acted as a restraint on the market’s upward progress. But even inthe circumstances of a no-deal scenario, with 75% of FTSE 100companies’ earnings derived from overseas, the market should findsome support. Longer term, UK companies’ balance sheets are wellcapitalised, and earnings and dividend growth supportive, assisted bythe Bank of England’s stimulative monetary policy.




Investment review

In this environment, the main strength of the fund’s investmentportfolio is its broad structure, with its emphasis on equities offeringabove-average income based on sustainable dividends, together witha substantial weighting in good-quality corporate bonds and a smallexposure to government bonds. At current valuation levels, though,the bond portfolio’s static contribution to the income stream is belowwhat might be expected over the longer term. However, the bondelement continues to provide a degree of stability when equitymarkets suffer from risk aversion.

Distribution prospects

The fund’s income generation has been assisted by the tailwind ofsterling weakness on the back of concerns about Brexit and theslowdown in the economy, which has principally benefited the UK’smultinationals by boosting the translational effects of their overseasearnings into sterling. The past two years have borne witness to abroadening of the market’s dividend-producing base. Despite recentweakness, the recovery in commodity prices from their 2016 lows hasenabled the mining behemoths to return to paying dividends onceagain, and a higher oil price combined with improved production costshas provided greater confidence about the security of future dividendflows from the energy sector. In addition, the UK’s banks, anotherimportant source of market income in the past, are returning to healthand paying dividends again in most cases.

Against this background, underlying dividends (excluding specialdividends) in the UK rose 8.7% in 2018. However, the forecast for 2019is less positive, with dividend growth expected to ease, reflectinggreater risks to economic growth. In addition, the magnitude of lastyear’s increases in the mining sector is unlikely to be repeated.Nevertheless, in the absence of unforeseen circumstances, we areaiming for a further increase in the fund’s distribution in the 2019/2020 year.

Michael StiasnyFund manager






Investments

Portfolio statement

as at 31 May 2019 2019 2018 [a]


EQUITIES 448,082 76.48 79.53 Software & computer services 9,725 1.66 1.13 290,360 Micro Focus International 5,521 0.94

565,000 Sage 4,204 0.72

Telecommunications service providers 24,226 4.14 4.46 3,800,000 BT 7,407 1.27

3,200,000 KCOM 3,098 0.53

10,500,000 Vodafone 13,721 2.34


1,250,000 GlaxoSmithKline 19,038 3.25

Banks 32,059 5.47 5.73 380,000 Close Brothers 5,244 0.89

3,350,000 HSBC 21,658 3.70

9,000,000 Lloyds Banking 5,157 0.88

Investment banking & brokerage services 16,364 2.80 1.95 1,000,000 Ashmore 4,720 0.81

655,821 Brewin Dolphin 2,004 0.34

396,429 EF Realisation [b] 47 0.01

65,000 Intermediate Capital 853 0.15

375,000 Jupiter Fund Management 1,374 0.24

1,630,000 Standard Life Aberdeen 4,360 0.74

1,100,000 TP ICAP 3,006 0.51

Equity investment instruments 3,121 0.53 0.49 1,110,000 Ecofin Global Utilities and Infrastructure Trust 1,476 0.25

1,750,000 Middlefield Canadian Income 1,645 0.28

Life insurance 34,670 5.92 6.86 2,352,000 Aviva 9,575 1.64

1,400,000 Chesnara 5,215 0.89

4,500,000 Legal & General 11,610 1.98

640,000 Phoenix 4,289 0.73

150,000 Prudential [c] 2,373 0.41

155,000 St. James’s Place 1,608 0.27

Non-life insurance 6,109 1.05 0.78 1,365,000 Direct Line Insurance 4,316 0.74

1,000,000 Hastings 1,793 0.31

Real estate investment & services 3,305 0.57 0.34 2,200,000 Channel Islands Property Fund 2,200 0.38

1,000,000 Grit Real Estate Income 1,105 0.19

Real estate investment trusts 16,461 2.81 2.75 202,127 British Land 1,075 0.18

304,687 Land Securities 2,518 0.43

1,021,809 LondonMetric Property 2,086 0.36

1,010,000 McKay Securities 2,434 0.42

425,000 Mucklow A & J 2,720 0.46

1,663,341 RDI REIT 1,823 0.31

2,300,000 Standard Life Investment Property Income Trust 2,130 0.36

1,650,000 Warehouse REIT 1,675 0.29

Household goods & home construction 7,029 1.20 1.39 105,000 Bellway 2,883 0.49

425,000 Bovis Homes 4,146 0.71

Leisure goods 4,462 0.76 0.56 100,000 Games Workshop 4,462 0.76



Outlook (continued)

Investment review

Personal goods 12,095 2.05 1.66 250,000 Unilever 12,095 2.05

Media 22,305 3.80 3.37 1,245,000 Informa 9,644 1.65

575,000 Moneysupermarket.com 2,098 0.36

1,573,163 Reach 1,243 0.21

250,000 RELX 4,605 0.79

500,000 WPP 4,715 0.79

Retailers 4,022 0.69 0.64 537,537 DFS Furniture 1,298 0.22

130,000 Dunelm 1,149 0.20

80,000 WH Smith 1,575 0.27

Travel & leisure 22,060 3.77 3.90 100,000 Compass 1,803 0.31

240,000 Go-Ahead 4,471 0.76

750,000 Greene King 4,797 0.82

3,100,000 Marston’s 3,339 0.57

1,300,000 National Express 5,158 0.88

128,226 Restaurant 172 0.03

1,750,000 William Hill 2,320 0.40

Beverages 0 0.00 0.28

Food producers 2,721 0.46 0.64 375,000 Tate & Lyle 2,721 0.46


500,000 Imperial Brands 9,642 1.65

Construction & materials 1,425 0.24 0.41 500,000 Kier 1,425 0.24

Electronic & electrical equipment 4,506 0.77 0.91 625,000 discoverIE 2,656 0.45

750,000 Morgan Advanced Materials 1,850 0.32

General industrials 2,291 0.39 0.51 731,818 DS Smith 2,291 0.39

Industrial engineering 816 0.14 1.12 90,000 IMI 816 0.14

Industrial support services 5,190 0.89 0.92 1,385,000 Connect 530 0.09

25,000 De La Rue 78 0.01

300,000 Electrocomponents 1,837 0.32

250,000 PayPoint 2,745 0.47

Industrial transportation 589 0.10 0.00 160,920 Global Ports 589 0.10

Industrial metals & mining 29,437 5.03 4.67 475,000 BHP 8,449 1.44

465,000 Rio Tinto 20,988 3.59

Chemicals 3,837 0.65 1.37 300,000 Synthomer 1,096 0.18

140,000 Victrex 2,741 0.47


36,791 Lonestar Resources 83 0.01

1,300,000 Royal Dutch Shell 31,974 5.46

Electricity 3,757 0.64 0.80 350,000 SSE 3,757 0.64

Gas, water & multi-utilities 23,813 4.06 4.71 90,855 Centrica 85 0.01

1,100,000 National Grid 8,650 1.48

750,000 Pennon 5,502 0.94

1,200,000 United Utilities 9,576 1.63

Non-convertible preference shares 23,971 4.09 4.05 1,500,000 Aviva 8.375% Cum. Irrd. Pref. 2,070 0.35

3,800,000 General Accident 7.875% Cum. Irrd. Pref. 4,826 0.82

2,000,000 General Accident 8.875% Cum. Irrd. Pref. 2,900 0.49

7,725,000 Lloyds Banking 9.25% Non-cum. Irrd. Pref. 11,163 1.91

6,250 Nationwide Building Society 10.25% CCD Non-cum. Irrd. Pref. 924 0.16

1,600,000 Standard Chartered 8.25% Non-cum. Irrd. Pref. 2,088 0.36

FIXED INCOME 141,103 24.10 21.29 ‘AAA’ credit rated bonds 19,551 3.34 3.29 £1,186,000 Barclays Bank FRN 1.04175% 09/01/2023 1,180 0.20

£2,121,129 Dukinfield FRN 2.08713% 20/12/2052 2,143 0.37

£6,030,000 European Investment Bank FRN 1.05375% 17/02/2020 6,040 1.03

£400,000 Johnson & Johnson 5.5% 06/11/2024 486 0.08

£2,700,000 KfW 5.55% 07/06/2021 2,952 0.50

£1,209,077 Paragon Mortgages No. 14 FRN 1.04463% 15/09/2039 1,149 0.20

£094,258 Residential Mortgage Securities No. 28 FRN 1.99463% 15/06/2046 95 0.02

£2,343,800 Ripon Mortgages FRN 1.60425% 20/08/2056 2,341 0.40

£1,742,000 Santander UK FRN 1.03363% 16/11/2022 1,734 0.30

£1,429,363 Towd Point Mortgage Funding 2016-Auburn 10 FRN 1.82275% 20/04/2045 1,431 0.24

‘AA’ credit rated bonds 21,125 3.61 3.86 £1,306,000 Land Securities Capital Markets 1.974% 08/02/2024 1,326 0.23

£2,442,000 Metropolitan Life Global Funding I 1.125% 15/12/2021 2,432 0.42

£510,000 Metropolitan Life Global Funding I 2.625% 05/12/2022 532 0.09

£2,500,000 New York Life Global Funding 1% 15/12/2021 2,487 0.42

£3,000,000 Procter & Gamble 1.375% 03/05/2025 3,010 0.51

£315,000 SLM Student Loan Trust 2003-10 FRN 1.39263% 15/12/2039 297 0.05

£1,335,000 Toyota Motor Credit 1.125% 07/09/2021 1,336 0.23

£1,500,000 UK Treasury 3.75% 07/09/2019 1,512 0.26

£2,490,000 UK Treasury 4% 07/03/2022 2,726 0.47

£3,360,000 UK Treasury IL 1.875% 22/11/2022 5,467 0.93

‘A’ credit rated bonds 45,772 7.82 6.24 £800,000 ABN AMRO Bank 1% 30/06/2020 798 0.14

£1,100,000 ABN AMRO Bank 1.375% 07/06/2022 1,101 0.19

£1,750,000 Amgen 5.5% 07/12/2026 2,158 0.37

£650,000 Anheuser-Busch InBev 9.75% 30/07/2024 897 0.15

£900,000 Banco Santander 2.75% 12/09/2023 922 0.16

£2,400,000 Banque Federative du Credit Mutuel 0.875% 08/06/2020 2,390 0.41

£1,200,000 Banque Federative du Credit Mutuel 1.375% 20/12/2021 1,197 0.20

£312,000 BASF 1.375% 21/06/2022 315 0.05



Investments


as at 31 May 2019 2019 2018 [a]



as at 31 May 2019 2019 2018 [a]


