M&G Smaller Companies Fund a sub-fund of M&G Investment Funds (3)
Annual Short Report June 2021 For the year ended 30 June 2021 M&G Smaller Companies Fund Fund information
The Authorised Corporate Director (ACD) of Investment objective M&G Investment Funds (3) presents its Annual Short Report for The fund aims to deliver a higher total return (the combination of M&G Smaller Companies Fund which contains a review of the capital growth and income) than the Numis Smaller Companies fund’s investment activities and investment performance during Index (excluding Investment Companies), net of the ongoing the period. The ACD’s Annual Long Report and audited Financial charge figure, over any five year period. Statements for M&G Investment Funds (3), incorporating all the sub-funds and a Glossary of terms is available free of charge either from our website at www.mandg.co.uk/reports or by calling Investment policy M&G Customer Relations on 0800 390 390. Atleast80%ofthefundisinvestedinUKsmallercompanies. These are UK listed companies which, at the initial time of An annual assessment report is available which shows the value purchase, are: provided to investors in each of M&G’s UK-based funds. The assessment report evaluates whether M&G’s charges are justified • in the bottom 10% (by market capitalisation) of the FTSE All- in the context of the overall service delivered to its investors. The Share index, or report can be found at www.mandg.co.uk/valueassessment • in the Numis Smaller Companies Index (excluding Investment ACD Companies), or • listedontheAlternativeInvestmentMarket. M&G Securities Limited, 10 Fenchurch Avenue, London EC3M 5AG, UK The fund may also invest in collective investment schemes and Telephone: 0800 390 390 (UK only) other transferable securities. Cash and near cash may be held for (Authorised and regulated by the Financial Conduct Authority. ancillary purposes and derivatives, including warrants, may be M&G Securities Limited is a member of the Investment used for efficient portfolio management and hedging purposes. Association and of The Investing and Saving Alliance) Investment approach Important information The fund manager takes a bottom-up approach to stockpicking There was a reduction in the annual charge on some share classes and aims to construct a well-diversified portfolio. A long-term from 15 February 2021. The reduction in annual charge varies perspective is adopted with particular focus placed on ‘growth across the M&G funds and the detail was communicated in the drivers’, competitive advantage, change, quality of management shareholder letter dated 15 January 2021. and valuation.
The World Health Organisation declared the COVID-19 outbreak a When a company held by the fund grows such that it no longer pandemic on 11 March 2020. has the characteristics of a smaller company, the fund manager will reduce the holding in a manner and timescale best suited to The COVID-19 pandemic has been an unprecedented event. After meeting the fund’s objective. an initial period of increased market volatility and uncertainty, there has been a marked recovery in global markets, bolstered by supportive economic policies from governments and positive news on vaccines for COVID-19.
The ACD continues to monitor the ongoing operational risks that are posed to the Company and its service providers due to global and local movement restrictions that have been enacted by various governments.
1 2 M&G Smaller Companies Fund Fund information
Benchmark The following table shows the risk number associated with the fund and is based on Sterling Class ‘A’ shares. Benchmark: Numis Smaller Companies Index (excluding Investment Companies). Low risk High risk
The benchmark is a target which the fund seeks to outperform. Typically lower rewards Typically higher rewards The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used to measure the fund’s performance and, together with the 123456 7 other index, and the Alternative Investment Market constrains the fund's portfolio construction as they define the investment universe of the fund. The above number:
The fund is actively managed. • 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 Within the given constraints, the fund manager has complete not be a reliable indicator of the future risk profile of the fund. freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the • is not guaranteed and may change over time and the lowest benchmark’s constituents. risk number does not mean risk free.
For unhedged and hedged share classes, the benchmark is shown • has changed during this period. From 1 July 2020 to 16 July in the share class currency. 2020 the risk number was 5. Risk profile The fund invests in the shares of smaller UK-listed companies and is, therefore, subject to the price volatility of the UK stockmarket and the performance of individual companies. The fund’s focus is on smaller companies and it can also invest in the shares of AIM-listed companies. Shares in both types of company can be more unpredictable and difficult to buy and sell compared to those of larger companies. Diversification is therefore key in managing liquidity risk and reducing market risk. The fund’s risks are measured and managed as an integral part of the investment process.