£2,500,000 BMW International Investment FRN 1.1165% 17/07/2019 2,499 0.43

£2,000,000 BNP Paribas 1.125% 16/08/2022 1,986 0.34

£3,000,000 BPCE 2.125% 16/12/2022 3,066 0.52

£1,500,000 Canadian Imperial Bank of Commerce FRN 1.254% 10/01/2022 1,504 0.26

£2,320,000 Daimler International Finance 1.5% 13/01/2022 2,321 0.40

£250,000 EDF 6.125% 02/06/2034 355 0.06

£1,950,000 EDF 6.875% 12/12/2022 2,323 0.40

£485,000 Experian Finance 2.125% 27/09/2024 494 0.08

£1,473,000 Heathrow Funding 5.225% 15/02/2023 1,671 0.29

£2,000,000 HSBC Var. Rate 2.256% 13/11/2026 1,961 0.33

£421,000 HSBC Holdings Var. Rate 3% 22/07/2028 427 0.07

£500,000 HSBC Holdings Var. Rate 3% 29/05/2030 501 0.09

£1,300,000 ING 3% 18/02/2026 1,339 0.23

£644,000 Lloyds Bank FRN 1.2793% 16/05/2024 645 0.11

£100,000 London Stock Exchange 9.125% 18/10/2019 103 0.02

£1,845,000 LVMH Moët Hennessy Louis Vuitton 1% 14/06/2022 1,840 0.31

£096,000 Motability Operations 6.625% 10/12/2019 99 0.02

£1,000,000 Munich Re Finance Var. Rate 6.625% 26/05/2042 1,124 0.19

£918,000 Notting Hill Housing Trust 3.25% 12/10/2048 923 0.16

£703,000 Total Capital International 1.75% 07/07/2025 715 0.12

£947,000 UBS 1.25% 10/12/2020 947 0.16

£1,320,000 United Utilities Water Finance 2% 14/02/2025 1,334 0.23

£1,043,000 Wells Fargo 1.375% 30/06/2022 1,029 0.18

£1,950,000 Wells Fargo 5.25% 01/08/2023 2,191 0.37

£2,530,000 Westfield America Management 2.125% 30/03/2025 2,526 0.43

£1,750,000 Yorkshire Water Finance 6.5876% 21/02/2023 2,071 0.35

‘BBB’ credit rated bonds 32,461 5.54 5.11 £794,000 Akelius Residential Property 2.375% 15/08/2025 781 0.13

£793,000 Annington Funding 2.646% 12/07/2025 790 0.13

£664,000 Aroundtown 3% 16/10/2029 637 0.11

£2,000,000 Aviva Var. Rate 6.625% 03/06/2041 2,162 0.37

£1,500,000 Bank of America 5.5% 22/11/2021 1,630 0.28

£1,000,000 Barclays 3.125% 17/01/2024 1,018 0.17

£1,026,000 Barclays Var. Rate 2.375% 06/10/2023 1,017 0.17

£846,000 Channel Link Enterprises Finance Var. Rate 3.043% 30/06/2050 862 0.15

£976,000 Citigroup 2.75% 24/01/2024 1,003 0.17

£1,171,000 Credit Suisse Var. Rate 2.125% 12/09/2025 1,152 0.20

£208,000 Deutsche Telekom 3.125% 06/02/2034 216 0.04

£552,000 Deutsche Telekom International Finance 2.5% 10/10/2025 569 0.10

£2,180,000 Deutsche Telekom International Finance 7.375% 04/12/2019 2,244 0.38

£178,000 Digital Stout 2.75% 19/07/2024 181 0.03

£322,000 Fidelity National Information Services 2.602% 21/05/2025 327 0.06

£300,000 FirstGroup 6.875% 18/09/2024 350 0.06

£734,000 Ford Motor Credit 4.535% 06/03/2025 761 0.13

£3,000 Glencore Canada 7.375% 27/05/2020 3 0.00

£800,000 Goldman Sachs 3.125% 25/07/2029 817 0.14

£1,000,000 Goldman Sachs 5.5% 12/10/2021 1,083 0.18

£878,000 Imperial Brands Finance 8.125% 15/03/2024 1,110 0.19

£1,250,000 Imperial Brands Finance 9% 17/02/2022 1,480 0.25

£357,000 Informa 3.125% 05/07/2026 369 0.06

£1,750,000 InterContinental Hotels 3.875% 28/11/2022 1,875 0.32

£426,000 LafargeHolcim Sterling Finance (Netherlands) 3% 12/05/2032 417 0.07

£795,000 Legal & General Var. Rate 10% 23/07/2041 924 0.16

£454,000 Liberty Living Finance 2.625% 28/11/2024 456 0.08

£700,000 Lloyds Bank 9.625% 06/04/2023 889 0.15

£200,000 McDonald’s 6.375% 03/02/2020 207 0.04

£369,000 Mckesson 3.125% 17/02/2029 377 0.06

£205,000 Next 3% 26/08/2025 209 0.04

£990,000 Rolls-Royce 3.375% 18/06/2026 1,066 0.18

£619,000 Royal Bank of Scotland Var. Rate 3.125% 28/03/2027 621 0.11

£241,000 Student Finance 2.6663% 30/09/2024 238 0.04

£1,000,000 Telefónica Emisiones 5.375% 02/02/2026 1,183 0.20

£422,000 Thames Water Utilities Finance 1.875% 24/01/2024 420 0.07

£505,000 UNITE 3.5% 15/10/2028 526 0.09

£2,500,000 Volkswagen Financial Services 1.5% 12/04/2021 2,491 0.43

‘BB’ credit rated bonds 608 0.10 0.13 £200,000 Telecom Italia 6.375% 24/06/2019 201 0.03

£277,000 Tesco 6.125% 24/02/2022 307 0.05

£101,000 Tesco Corporate Treasury Services 2.5% 02/05/2025 100 0.02

Bonds with no credit rating 21,586 3.69 2.66 £1,242,000 Coventry Building Society 1% 05/05/2020 1,238 0.21

£2,000,000 Coventry Building Society 1.875% 24/10/2023 2,015 0.34

£513,000 DP World 4.25% 25/09/2030 547 0.09

£146,900 Feldspar 2016-1 FRN 1.54463% 15/09/2045 147 0.03

£793,361 Finsbury Square 2018-1 FRN 1.495% 12/09/2065 793 0.14

£2,000,000 Hammerson 3.5% 27/10/2025 2,048 0.35

£1,536,000 John Lewis 6.125% 21/01/2025 1,719 0.29

£1,525,000 London Merchant Securities 6.5% 16/03/2026 1,936 0.33

£1,000,000 National Express 2.5% 11/11/2023 1,008 0.17

£500,000 Newday Partnership Funding 2017-1 FRN 1.48125% 15/12/2027 494 0.08

£1,997,000 Nordea Eiendomskreditt FRN 1.176% 18/06/2023 1,986 0.34

£1,306,749 Oat Hill No. 1 FRN 1.4445% 25/03/2046 1,302 0.22

£688,000 PCL Funding II FRN 1.48125% 15/06/2022 689 0.12

£572,000 PCL Funding III FRN 1.38125% 15/06/2023 571 0.10

£1,071,000 Shaftesbury Chinatown 2.348% 30/09/2027 1,059 0.18

£463,000 Skipton Building Society 1.75% 30/06/2022 457 0.08




as at 31 May 2019 2019 2018 [a]


‘A’ credit rated bonds (continued)


as at 31 May 2019 2019 2018 [a]



Investments




WPP 3,772

Imperial Brands 3,194

TP ICAP 3,142

BPCE 2.125% 16/12/2022 2,983

Standard Life Aberdeen 2,344

PayPoint 2,333

Brewin Dolphin 2,000

Nordea Eiendomskreditt FRN 1.176% 18/06/2023 1,997

Hastings 1,881

Vodafone 1,826




Vitec 6,733

Prudential [a] 4,612

British American Tobacco 3,094

AstraZeneca 3,019

Severn Trent 2,777

GlaxoSmithKline 2,720

Marshalls 2,616

Old Mutual 2,580

Centrica 2,261

Tate & Lyle 2,167

Other sales 67,786

Total sales 100,365


funds.

[a] Related party to the fund.


£965,000 Virgin Money FRN 1.4254% 22/03/2024 970 0.17

£698,000 Virgin Money Holdings Var. Rate 3.375% 24/04/2026 694 0.12

£149,000 Wm Morrison Supermarkets 3.5% 27/07/2026 161 0.03

£1,500,000 Yorkshire Building Society 3.5% 21/04/2026 1,594 0.27

£157,000 Yorkshire Building Society Var. Rate 3% 18/04/2025 158 0.03






[a] The comparative sector weightings have been re-analysed to reflect changes to


[b] Unquoted / unlisted.

[c] Related party to the fund.





as at 31 May 2019 2019 2018 [a]


Bonds with no credit rating (continued)

Investments

Fund performance




• The performance of the Sterling Class ‘A’ (Accumulation) share iswhat most individuals investing directly with M&G have received. Ithas the highest ongoing charge of all the sterling share classes.Performance is shown after deduction of this charge. All UKinvestors in the fund therefore received this performance or better.





2019 2018 2017as at 31 May £’000 £’000 £’000


Share class performance since launch

To give an indication of how the fund has performed since launch, thechart below shows performance of Sterling Class ‘A’ (Accumulation)shares and Sterling Class ‘A’ (Income) shares. With Accumulationshares, income received from an investment is reinvested, while withIncome shares, the income is paid out to shareholders.

Ten-year performance

The fund’s comparative index changed from the FTSE All-Share Indexto a composite index (which comprises 70% FTSE All-Share Indexand 30% FTSE UK Conventional Gilts All Stocks Index) in June 2000to reflect the change in the fund’s holdings. Given that we are unableto show the fund’s performance against the composite index frominception, please find below a ten-year chart for comparison.


50

100

200

400

600

1,000

2,000

4,000

7,000

12,000

20,000

7573 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

November 1973 = 100, plotted monthly Chart date 3 June 2019




90

100

170

140

120

250

300

200

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ten years, 3 June 2009 = 100, plotted monthly Chart date 3 June 2019


70% FTSE All-Share Index, 30% FTSE UK Conventional Gilts All Stocks Index



Morningstar (IA) UK Equity & Bond Income sector average*


M&G UK Income Distribution Fund Financial highlights

Historic yield

The chart below shows the historic yield of Sterling Class ‘A’ (Income)shares against that of a comparative index.

Historic yield: The historic yield reflects distributions declared over thepast twelve months as a percentage of the mid-market price, as at thedate shown. It does not include any preliminary charge and investorsmay be subject to tax on their distributions.

Distribution

The charts below show the annual distribution of Sterling Class ‘A’(Income) shares over ten years and Sterling Class ‘I’ (Income) sharessince launch.

2

4

6

8

10

12

14

16

18

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

Yield comparison from January 1974, plotted monthly Chart date 3 June 2019

Sterling Class ‘A’ (Income) shares yield

FTSE All-Share Index yield Source: Morningstar, Inc. and M&G

0.0

5.0

10.0

20.0

25.0

15.0

35.0

30.0

40.0

2017 2018 20192010 2011 2012 2013 2014 2015 2016

Annual distributions over ten years Chart date 3 June 2019


Year ending May

Dis

trib

utio

n (p

ence

per

sha

re)

Source: M&G




Sterling [b] Class ‘A’ -2.6 +5.6 +4.4 +11.6 [c]

Class ‘C’ -1.5 +6.8 +5.6 +6.9 [d]

Class ‘I’ -2.0 +6.2 +5.0 +7.5 [e]

Class ‘R’ -2.2 +6.0 +4.8 +7.2 [e]

Class ‘X’ -2.6 +5.6 +4.4 +7.4 [f]

[a] Absolute basis.


[c] 19 November 1973, the end of the initial offer period of the predecessor unit trust.

[d] 1 December 2005, the launch date of the share class.

[e] 3 August 2012, the launch date of the share class.

[f] 1 October 2002, the launch date of the share class.

0.0

10.0

40.0

20.0

30.0

60.0

50.0

70.0

2013 2014 2015 2017 2018 20192016

Annual distributions since launch of the share class Chart date 3 June 2019

Sterling Class ‘I’ (Income) shares

Year ending May

Dis

trib

utio

n (p

ence

per

sha

re)

Source: M&G



Fund performance



Operating charges




















Taxes 0.02 0.03 0.23 0.09













Fund performance




Sterling Class ‘A’ Income share performanceThe share class was launched on 19 November 1973.


Opening NAV 785.86 802.90 714.43




Distributions (37.11) (35.28) (34.62)

Closing NAV 734.51 785.86 802.90











Other information

Closing NAV (£’000) 143,765 163,142 188,164


Number of shares 19,572,985 20,759,599 23,435,550



Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 19 November 1973.


Opening NAV 7,300.31 7,131.83 6,071.24

Return before operating charges and after directportfolio transaction costs (28.55) 269.04 1,153.37


Return after operating charges (130.91) 168.48 1,060.59

Distributions (251.75) (219.55) (237.99)


Closing NAV 7,169.40 7,300.31 7,131.83











Other information

Closing NAV (£’000) 20,174 22,610 26,032


Number of shares 281,385 309,708 365,011



Sterling Class ‘C’ Income share performanceSterling Class ‘C’ shares are not generally available to all investors

The share class was launched on 1 December 2005.


Opening NAV 897.80 905.98 796.35




Distributions (41.81) (39.29) (37.84)

Closing NAV 849.58 897.80 905.98











Other information

Closing NAV (£’000) 67,285 74,902 83,238


Number of shares 7,919,730 8,342,838 9,187,604






for the year to 31 May 2019 2018 2017Change in NAV per share UK p UK p UK pOpening NAV 1,283.58 1,303.10 1,153.24Return before operating charges and after directportfolio transaction costs (5.63) 47.82 216.29



Distributions (60.82) (57.45) (56.04)

Closing NAV 1,207.33 1,283.58 1,303.10

Direct portfolio transaction costs UK p UK p UK pCosts before dilution adjustments 0.39 0.46 2.87Dilution adjustments [a] (0.18) (0.14) (1.34)


Performance and charges % % %Direct portfolio transaction costs [b] 0.02 0.03 0.12Operating charges 0.79 0.77 0.84*Return after operating charges -1.20 +2.91 +17.85Historic yield 4.94 4.47 4.32Effect on yield of charges offset against capital 0.76 0.76 0.84

Other information Closing NAV (£’000) 79,074 73,043 67,776Closing NAV percentage of total fund NAV (%) 13.50 11.55 10.06Number of shares 6,549,484 5,690,580 5,201,104Highest share price (UK p) 1,301.21 1,328.00 1,329.13Lowest share price (UK p) 1,142.16 1,210.10 1,113.34

* As the annual management charge was discounted during the period 0.76% ismore reliable estimate of the operating charges for the period to 31.05.17.


for the year to 31 May 2019 2018 2017Change in NAV per share UK p UK p UK pOpening NAV 1,663.07 1,614.52 1,367.12Return before operating charges and after directportfolio transaction costs (6.69) 60.96 259.88



Distributions (67.69) (59.97) (59.22)


Closing NAV 1,643.50 1,663.07 1,614.52

Direct portfolio transaction costs UK p UK p UK pCosts before dilution adjustments 0.51 0.58 3.44Dilution adjustments [a] (0.24) (0.18) (1.61)


Performance and charges % % %Direct portfolio transaction costs [b] 0.02 0.03 0.12

Operating charges 0.79 0.77 0.84*Return after operating charges -1.18 +3.01 +18.10Historic yield 4.04 3.60 3.43Effect on yield of charges offset against capital 0.01 0.01 0.09

Other information Closing NAV (£’000) 35,417 32,754 26,341Closing NAV percentage of total fund NAV (%) 6.05 5.18 3.91Number of shares 2,154,969 1,969,502 1,631,525Highest share price (UK p) 1,696.15 1,684.84 1,613.89Lowest share price (UK p) 1,505.00 1,535.26 1,319.92

* As the annual management charge had been discounted during the period 0.76%is more reliable estimate of the operating charges for the period to 31.05.17.



Opening NAV 126.54 128.79 114.25




Distributions (5.99) (5.67) (5.54)

Closing NAV 118.72 126.54 128.79






Direct portfolio transaction costs [b] 0.02 0.03 0.12Operating charges 1.04 1.02 1.01




Other information

Closing NAV (£’000) 197,766 220,024 240,949


Number of shares 166,576,488 173,879,841 187,092,541





Opening NAV 164.08 159.68 135.54




Distributions (6.27) (5.53) (5.61)


Closing NAV 161.75 164.08 159.68







Operating charges 1.04 1.02 1.09*




Other information

Closing NAV (£’000) 17,692 15,673 391


Number of shares 10,938,290 9,552,132 245,112



* As the annual management charge had been discounted during the period 1.01%

is more reliable estimate of the operating charges for the period to 31.05.17.






Opening NAV 792.26 809.43 720.26




Distributions (37.41) (35.57) (34.91)

Closing NAV 740.52 792.26 809.43











Other information

Closing NAV (£’000) 20,739 24,973 33,811


Number of shares 2,800,614 3,152,075 4,177,058





Opening NAV 7,216.95 7,050.45 6,002.23

Return before operating charges and after directportfolio transaction costs (28.12) 265.83 1,140.06


Return after operating charges (129.26) 166.50 1,048.22

Distributions (249.04) (216.97) (234.90)


Closing NAV 7,087.69 7,216.95 7,050.45











Other information

Closing NAV (£’000) 3,899 5,128 7,068


Number of shares 55,012 71,061 100,251











Income

Net capital gains / (losses) 3 (33,578) (5,929)

Revenue 5 29,826 29,185


Taxation 7 0 (18) ______ ______Net revenue / (expense) aftertaxation 23,809 22,622












Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets





Total assets 599,007 645,124

Liabilities

Creditors Distribution payable (12,365) (11,682)

Other creditors 11 (831) (1,193)







In determining the amount available for reinvestment to Accumulationshares, all expenses with the exception of the annual managementcharge, administration charge and overdraft interest are offset againstcapital, increasing the amount available for reinvestment whilstrestraining capital performance to an equivalent extent. In determiningthe amount available for distribution to Income shares, all expenseswith the exception of overdraft interest are offset against capital,increasing the amount available for distribution whilst restraining capitalperformance to an equivalent extent.

In determining the amount available for distribution, a transfer hasbeen made between revenue and capital to disregard the change in the Retail Price Index during the period in respect of interest from index-linked gilt-edged securities. This is to contribute to thepreservation of the share value in real terms.



Non-derivative securities (33,568) (5,930)

Currency gains / (losses) (8) 5


Net capital gains / (losses) (33,578) (5,929)


M&G UK Income Distribution Fund Financial statements and notes





Commissions 14 0.02 15 0.04

Taxes 149 0.22 187 0.44






Commissions (26) 0.03 (31) 0.04







Taxes paid Equities 149 0.02 187 0.03

Total direct portfolio transactioncosts [b] 189 0.03 233 0.04


Portfolio dealing spread [c] 0.26 0.26


[b] Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section


[c] Average portfolio dealing spread at the balance sheet date.


Bank interest 2 0





Stock dividends 363 982

Underwriting commission 15 0





5,959 6,486





17 16






Total taxation 0 18



Effects of:



Current year expenses not utilised 402 553


Relief for indexation on UK gilts (32) (36)










First interim 4,538 507 4,718 367

Second interim 4,498 470 4,594 437

Third interim 4,445 451 4,495 477

Final 12,365 1,482 11,682 1,096







Sharing of relief between classes (63) (60)

Effective yield adjustment not distributed (163) (179)







9 Debtors 2019 2018as at 31 May £’000 £’000





Sales awaiting settlement 41 0









Amounts payable on cancellation of shares 638 1,004


Total other creditors 831 1,193



13 Shares in issue



Sterling Class ‘A’ Income 20,759,599 314,724 (1,501,338) 19,572,985

Class ‘A’ Accumulation 309,708 3,324 (31,647) 281,385

Class ‘C’ Income 8,342,838 456,842 (879,950) 7,919,730

Class ‘I’ Income 5,690,580 1,225,409 (366,505) 6,549,484

Class ‘I’ Accumulation 1,969,502 437,766 (252,299) 2,154,969

Class ‘R’ Income 173,879,841 5,209,454 (12,512,807) 166,576,488


Class ‘X’ Income 3,152,075 40,177 (391,638) 2,800,614

Class ‘X’ Accumulation 71,061 3,265 (19,314) 55,012






Class ‘R’ nil n/a 0.85

Class ‘X’ nil n/a 1.25

15 Related parties



During the year, there were transactions in Prudential plc, a relatedparty of M&G Securities Limited with a total value of £4,612,000(2018: £nil).















This refers to instruments which have been valued using models withunobservable data inputs. This includes single broker-pricedinstruments, suspended/unquoted securities, private equity, unlistedclosed-ended funds and open-ended funds with restrictions onredemption rights. Assets Liabilities Assets Liabilitiesas at 31 May 2019 2019 2018 2018Basis of valuation £’000 £’000 £’000 £’000

Level 1 457,740 0 512,772 0

Level 2 131,398 0 123,977 0

Level 3 47 0 691 0

589,185 0 637,440 0



The general risk management policies for the fund are set out in note 3 to the financial statements on pages 8 and 9.






Changes in interest rates or changes in expectations of future interestrates may result in an increase or decrease in the market value of theinvestments held. A one per cent increase in interest rates (based oncurrent parameters used by the Manager’s Investment Riskdepartment) would have the effect of decreasing the return and netassets by £(7,707,114), (2018: £(8,411,072)). A one per cent decreasewould have the effect of increasing the return and net assets by£9,179,698 (2018: £10,286,000). The table below sets out the fund’sexposure to interest rate risk. 2019 2018as at 31 May £’000 £’000

Investments with fixed interest rates 101,490 97,218

Investments with variable interest rates 39,613 40,025

Non-interest bearing investments 448,082 500,197

Total 589,185 637,440

22 Credit risk



Below investment grade securities 608 842


Other investments 448,082 502,828

Total 589,185 637,440


This fund pays quarterly ordinary distributions and the following tablesets out the distribution periods.


First interim 01.06.18 31.08.18 03.09.18 31.10.18

Second interim 01.09.18 30.11.18 03.12.18 31.01.19

Third interim 01.12.18 28.02.19 01.03.19 30.04.19

Final 01.03.19 31.05.19 03.06.19 31.07.19







Second interim 0.0000 6.4000 6.4000 6.2500

Third interim 0.0000 6.4000 6.4000 6.2500

Final 5.9265 11.9831 17.9096 16.5321




Second interim 0.0000 41.5000 41.5000 41.5000

Third interim 0.0000 39.5000 39.5000 42.0000

Final 48.3907 77.3613 125.7520 94.5454




17 Fair value analysis (continued)




Second interim 0.0000 7.2000 7.2000 7.0000

Third interim 0.0000 7.1500 7.1500 7.0000

Final 5.1095 15.1470 20.2565 18.2914




Second interim 0.0000 10.5000 10.5000 10.1000

Third interim 0.0000 10.5000 10.5000 10.1000

Final 6.5604 22.7609 29.3213 27.2548




Second interim 0.0000 11.2500 11.2500 11.5000

Third interim 0.0000 11.2500 11.2500 11.6000

Final 10.8514 22.5926 33.4440 26.1210




Second interim 0.0000 1.0300 1.0300 1.0000

Third interim 0.0000 1.0300 1.0300 1.0000

Final 0.6719 2.2271 2.8990 2.6705




Second interim 0.0000 1.0500 1.0500 1.1000

Third interim 0.0000 1.0200 1.0200 1.1100

Final 1.1182 1.9846 3.1028 2.3219




Second interim 0.0000 6.4500 6.4500 6.2500

Third interim 0.0000 6.4500 6.4500 6.2500

Final 4.8019 13.2575 18.0594 16.8221




Second interim 0.0000 41.0000 41.0000 41.0000

Third interim 0.0000 39.0000 39.0000 41.5000

Final 42.7720 81.7647 124.5367 93.4742




23 Dividend distribution tables (continued)

Investment objective and policy up to28 February 2019

The fund invests principally in the equities of UK companies with highgrowth potential with the sole objective of capital growth. The fundmay at any time be concentrated in a limited number of equities.Income considerations are ignored.

Investment approach up to 28 February 2019

The fund manager employs a bottom-up stockpicking approach, drivenby the fundamental analysis of individual companies. He seeks toinvest in companies with sustainable competitive advantages that havethe opportunity to reinvest their capital at high rates of return. Acompany’s strategy around capital allocation is central to theinvestment process. The fund manager focuses on companies whichrecognise the importance of dividends, which in turn instils capitaldiscipline and ensures that the highest-returning growth projects areprioritised. Rising free cashflow is expected to result in dividend growthof the fund’s holdings being higher than that of a broad index of UKequities over the long term. This premium dividend growth is expectedto drive the fund’s long-term capital growth and growth in the fund’sincome distributions. The fund will hold less than 50 stocks, with a long-term investment view and a typical holding period of three to five years.

Investment objective from1 March 2019

The fund aims to provide a higher total return (the combination ofcapital growth and income), net of the ongoing charge figure, than thatof the FTSE All Share Index over any five-year period.

Investment policy from 1 March 2019

At least 80% of the fund is invested directly in equity securities andequity-related securities of companies across any sectors and marketcapitalisations, that are incorporated, domiciled, listed or do most oftheir business in the United Kingdom.

The fund usually holds a concentrated portfolio of fewer than 50 companies.

The fund may also invest in other transferable securities directly andvia collective investment schemes (including funds managed by M&G).

The fund may also hold cash and near cash for liquidity purposes.

Derivatives may be used for efficient portfolio management andhedging.

Investment approach from 1 March 2019

The fund employs a disciplined approach to investment whichconcentrates on the analysis and selection of individual companies.

The investment approach seeks to identify UK companies that havesustainable competitive advantages leading to high return on investedcapital. Each company’s strategy around capital allocation is centralto the investment process.

The fund manager focuses on companies which recognise theimportance of dividends, which in turn instils capital discipline andensures that the highest returning growth projects are prioritised.

Rising cashflow, and over time, rising dividends, for the fund’s holdingsare expected to drive the long-term total return of the fund.

Risk profile

The fund invests in the shares of UK-listed companies and is, therefore,subject to the price volatility of the UK stockmarket and theperformance of individual companies. The fund typically holds around50 stocks and this relatively concentrated profile requires the fundmanager to have strong conviction in each and every holding. However,the fund is mainly invested in the shares of large and medium-sizedcompanies, which are normally traded with relative ease.

Diversification is key in managing liquidity risk and reducing marketrisk. The fund’s risks are measured and managed as an integral partof the investment process.


The above number:





mean risk free.


Low risk High risk


1 2 3 4 5 6 7


M&G UK Select Fund Authorised Corporate Director’s Report

Investment review



Between 1 June 2018 (the start of the review period) and 3 June 2019,the fund delivered a negative total return (the combination of incomeand growth of capital) across all share classes. The total return by thefund’s Sterling Class ‘A’ (Accumulation) shares of -3.5% was broadlyin line with the FTSE All-Share Index, a comparative index, whichreturned -3.3%, while the fund’s Sterling Class ‘I’ (Accumulation)shares returned -2.8%.

On 1 March 2019 the fund’s objective changed to aiming to provide ahigher total return (the combination of capital growth and income), netof the ongoing charge figure, than that of the FTSE All Share Indexover any five-year period. Prior to this date, the fund’s aim was to investprincipally in the equities of UK companies with high growth potential,with the sole objective of capital growth. Income considerations were ignored.

The fund has not achieved its new objective over five years. The totalreturns by the fund’s Sterling Class ‘A’ and ‘I’ (Accumulation) sharesof 4.1% and 4.9% per annum respectively were behind the FTSE All-Share Index return of 5.3% per annum.*




The 12 months under review was a period of contrasts, with markeddeclines in UK and many global stockmarkets in the second half of2018, before a significant rally in the early months of 2019. Thesemoves resulted in the UK stockmarket recording a modest decline overthe period.

Late 2018 saw a continuation of previous weakness on concernsabout slowing US growth, just as the effect of President Trump’s taxcuts was beginning to wane. Rising US protectionism and the prospectof higher interest rates added to investors’ worries. However, riskappetite improved dramatically in the new year, after the US FederalReserve indicated a pause in interest rate hikes due to concerns abouttheir economic impact, the sharp increase in market volatility andmuted domestic inflation. In addition, investors were encouraged bysome better-than-expected corporate results, signs of progress in theUS-China trade talks, and news that China’s central bank was boostinglending in the Chinese economy in response to slowing growth. Therewas a brief setback in March when some business sentiment data inthe US and Europe disappointed, before equity markets, the UKincluded, resumed their upward trajectory, with the US reaching a newall-time high. However, in the final month of the fund’s year, investorsentiment deteriorated sharply as the US president surprised everyoneby escalating his disputes over trade, initially with China but later takingaim at Mexico and India.

In the UK, Brexit increasingly dominated the headlines. Prime MinisterTheresa May secured a withdrawal agreement with the EU, but MPsrejected the deal three times, along with a number of indicative voteson alternative options put forward by MPs. The original 29 March 2019deadline for Brexit came and went after the EU agreed to extend theprocess. With the aim of avoiding a departure with no deal in place on12 April, the Prime Minister secured agreement to a new deadline of31 October 2019, before announcing that she would step down asparty leader on 7 June when she accepted that she had insufficientsupport for her deal in Parliament, kick-starting the contest to find herreplacement and a new Prime Minister.

Sterling experienced a volatile 12 months, mainly in response to Brexitdevelopments. The currency stood at around US$1.33 at the start ofthe period, and passed lows of around US$1.25 in December asinvestors contemplated the possibility of a messy outcome or ageneral election. It then recovered to US$1.33 as ‘no deal’ appearedless likely in February, before settling at US$1.26 by the end of May2019 in the wake of the prime minister’s resignation.

All company size categories declined over the 12 months, reflectingthe market sell-off in 2018. Larger companies were more resilientoverall, assisted by sterling weakness in 2018. However, medium-sizedcompanies have outperformed so far in 2019. Currency has been abig driver, with sterling weakness last year boosting the overseasrevenues of UK multinationals, while sterling strength since the startof 2019 has brought down import costs for more domestically focusedmedium-sized and smaller companies.

Sector performance was mixed, reflecting the mid-term market volte-face, with mining, oil & gas producers, consumer staples,pharmaceuticals, media, fixed line telecoms, water utilities, non-lifeinsurance and technology companies outperforming, while oilservices, chemicals, industrials, tobacco, healthcare equipment,consumer services, mobile telecoms, financials and electricitygenerators underperformed. Notably, consumer staples (excludingtobacco) companies attracted support, reflecting their steady earningsgrowth characteristics. Technology was helped by the strength of theUS sector, but it is a very small part of the UK market. The energysector was lacklustre, as the oil price ended the 12-month period downslightly at US$66, although this disguised a rise to above US$86 inOctober, followed by a steep fall to US$50 by the end of 2018, beforesupply constraints and US sanctions caused the trend to reverse.

Against this background, there was a positive contribution to the fund’sperformance from stock selection within large and medium-sizedstocks held in the portfolio, especially in mining, general retailers,financials, healthcare and software companies. Sector allocation alsoadded value, primarily through holding above-market positions inpersonal goods and software, versus below-market positions in banksand mobile telecoms.

Some performance was surrendered, however, as the fund had a belowmarket position in larger companies, which outperformed, helped bysterling weakness against the US dollar, and an above-market positionin medium-sized companies, which underperformed amidst concernsabout the impact of Brexit on the economy. In addition, the fund has asmall overseas exposure that lagged the domestic market.



The main individual contributors to the fund’s performance includedwealth manager AJ Bell, software firm Micro Focus, soft drinksmanufacturer A.G. Barr, household goods and food producer Unilever,plus electronic exchange NEX. AJ Bell, which was only floated on themarket in December, was a very strong performer as it benefited fromthe market rally in 2019. Micro Focus’ latest results showed it isbeginning to recover from last year’s acquisition of HP Enterprise’ssoftware business. Consumer staples remained in demand over the12 months and this was reflected in strong performances from AG Barrand Unilever. NEX was taken over in the second half of 2018 by CME(the Chicago Mercantile Exchange).

The principal individual detractors included paper and packagingmanufacturer DS Smith, online travel company On The Beach, pizzadelivery business Domino’s Pizza and medical equipmentmanufacturer ConvaTec. DS Smith was affected by concerns about asupply glut and the debt required to fund the US$2 billion acquisitionof rival Europac. On The Beach consolidated with the rest of the travelindustry as a result of the hot weather across Europe and concernsabout Brexit suppressing demand for foreign holidays. Domino’sPizza’s international performance was worse than expected; however,the majority of its business is in the UK and Ireland, which generatedan increase in revenues. ConvaTec’s results were disappointing in2018 and the chief executive has been replaced; the company, whichmakes colostomy bags and wound dressings, is under marginpressure from lower priced rivals, and in response has launched aUS$150 million, three-year turnaround strategy.

In addition, the fund’s overseas exposure lagged due to stock-specificissues, as PrairieSky Royalty and Methanex in Canada were affectedby weaker energy prices, and Ireland’s newly privatised AIB (AlliedIrish Bank) succumbed to the Brexit uncertainty and worries aboutcore profitability.


The main purchases over the 12-month period included London Stock Exchange (LSE), engineering group Rotork, cyber security firmGB Group and wealth manager AJ Bell.

LSE was added to the portfolio following the takeover of NEX. Theexchange has been restructuring its business around revenue streamsthat are generated independently of market moves. Today only circa20% of LSE’s earnings are linked to the overall volume and price levelof capital markets. The business has two highly moated businessesin LCH Clearnet and FTSE Russell Indices. The LSE purchasecoincided with a market sell-off in October where Brexit became whatwas believed to be a mispriced concern.

Rotork is one of the highest quality companies in the globalengineering sector. Through its control valve actuator – a device thattakes a process signal and controls a valve – Rotork has establishedmarket leadership where brand, service and a reliable reputation havebeen built up over more than 60 years of actuator development.Actuators are sold into process industries, with core markets in oil andgas, waste water and power. The cost of an actuator is very low in thecontext of a new build refinery or waste water treatment facility, andconsequently Rotork has strong pricing power.

GB’s products and services are largely software solutions that use third-party data banks to help businesses validate and verify the locationand identity of their consumers. The structural growth in these marketsis highly attractive given the digitisation trends and increase in securityconcerns as more and more businesses and consumers move online.GB’s organic growth has run between 10-15% per annum as the groupfocuses on expanding existing products into new geographies.

AJ Bell was added to the portfolio via a market flotation in December2018. The company operates platforms used by financial advisers andDIY investors, and is one of two DIY platforms that is profitable in afragmented market. The business has now reached scale and shouldcontinue to drive +10% profit growth as market share grows (4% onDIY and 5% on the adviser platform) on costs that are largely fixed.The business is net cash, requires negligible capital to continuegrowing and is expected to pay out 65% of its earnings toshareholders via dividends.

The main sales over the 12-month period included mezzanine financespecialist Intermediate Capital (ICG), Irish construction materials firm CRH, office space developer Workspace and the UK’s leadingpet-and-vet retailer Pets at Home.

Investors in ICG have been well rewarded with outperformance andthe business has enjoyed the benefit of margin expansion as assetshave grown. The decision to sell was based upon performancewhereby the shares appeared to be fully valued and the funds raisedcould be put to use in investments with greater upside.

Confidence was lost in the CRH investment case for two reasons. The first was that although CRH has an outstanding long-termdividend record, it was felt that the growth of the dividend was ofsecondary importance to driving acquisitive growth. The secondreason was due to the number of large acquisitions the companyseemed to be pursuing.

The Workspace holding was sold because of growing concerns aboutsupply additions and increased competition in temporary offices ledby the growth of providers such as WeWork, which appears more thanhappy to run at a loss as it grows market share. The fund’s position inWorkspace had been trimmed previously due to valuation concerns,although the decision to exit was taken when the company issuedequity to bolster its balance sheet for further acquisitions. However,the shares had delivered good performance during the time they wereheld in the portfolio.

The decision to buy Pets at Home in 2017 was predicated on thestrength of the Vets franchise, which, it was believed, would drivegrowth at higher rates of return than the business was generating inthe conventional retail operation. However, the Vets operation hasstruggled to grow profitability in line with expectations, and in somecases has been forced to receive loans from Pets at Home to coverlosses within the Vets clinic. This meant that more of Pets At Home’scapital was tied up in the Vets clinic than anticipated and, as it was feltthat earnings and dividend growth would not materialise as expected,the holding was sold.

A number of companies also exited the portfolio due to takeovers andthese included drugmaker Shire, Zoopla owner ZPG and electronicexchange NEX.



Investment activities (continued)

Investment review

Outlook

The UK equity market has proved to be remarkably sanguine so farthis year, notwithstanding a deterioration in the economic outlook athome and abroad, an increase in trade tensions between the US andits major trading partners, and concerns around Brexit, which iseffectively on hold until the Conservative Party finds a new leader andprime minister.

The main reasons behind the market’s support have been the Bankof England’s maintenance of a low interest rate policy, together withthe low level of bond yields. Another factor, however, has been aremarkably resilient consumer, helped by unemployment at a 44-yearlow and wage growth that has finally overtaken inflation. In addition,UK equities began 2019 looking relatively cheap as investors reactedto the increased uncertainty over Brexit. Despite this year’s rally, theUK equity market still represents fair value compared to other equitymarkets, but it is likely to remain at a discount to them until the Brexitimbroglio has run its course.

Sterling has tended to be more immediately reflective of the Brexitoutlook and it is expected to rally strongly if ‘no deal’ is avoided, andsell off sharply in the wake of a hard Brexit. A deal would also supportthe equity market, especially domestic stocks, and may potentiallyreduce the risk of a Labour government, worries about which havealso acted as a restraint on the market’s upward progress. But even inthe circumstances of a no deal scenario, with 75% of FTSE 100companies’ earnings derived from overseas, the market should findsome support. Longer term, UK companies’ balance sheets are wellcapitalised, and earnings and dividend growth supportive, assisted bythe Bank of England’s stimulative monetary policy.

With the M&G UK Select Fund, we are trying to create a concentratedand high-conviction portfolio of great investments that combine tominimise any macroeconomic exposure. So whether we see eventssuch as a no-deal Brexit, a Trump impeachment, China/US tradenegotiations sour or global economic growth grind to a halt, we aim tooutperform over the longer term.

Rory Alexander Fund manager

An employee of M&G Limited which is an associate of M&G Securities Limited. At

the start of the review period Sam Ford was the fund manager.





Investments

Portfolio statement

as at 31 May 2019 2019 2018 [a]


EQUITIES 560,471 96.44 98.39 Software & computer services 30,878 5.30 3.25 1,900,000 GB 11,704 2.01

1,550,000 Sage 11,532 1.98

1,847,746 Sophos 7,642 1.31

Technology hardware & equipment 2,341 0.40 0.00 3,021,026 IQE 2,341 0.40

Telecommunication service providers 0 0.00 1.35

Medical equipment & services 20,519 3.53 4.28 4,963,382 ConvaTec 6,976 1.20

810,000 Smith & Nephew 13,543 2.33


230,000 Dechra Pharmaceuticals 6,293 1.08

27,902 Hutchison China MediTech ADR 605 0.10

Banks 52,724 9.07 7.39 2,676,472 HSBC 17,303 2.98

34,000,000 Lloyds Banking 19,482 3.35

2,335,000 Standard Chartered 15,939 2.74

Investment banking & brokerage services 74,049 12.75 5.94 3,200,000 AJ Bell 13,312 2.29

751,139 Burford Capital 12,394 2.13

1,400,000 IntegraFin 5,501 0.95

902,160 Liontrust Asset Management 6,044 1.04

480,000 London Stock Exchange 25,027 4.31

8,058,002 Man 11,771 2.03

Life insurance 25,345 4.37 7.35 520,000 Prudential [b] 8,226 1.42

1,650,000 St. James’s Place 17,119 2.95

Non-life insurance 13,423 2.31 2.39 820,000 Hiscox 13,423 2.31

Real estate investment trusts 0 0.00 1.25

Household goods & home construction 32,941 5.66 5.21 4,075,000 Countryside Properties 12,404 2.13

325,000 Reckitt Benckiser 20,537 3.53

Leisure goods 0 0.00 0.46

Personal goods 39,673 6.83 7.32 227,844 Burberry 3,872 0.67

740,000 Unilever 35,801 6.16

Media 25,188 4.33 3.43 2,989,896 Ascential 11,750 2.02

2,034,174 Moneysupermarket.com 7,425 1.28

1,070,000 Next Fifteen Communications 6,013 1.03

Retailers 21,845 3.76 4.07 1,110,000 WH Smith 21,845 3.76

Travel & leisure 10,735 1.85 3.70 2,375,000 On the Beach 10,735 1.85

Beverages 4,740 0.82 2.47 500,000 A.G. Barr 4,740 0.82

Food producers 17,523 3.02 1.26 640,000 Cranswick 17,523 3.02



Investment review


Construction & materials 2,341 0.40 1.27 545,179 Polypipe 2,341 0.40

General industrials 19,695 3.39 5.84 1,165,949 DS Smith 3,651 0.63

1,120,000 Smiths 16,044 2.76

Industrial engineering 25,430 4.38 1.81 160,000 Kone 6,904 1.19

6,560,036 Rotork 18,526 3.19

Industrial support services 27,040 4.65 1.89 1,909,069 Essentra 7,640 1.31

499,685 Experian 11,843 2.04

143,075 Intertek 7,557 1.30

Industrial transportation 2,762 0.48 0.00 114,130 Clarkson 2,762 0.48

Industrial metals & mining 0 0.00 1.58

Chemicals 17,572 3.03 2.86 328,643 Methanex 11,306 1.95

320,000 Victrex 6,266 1.08


Unquoted / unlisted 0 0.00 0.00 770,825 Izodia [c] 0 0.00






[a] The comparative sector weightings have been re-analysed to reflect changes to


[b] Related party to the fund.

[c] Suspended.






London Stock Exchange 22,722

Rotork 20,392

HSBC 17,721

GVC 17,421

Cranswick 12,743

Burford Capital 12,233

Ascential 11,846

Experian 11,782

British American Tobacco 10,933

BP 9,249




ZPG 20,670

NEX 18,761

Prudential [a] 17,184

Imperial Brands 16,924

Shire 16,217

DS Smith 14,721

Burberry 14,604

A.G. Barr 14,574

Rio Tinto 14,431

Intermediate Capital 12,878

Other sales 153,321

Total sales 314,285

[a] Related party to the fund.


funds.



Investments


as at 31 May 2019 2019 2018 [a]


Fund performance









2019 2018 2017as at 31 May £’000 £’000 £’000




Ten-year performance

Please note that comparative data is not available from fund launch.Therefore a ten-year comparable performance chart is shown below.


120

140

170

200

270

230

1002009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ten years, 3 June 2009 = 100, plotted monthly Chart date 3 June 2019


FTSE All-Share Index



Morningstar (IA) UK All Companies sector average*

50

100

200

400

600

1,000

1,500 2,000

3,000

5,000

7,000

10,000

7168 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16 19

December 1968 = 100, plotted monthly Chart date 3 June 2019






M&G UK Select Fund Financial highlights

To give an indication of the performance of the fund, the following table shows the compound rate of return, per annum, over the period.Calculated on a price to price basis with income reinvested.



Euro [b] Class ‘A’ -4.1 +2.2 +2.4 +2.8 [c]

Class ‘C’ -3.4 +3.0 +3.2 +3.6 [c]

Sterling [d] Class ‘A’ -3.5 +6.9 +4.1 +9.5 [e]

Class ‘C’ -2.1 +8.5 +5.7 +7.1 [f]

Class ‘I’ -2.8 +7.7 +4.9 +8.0 [g]

Class ‘R’ -3.0 +7.4 +4.7 +7.7 [g]

Class ‘X’ -3.5 +6.9 +4.1 +8.5 [h]

[a] Absolute basis.

[b] Price to price with net income reinvested.

[c] 31 August 2007, the launch date of the share class.

[d] Price to price with income reinvested.

[e] 17 December 1968, the end of the initial offer period of the predecessor unit trust.

[f] 13 March 2013, the launch date of the share class.

[g] 3 August 2012, the launch date of the share class.

[h] 1 October 2002, the launch date of the share class.



Operating charges




















Taxes 0.22 0.14 0.27 0.21













Fund performance




Euro Class ‘A’ Accumulation share performanceThe share class was launched on 31 August 2007.


Opening NAV 1,451.15 1,391.94 1,323.73




Distributions (21.82) (15.71) (13.96)


Closing NAV 1,388.29 1,451.15 1,391.94











Other information

Closing NAV (£’000) 1,840 2,684 2,829


Number of shares 149,548 211,045 232,675



Euro Class ‘C’ Accumulation share performanceThe share class was launched on 31 August 2007.


Opening NAV 1,571.50 1,496.07 1,412.18




Distributions (34.88) (28.10) (24.93)


Closing NAV 1,514.76 1,571.50 1,496.07











Other information

Closing NAV (£’000) 4,390 34 44


Number of shares 327,077 2,465 3,334





Opening NAV 3,069.31 3,015.29 2,558.66

Return before operating charges and after directportfolio transaction cost s (52.70) 186.62 562.97



Distributions (94.58) (83.18) (61.25)

Closing NAV 2,873.47 3,069.31 3,015.29











Other information

Closing NAV (£’000) 224,258 257,652 289,918


Number of shares 7,804,421 8,394,454 9,614,954





Sterling Class ‘A’ Accumulation share performanceThe share class was launched on 17 December 1968.


Opening NAV 4,809.42 4,598.26 3,819.83Return before operating charges and after directportfolio transaction costs (80.52) 286.79 845.98



Distributions (73.22) (52.09) (45.73)


Closing NAV 4,652.54 4,809.42 4,598.26


Costs before dilution adjustments 11.87 7.84 14.75Dilution adjustments [a] (1.67) (0.26) (0.63)



Direct portfolio transaction costs [b] 0.22 0.16 0.34Operating charges 1.66 1.66 1.66Return after operating charges -3.26 +4.59 +20.38Historic yield 1.56 1.08 1.02Effect on yield of charges offset against capital 0.00 0.00 0.00

Other information

Closing NAV (£’000) 180,828 203,795 221,522Closing NAV percentage of total fund NAV (%) 31.11 33.89 35.48Number of shares 3,886,649 4,237,421 4,817,512Highest share price (UK p) 4,884.05 4,872.93 4,596.70Lowest share price (UK p) 4,081.30 4,306.59 3,446.72

Sterling Class ‘C’ Income share performanceSterling Class ‘C’ shares are not generally available to all investors.The share class was launched on 13 March 2013.


Opening NAV 3,150.12 3,048.20 2,560.64Return before operating charges and after directportfolio transaction costs (53.07) 191.53 566.54



Distributions (97.89) (84.73) (74.60)

Closing NAV 2,994.19 3,150.12 3,048.20


Costs before dilution adjustments 7.80 5.22 9.90Dilution adjustments [a] (1.10) (0.17) (0.42)



Direct portfolio transaction costs [b] 0.22 0.16 0.34Operating charges 0.16 0.16 0.16Return after operating charges -1.84 +6.12 +21.95Historic yield 3.25 2.69 2.53Effect on yield of charges offset against capital 0.15 0.15 0.15

Other information

Closing NAV (£’000) 14,582 17,233 18,120Closing NAV percentage of total fund NAV (%) 2.51 2.86 2.90Number of shares 487,022 547,039 594,436Highest share price (UK p) 3,208.32 3,254.26 3,089.82Lowest share price (UK p) 2,674.58 2,868.98 2,312.77



Opening NAV 1,513.97 1,476.12 1,246.28




Distributions (46.85) (40.84) (33.07)

Closing NAV 1,428.16 1,513.97 1,476.12











Other information

Closing NAV (£’000) 30,714 34,102 30,055


Number of shares 2,150,600 2,252,490 2,036,114





Opening NAV 1,733.34 1,644.85 1,356.20




Distributions (38.96) (30.98) (27.14)


Closing NAV 1,689.42 1,733.34 1,644.85











Other information

Closing NAV (£’000) 88,570 50,251 45,357


Number of shares 5,242,643 2,899,075 2,757,523








Opening NAV 150.72 147.33 124.60




Distributions (4.66) (4.05) (3.20)

Closing NAV 141.82 150.72 147.33











Other information

Closing NAV (£’000) 5,206 4,911 898


Number of shares 3,670,824 3,258,198 609,939





Opening NAV 170.77 162.46 134.28




Distributions (3.42) (2.64) (2.33)


Closing NAV 166.03 170.77 162.46











Other information

Closing NAV (£’000) 21,153 18,947 407


Number of shares 12,740,356 11,095,303 250,639





Opening NAV 3,089.78 3,035.39 2,575.72




Distributions (95.22) (83.87) (61.66)

Closing NAV 2,892.63 3,089.78 3,035.39











Other information

Closing NAV (£’000) 5,836 7,018 9,568


Number of shares 201,759 227,138 315,228





Opening NAV 4,757.81 4,548.91 3,778.84




Distributions (72.43) (51.56) (45.24)


Closing NAV 4,602.61 4,757.81 4,548.91











Other information

Closing NAV (£’000) 3,790 4,638 5,558


Number of shares 82,354 97,489 122,172











Income

Net capital gains / (losses) 3 (30,213) 19,153

Revenue 5 19,192 17,109




Change in net assets attributableto shareholders from investmentactivities (33,797) 14,553




Amounts paid on cancellation of shares (53,172) (77,845) ______ ______ 8,048 (41,137)


Change in net assets attributable toshareholders from investment activities(see above) (33,797) 14,553




Balance sheet

2019 2018as at 31 May Note £’000 £’000

Assets



Cash and bank balances 10 597 2,880


Total assets 615,231 611,175

Liabilities

Creditors Bank overdrafts (16,273) 0


Other creditors 11 (10,805) (3,467)








In determining the amount available for distribution, ordinary stockdividends have been transferred to capital, reducing the amountavailable.



Non-derivative securities (30,071) 19,172

Currency gains / (losses) (135) (14)


Net capital gains / (losses) (30,213) 19,153


M&G UK Select Fund Financial statements and notes





Commissions 123 0.04 61 0.03

Taxes 1,231 0.40 870 0.45





Commissions (119) 0.04 (95) 0.04

Taxes (1) 0.00 (1) 0.00




Taxes paid Equities 1,232 0.22 871 0.14

Total direct portfolio transactioncosts [a] 1,474 0.26 1,027 0.17



[a] Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section




Bank interest 1 0




Stock dividends 790 293





8,291 8,941





14 13









Effects of:



Current year expenses not utilised 1,610 1,741











Interim 2,318 897 2,360 745

Final 6,986 4,415 6,443 2,724







Stock dividends not distributed (790) (293)







9 Debtors 2019 2018as at 31 May £’000 £’000

Amounts receivable on issues of shares 4,301 18



Sales awaiting settlement 2,671 2,748



Cash held as bank balances 597 2,880

Total cash and bank balances 597 2,880






Purchases awaiting settlement 9,581 2,809

Total other creditors 10,805 3,467



13 Shares in issue



Euro Class ‘A’ Accumulation 211,045 257,155 (318,652) 149,548

Class ‘C’ Accumulation 2,465 327,162 (2,550) 327,077

Sterling Class ‘A’ Income 8,394,454 114,106 (704,139) 7,804,421

Class ‘A’ Accumulation 4,237,421 658 (351,430) 3,886,649

Class ‘C’ Income 547,039 30,811 (90,828) 487,022

Class ‘I’ Income 2,252,490 106,117 (208,007) 2,150,600

Class ‘I’ Accumulation 2,899,075 2,577,935 (234,367) 5,242,643

Class ‘R’ Income 3,258,198 731,797 (319,171) 3,670,824


Class ‘X’ Income 227,138 4,887 (30,266) 201,759

Class ‘X’ Accumulation 97,489 4,281 (19,416) 82,354



Euro Class ‘A’ 5.25 n/a 1.50

Class ‘C’ 3.25 n/a 0.75




Class ‘R’ nil n/a 1.00

Class ‘X’ nil n/a 1.50

15 Related parties



During the year, there were transactions in Prudential plc, a relatedparty of M&G Securities Limited with a total value of £17,430,000(2018: £2,097,000).

















Level 1 560,471 0 591,583 0

Level 2 0 0 0 0

Level 3 0 0 0 0

560,471 0 591,583 0









As the majority of the fund’s financial assets are non-interest bearing,the risk is not considered significant and is therefore not disclosed.

22 Credit risk

Credit risk is not considered significant for the fund and is thereforenot disclosed.


This fund pays semi-annual ordinary distributions and the followingtable sets out the distribution periods.


Interim 01.06.18 30.11.18 03.12.18 31.01.19

Final 01.12.18 31.05.19 03.06.19 31.07.19




Euro Class ‘A’ Accumulation shares


¢ ¢ ¢ ¢Interim 3.2062 0.8127 4.0189 3.2209

Final 9.1401 8.6635 17.8036 12.4909

Euro Class ‘C’ Accumulation shares


¢ ¢ ¢ ¢Interim 0.0000 7.7069 7.7069 6.7229

Final 10.1280 17.0498 27.1778 21.3788



p p p pInterim 10.5592 12.4408 23.0000 21.5000

Final 35.9788 35.6056 71.5844 61.6793






p p p pInterim 0.0000 13.3960 13.3960 10.7073

Final 30.1662 29.6555 59.8217 41.3826



p p p pInterim 5.4322 18.2549 23.6871 21.8101

Final 50.7636 23.4407 74.2043 62.9184



p p p pInterim 1.0865 10.2781 11.3646 10.5410

Final 14.0909 21.3952 35.4861 30.3007



p p p pInterim 0.5564 7.9950 8.5514 7.4280

Final 8.3194 22.0874 30.4068 23.5525



p p p pInterim 0.1858 0.9450 1.1308 1.0517

Final 1.3057 2.2212 3.5269 2.9937



p p p pInterim 0.1471 0.5730 0.7201 0.6153

Final 0.9491 1.7551 2.7042 2.0198



p p p pInterim 11.9912 11.1622 23.1534 21.6400

Final 47.2150 24.8469 72.0619 62.2325




p p p pInterim 5.4422 7.8099 13.2521 10.6044

Final 44.2541 14.9258 59.1799 40.9600



23 Dividend distribution tables (continued)

M&G Investment Funds (2)Other regulatory disclosures

Remuneration

In line with the requirements of the Undertakings for CollectiveInvestment in Transferable Securities (UCITS) V, the UCITS Manageris subject to a remuneration policy which is consistent with theprinciples outlined in SYSC19E of the FCA Handbook (UCITSRemuneration Code).

The remuneration policies are designed to ensure that any relevantconflicts of interest can be managed appropriately at all times and that the remuneration of its staff is in line with the risk policies and objectives of the UCITS funds it manages. Further details of the remuneration policy applicable at an M&G Limited level can befound here: www.mandg.com/about-us/policies-and-business-principles.M&G’s remuneration policy and its implementation is reviewed on anannual basis, or more frequently where required, and approved by theM&G Remuneration Committee. The latest review found that theremuneration policy continued to align to all local regulatoryrequirements and continued to operate as intended.

The UCITS management company is required under UCITS to makequantitative disclosures of remuneration. These disclosures are madein line with M&G’s interpretation of currently available guidance onquantitative remuneration disclosures. As market or regulatoryguidance evolves, M&G may consider it appropriate to make changesto the way in which quantitative disclosures are calculated. Membersof staff and senior management typically provide both UCITS andnon-UCITS related services and have a number of areas ofresponsibility. Therefore, only the portion of remuneration for thoseindividuals’ services which may be attributable to UCITS is includedin the remuneration figures disclosed. Accordingly the figures are notrepresentative of any individual’s actual remuneration.

M&G Securities Limited does not directly employ any staff members.However, for the financial year ended 31 December 2018, aggregateremuneration of £47,703,371 (£7,395,780 in respect of fixedremuneration and £40,307,591 in respect of variable remuneration)was paid to individuals whose actions may have a material impact onthe risk profile of the UCITS Manager, of which £3,523,355 related tosenior management.

Swiss investor information

For funds registered in Switzerland we are required by FINMA todisclose the Total Expense Ratio (TER).

For these funds the TERs are the same as the operating chargesdisclosed in each fund’s financial highlights section under‘Performance and charges’.



Glossary

Accumulation shares: A type of share where distributions areautomatically reinvested and reflected in the value of the shares.

Accumulation units: A type of unit where distributions areautomatically reinvested and reflected in the value of the units.

Asset: Anything having commercial or exchange value that is ownedby a business, institution or individual.

Asset allocation: Apportioning a portfolio’s assets according to risktolerance and investment goals.

Asset class: Category of assets, such as cash, company shares,fixed income securities and their sub-categories, as well as tangibleassets such as real estate.

Bond:A loan in the form of a security, usually issued by a governmentor company, which normally pays a fixed rate of interest over a giventime period, at the end of which the initial amount borrowed is repaid.

Bond issue: A set of fixed income securities offered for sale to thepublic by a company or government. If the bonds are sold for the firsttime, it is called a ‘new issue’.

Bottom-up selection: Selecting stocks based on the attractivenessof a company.

Bunds: Fixed income securities issued by the German government.

Capital: Refers to the financial assets, or resources, that a companyhas to fund its business operations.

Capital growth: Occurs when the current value of an investment isgreater than the initial amount invested.

Capital return: The term for the gain or loss derived from aninvestment over a particular period. Capital return includes capital gainor loss only and excludes income (in the form of interest or dividendpayments).

Cash equivalents: Deposits or investments with similarcharacteristics to cash.

Comparative sector: A group of funds with similar investmentobjectives and/or types of investment, as classified by bodies such asthe Investment Association (IA) or Morningstar™. Sector definitionsare mostly based on the main assets a fund should invest in, and mayalso have a geographic focus. Sectors can be the basis for comparingthe different characteristics of similar funds, such as their performanceor charging structure.

Consumer Prices Index (CPI): An index used to measure inflation,which is the rate of change in prices for a basket of goods andservices. The contents of the basket are meant to be representativeof products and services we typically spend our money on.

Convertible bonds: Fixed income securities that can be exchangedfor predetermined amounts of company shares at certain times duringtheir life.

Corporate bonds: Fixed income securities issued by a company.They are also known as bonds and can offer higher interest paymentsthan bonds issued by governments as they are often considered morerisky.

Coupon: The interest paid by the government or company that hasraised a loan by selling bonds.

Credit: The borrowing capacity of an individual, company orgovernment. More narrowly, the term is often used as a synonym forfixed income securities issued by companies.

Credit default swaps (CDS): Are a type of derivative, namelyfinancial instruments whose value, and price, are dependent on oneor more underlying assets. CDS are insurance-like contracts that allowinvestors to transfer the risk of a fixed income security defaulting toanother investor.

Credit rating: An independent assessment of a borrower’s ability torepay its debts. A high rating indicates that the credit rating agencyconsiders the issuer to be at low risk of default; likewise, a low ratingindicates high risk of default. Standard & Poor’s, Fitch and Moody’sare the three most prominent credit rating agencies. Default meansthat a company or government is unable to meet interest payments orrepay the initial investment amount at the end of a security’s life.

Credit rating agency: A company that analyses the financialstrength of issuers of fixed income securities and attaches a rating totheir debt. Examples include Standard & Poor’s and Moody’s.

Credit risk: Risk that a financial obligation will not be paid and a losswill result for the lender.

Credit selection: The process of evaluating a fixed income security,also called a bond, in order to ascertain the ability of the borrower tomeet its debt obligations. This research seeks to identify theappropriate level of default risk associated with investing in thatparticular bond.

Credit spread: The difference between the yield of a corporate bond,a fixed income security issued by a company, and a government bondof the same life span. Yield refers to the income received from aninvestment and is expressed as a percentage of the investment’scurrent market value.

Default: When a borrower does not maintain interest payments orrepay the amount borrowed when due.

Defaulted bond: When a bond issuer does not maintain interestpayments or repay the amount borrowed when due.

Default risk: Risk that a debtholder will not receive interest and fullrepayment of the loan when due.

Derivatives: Financial instruments whose value, and price, aredependent on one or more underlying assets. Derivatives can be usedto gain exposure to, or to help protect against, expected changes inthe value of the underlying investments. Derivatives may be traded ona regulated exchange or traded over the counter.

Developed economy/market:Well-established economies with ahigh degree of industrialisation, standard of living and security.

Dilution adjustments: The dilution adjustment is used to protectongoing investors against the transaction charges incurred in investingor divesting in respect of creations and cancellations. The dilutionadjustment is made up of the direct and indirect transaction charges.In the financial statements the direct transaction charges as apercentage of average NAV will be disclosed. This percentage will takeaccount of those direct transaction charges that have been recoveredthrough the dilution adjustment leaving a percentage that justrepresents the costs incurred in portfolio management.

Distribution: Distributions represent a share in the income of thefund and are paid out to Income shareholders or reinvested forAccumulation shareholders at set times of the year (monthly, quarterly,half-yearly or annually). They may either be in the form of interestdistributions or dividend distributions.


Glossary

Distribution yield: Expresses the amount that is expected to bedistributed by the fund over the next 12 months as a percentage of theshare price as at a certain date. It is based on the expected grossincome less the ongoing charges.

Diversification: The practice of investing in a variety of assets. Thisis a risk management technique where, in a well-diversified portfolio,any loss from an individual holding should be offset by gains in otherholdings, thereby lessening the impact on the overall portfolio.

Dividend: Dividends represent a share in the profits of a companyand are paid out to the company’s shareholders at set times of theyear.

Duration:A measure of the sensitivity of a fixed income security, alsocalled a bond, or bond fund to changes in interest rates. The longer abond or bond fund’s duration, the more sensitive it is to interest ratemovements.

Duration risk: The longer a fixed income security, also called a bond,or bond fund’s duration, the more sensitive and therefore at risk it is tochanges in interest rates.

Emerging economy or market:Economies in the process of rapidgrowth and increasing industrialisation. Investments in emergingmarkets are generally considered to be riskier than those in developedmarkets.

Equities: Shares of ownership in a company.

Exchange traded: Usually refers to investments traded on anexchange, such as company shares on a stock exchange.

Ex-dividend, ex-distribution or XD date: The date on whichdeclared distributions officially belong to underlying investors.

Exposure: The proportion of a fund invested in a particularshare/fixed income security, sector/region, usually expressed as apercentage of the overall portfolio.

Fixed income security: A loan in the form of a security, usuallyissued by a government or company, which normally pays a fixed rateof interest over a given time period, at the end of which the initialamount borrowed is repaid. Also referred to as a bond.

Floating rate notes (FRNs): Securities whose interest (income)payments are periodically adjusted depending on the change in areference interest rate.

Foreign exchange: The exchange of one currency for another, orthe conversion of one currency into another currency. Foreignexchange also refers to the global market where currencies are tradedvirtually around the clock. The term foreign exchange is usuallyabbreviated as ‘forex’ and occasionally as ‘FX’.

Foreign exchange (FX) strategy: Currencies can be an assetclass in its own right, along with company shares, fixed incomesecurities, property and cash. Foreign exchange strategy can thereforebe a source of investment returns.

Forward contract: A contract between two parties to buy or sell aparticular commodity or financial instrument at a pre-determined priceat a future date. Examples include forward currency contracts.

Fundamentals (company): A basic principle, rule, law, or the like,that serves as the groundwork of a system. A company’sfundamentals pertain specifically to that company, and are factors suchas its business model, earnings, balance sheet and debt.

Fundamentals (economic): A basic principle, rule, law, or the like,that serves as the groundwork of a system. Economic fundamentalsare factors such as inflation, employment, economic growth.

Futures: A futures contract is a contract between two parties to buyor sell a particular commodity or financial instrument at a pre-determined price at a future date. Futures are traded on a regulatedexchange.

Gilts: Fixed income securities issued by the UK government.

Government bonds: Fixed income securities issued bygovernments, that normally pay a fixed rate of interest over a giventime period, at the end of which the initial investment is repaid.

Hedging: A method of reducing unnecessary or unintended risk.

High water mark (HWM): The highest level that a fund’s NAV (netasset value) has reached at the end of any 12-month accountingperiod.

High yield bonds: Fixed income securities issued by companies witha low credit rating from a recognised credit rating agency. They areconsidered to be at higher risk of default than better quality, ie higher-rated fixed income securities but have the potential for higher rewards.Default means that a company or government is unable to meetinterest payments or repay the initial investment amount at the end ofa security’s life.

Historic yield: The historic yield reflects distributions declared overthe past 12 months as a percentage of the share price, as at the dateshown.

Income yield:Refers to the income received from an investment andis usually expressed annually as a percentage based on theinvestment’s cost, its current market value or face value.

Index: An index represents a particular market or a portion of it,serving as a performance indicator for that market.

Income shares: A type of share where distributions are paid out ascash on the payment date.

Income units:A type of unit where distributions are paid out as cashon the payment date.

Index tracking:A fund management strategy that aims to match thereturns from a particular index.

Index-linked bonds: Fixed income securities where both the valueof the loan and the interest payments are adjusted in line with inflationover the life of the security. Also referred to as inflation-linked bonds.

Inflation: The rate of increase in the cost of living. Inflation is usuallyquoted as an annual percentage, comparing the average price thismonth with the same month a year earlier.

Inflation risk: The risk that inflation will reduce the return of aninvestment in real terms.

Initial public offering (IPO): The first sale of shares by a privatecompany to the public.

Interest rate risk: The risk that a fixed income investment will losevalue if interest rates rise.

Interest rate swap: An agreement between two parties to swap afixed interest payment with a variable interest payment over a specifiedperiod of time.

Investment Association (IA): The UK trade body that representsfund managers. It works with investment managers, liaising withgovernment on matters of taxation and regulation, and also aims tohelp investors understand the industry and the investment optionsavailable to them.

Issuer: An entity that sells securities, such as fixed income securitiesand company shares.


Investment grade bonds: Fixed income securities issued by acompany with a medium or high credit rating from a recognised creditrating agency. They are considered to be at lower risk from default thanthose issued by companies with lower credit ratings. Default meansthat a company or government is unable to meet interest payments orrepay the initial investment amount at the end of a security’s life.

Issuer: An entity that sells securities, such as fixed income securitiesand company shares.

Leverage: When referring to a company, leverage is the level of acompany’s debt in relation to its assets. A company with significantlymore debt than capital is considered to be leveraged. It can also referto a fund that borrows money or uses derivatives to magnify aninvestment position.

Liquidity: A company is considered highly liquid if it has plenty ofcash at its disposal. A company’s shares are considered highly liquidif they can be easily bought or sold since large amounts are regularlytraded.

Long position: Refers to ownership of a security held in theexpectation that the security will rise in value.

Macroeconomic: Refers to the performance and behaviour of aneconomy at the regional or national level. Macroeconomic factors suchas economic output, unemployment, inflation and investment are keyindicators of economic performance. Sometimes abbreviated to‘macro’.

Maturity: The length of time until the initial investment amount of afixed income security is due to be repaid to the holder of the security.

Modified duration: A measure of the sensitivity of a fixed incomesecurity, called a bond, or bond fund to changes in interest rates. Thelonger a bond or bond fund’s duration, the more sensitive it is to interestrate movements.

Monetary easing: When central banks lower interest rates or buysecurities on the open market to increase the money in circulation.

Monetary policy:A central bank’s regulation of money in circulationand interest rates.

Monetary tightening: When central banks raise interest rates orsell securities on the open market to decrease the money in circulation.

Morningstar™: A provider of independent investment research,including performance statistics and independent fund ratings.

Near cash: Deposits or investments with similar characteristics tocash.

Net asset value (NAV): A fund’s net asset value is calculated bytaking the current value of the fund’s assets and subtracting itsliabilities.

Ongoing Charge Figure: The Ongoing Charge Figure includescharges for the following items: management of the fund (also knownas Annual Management Charge), administration services, servicesprovided by external parties which include depository, custody andaudit, as well as incorporating the ongoing charge figure from fundsheld in the portfolio (taking into account any rebates).

Open-ended investment company (OEIC): A type of managedfund, whose value is directly linked to the value of the fund’s underlyinginvestments.

Options: Financial contracts that offer the right, but not the obligation,to buy or sell an asset at a given price on or before a given date in thefuture.

Over-the-counter (OTC): Whereby financial assets are tradeddirectly between two parties. This is in contrast to exchange trading,which is carried out through exchanges set up specifically for thepurpose of trading. OTC is also known as off-exchange trading.

Overweight: If a fund is ‘overweight’ a stock, it holds a largerproportion of that stock than the comparable index or sector.

Payment date: The date on which distributions will be paid by thefund to investors, usually the last business day of the month.

Physical assets: An item of value that has tangible existence, forexample, cash, equipment, inventory or real estate. Physical assetscan also refer to securities, such as company shares or fixed incomesecurities.

Portfolio transaction cost: The cost of trading, such as brokerage,clearing, exchange fees and bid-offer spread as well as taxes such asstamp duty.

Preference shares: Preference shares are a loan to a company thatmay be traded in the same way as ordinary shares, but generally havea higher yield and pay dividends on fixed dates. Preference shareshave varying characteristics as to the treatment of the principal andthe dividend payment, which includes ranking them above ordinaryshares when it comes to dividend payments.

Principal: The face value of a fixed income security, which is theamount due back to the investor by the borrower when the securityreaches the end of its life.

Private placement:An offer of sale of securities to a relatively smallnumber of investors selected by the company, generally investmentbanks, mutual funds, insurance companies or pension funds.

Property Expense Ratio (PER): Property expenses are theoperating expenses that relate to the management of the propertyassets in the portfolio. These include: insurance and rates, rent reviewand lease renewal costs and maintenance and repairs, but notimprovements. They depend on the level of activity taking place withinthe fund. The Property Expense Ratio is the ratio of property expensesto the fund’s net asset value.

Real yield: The return of an investment, adjusted for changes inprices in an economy.

Retail Prices Index (RPI): A UK inflation index that measures therate of change in prices for a basket of goods and services in the UK,including mortgage payments and council tax.

Risk: The chance that an investment’s return will be different to whatis expected. Risk includes the possibility of losing some or all of theoriginal investment.

Risk management: The term used to describe the activities the fundmanager undertakes to limit the risk of a loss in a fund.

Risk premium: The difference between the return from a risk-freeasset, such as a high-quality government bond or cash, and the returnfrom an investment in any other asset. The risk premium can beconsidered the ‘price’ or ‘pay-off’ for taking on increased risk. A higherrisk premium implies higher risk.

Risk-free asset: An asset that notionally carries no risk of non-payment by the borrower such as a high-quality fixed income securityissued by a government or cash.

Risk/reward ratio: A ratio comparing the expected returns of aninvestment with the amount of risk undertaken.

Safe-haven assets: Refers to assets that investors perceive to berelatively safe from suffering a loss in times of market turmoil.

Glossary

Security: Financial term for a paper asset – usually a share in acompany or a fixed income security also known as a bond.

Share class: Each M&G fund has different share classes, such as A,R and I. Each has a different level of charges and minimuminvestment. Details on charges and minimum investments can befound in the Key Investor Information Documents.

Share class hedging: Activities undertaken in respect of hedgedshares to mitigate the impact on performance of exchange ratemovements between the fund’s currency exposure and the investor’schosen currency.

Short position: A way for a fund manager to express his or her viewthat the market might fall in value.

Short selling: This often refers to the practice whereby an investorsells an asset they do not own. The investor borrows the asset fromsomeone who does own it and pays a fee. The investor musteventually return the borrowed asset by buying it in the open market.If the asset has fallen in price, the investor buys it for less than theysold it for, thus making a profit. The contrary may also occur.

Short-dated corporate bonds: Fixed income securities issued bycompanies and repaid over relatively short periods.

Short-dated government bonds: Fixed income securities issuedby governments and repaid over relatively short periods.

Sovereign debt: Debt of a government. Also referred to asgovernment bonds.

Sub-investment grade bonds: Fixed income securities issued bya company with a low rating from a recognised credit rating agency.They are considered to be at higher risk from default than those issuedby companies with higher credit ratings. Default means that a companyor government is unable to meet interest payments or repay the initialinvestment amount at the end of a security’s life.

Suspended: Temporarily halting the trading of a listed security on thestock exchange. It can be voluntary (requested by the issuingcompany) or imposed by regulators. Typically, trading suspensions areintroduced ahead of important news announcements, followingtechnical glitches, or due to regulatory concerns.

Top-down investing: An investment approach that analyseseconomic factors, ie surveys the ‘big picture’, before selecting whichcompanies to invest in. The top-down investor will look at whichindustries are likely to generate the best returns in certain economicconditions and limit the search to that area.

Total return: The term for the gain or loss derived from an investmentover a particular period. Total return includes income (in the form ofinterest or dividend payments) and capital gains.

Treasuries: Fixed income securities issued by the US government.

Triple A or AAA rated: The highest possible rating a fixed incomesecurity, also called a bond, can be assigned by credit rating agencies.Bonds that are rated AAA are perceived to have the lowest risk ofdefault. Default means that a company or government is unable tomeet interest payments or repay the initial investment amount at theend of a security’s life.

UCITS: Stands for Undertakings for Collective Investment inTransferable Securities. This is the European regulatory framework foran investment vehicle that can be marketed across the EuropeanUnion and is designed to enhance the single market in financial assetswhile maintaining high levels of investor protection.

Unconstrained: The term used to describe the mandate of a fundwhereby the manager has the freedom to invest according to his orher own strategy, not being obliged to allocate capital according to theweightings of any index, for example.

Underlying value: The fundamental value of a company, reflectingboth tangible and intangible assets, rather than the current marketvalue.

Underlying yield:Refers to the income received by a managed fund,and is usually expressed annually as a percentage based on the fund’scurrent value.

Underweight: If a portfolio is ‘underweight’ a stock, it holds a smallerproportion of that stock than the comparable index or sector.

Unit trust: A type of managed fund, whose value is directly linked tothe value of the fund’s underlying investments.

Unit/share type: Type of units/shares held by investors in a trust orfund (unit/share types differ by features such as whether income is tobe paid out as cash or reinvested on the payment date).

Unlisted/unquoted stocks:Shares of ownership in companies thatare not listed on a public exchange, known as private companies.

Valuation: The worth of an asset or company based on its currentprice.

Volatile: When the value of a particular share, market or sectorswings up and down fairly frequently and/or significantly, it isconsidered volatile.

Volatility: The degree to which a given security, fund, or index rapidlychanges. It is calculated as the degree of deviation from the norm forthat type of investment over a given time period. The higher thevolatility, the riskier the security tends to be.

Warrant: A security issued by a company that gives the holder theright to buy shares in that company at a specified price and within acertain timeframe.

Yield: This refers to either the interest received from a fixed incomesecurity or to the dividends received from a share. It is usuallyexpressed as a percentage based on the investment’s costs, its currentmarket value or its face value. Dividends represent a share in theprofits of the company and are paid out to a company’s shareholdersat set times of the year.

Yield (equity): Refers to the dividends received by a holder ofcompany shares and is usually expressed annually as a percentagebased on the investment’s cost, its current market value or face value.Dividends represent a share in the profits of the company and are paidout to a company’s shareholders at set times of the year.

Yield (bonds): This refers to the interest received from a fixed incomesecurity and is usually expressed annually as a percentage based onthe investment’s cost, its current market value or its face value.

Yield (income): Refers to the income received from an investmentand is usually expressed annually as a percentage based on theinvestment’s cost, its current market value or face value.


Glossary

M&G Securities Limited is authorised and regulated by the Financial Conduct

Authority and provides investment products. The Company’s registered office is 10

Fenchurch Avenue, London EC3M 5AG. Registered in England number 90776.


Notes


Notes

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