Please note that the risk management policies are set out in full in the financial statements and notes sections of the Annual Long Report and audited Financial Statements of M&G Investment Funds (3).
3 4 M&G Smaller Companies Fund Fund information
Investment review different countries, including the UK, led to renewed restrictions As at 1 July 2021, for the year ended 30 June 2021 and increased investor risk aversion. Minimal progress in the Performance against objective Brexit negotiations with the European Union (EU) also weighed on Between 1 July 2020 (the start of the review period) and 1 July the mood. The UK stockmarket rallied strongly in November 2020, 2021, the M&G Smaller Companies Fund delivered a positive total thanks to positive news on a vaccine for COVID-19. The start of a return (the combination of income and growth of capital) across all UK vaccination programme in December further boosted of its share classes. Fund performance was behind a comparative investors’ risk appetite, despite the emergence of some highly index, the Numis Smaller Companies ex Investment Companies infectious strains of the virus. A source of uncertainty for many Index, which returned 51.5%. months, the UK and EU finally secured a last-minute trade deal at the end of the year. The fund met its investment objective of delivering a higher total return than the Numis Smaller Companies ex Investment The new year saw early optimism fade somewhat due to the Companies Index over any five-year period for all share classes. emergence of further transmissible mutations of the virus, leading The index returned 10.8% pa in the five years to 1 July 2021. to the imposition of a third population lockdown and renewed business restrictions. At the same time, the UK announced a For the performance of each share class, please refer to the £4.6 billion relief package for closed retail, hospitality and leisure ‘Long-term performance by share class’ table in the 'Financial businesses. In late February, concerns about higher inflation, highlights' section of Annual Long Report and audited Financial fuelled by hopes of a rapid economic recovery in the near term, Statements for M&G Investment Funds (3). drained investors’ risk appetite. March saw more positive To give an indication of the performance of the fund, the following sentiment, buoyed by US President Biden’s US$1.9 trillion relief table shows the compound rate of return, per annum, over the package. In the UK, chancellor Rishi Sunak extended the period for Sterling Class ‘A’ (Accumulation) shares. Calculated on government’s support measures for the economy. a price to price basis with income reinvested. The UK vaccination programme continued to proceed positively Long-term performance and restrictions were partially eased in the spring, although the emergence of a particularly infectious variant of the virus Share class One Three Five Since tempered optimism to an extent. The UK stockmarket continued to year years years launch advance in April and May, but moved sideways in June, due to a 01.07.20 02.07.18 01.07.16 delay to lifting lockdown restrictions. All company sizes gained %a %pa %pa %pa over the period under review, with smaller companies notably Sterlingb ahead of their larger counterparts. c Class ‘A’ +48.8 +9.1 +13.8 +12.3 The fund’s performance over the period under review was supported by asset allocation, most notably an above-index a Absolute basis. b Price to price with income reinvested. position in technology stocks. On the other hand, stock selection c 27 September 1967, the end of the initial offer period of the predecessor overall detracted, with performance held back by stock selection unit trust. in industrials and consumer discretionary. However, stock picks in basic materials and financials added value. Please note past performance is not a guide to future performance and the value of investments, and the income from Significant contributors to the fund’s performance included digital them, will fluctuate. This will cause the fund price to fall as well as marketing company Kin and Carta, Tyman, which supplies rise and you may not get back the original amount you invested. engineered components to the door and window industry, and Future, a magazine retailer with a strong online presence. Performance review Coronavirus remained a dominant theme in the 12 months under Kin and Carta has seen its digital transformation business boosted review; during the summer of 2020, a resurgence of COVID-19 in by the pandemic and it released a series of strong trading
5 6 M&G Smaller Companies Fund Fund information
statements. Tyman, which has exposure to the huge US housing As the period progressed, we focused on stocks that we felt market, is trading well and has upgraded its earnings should benefit from the re-opening of the economy as the expectations. Meanwhile, Future has also benefited from very vaccination roll-out went well and restrictions partially eased. At strong trading figures. this time we started new positions in bus and coach operator Stagecoach, restaurant and pub chain The Restaurant Group and Other contributors included Alpha Financial Markets, as investors environmental consultancy group RPS. In our view, Stagecoach welcomed its acquisition strategy, which has served to expand its and The Restaurant Group still offer reasonable value, while RPS interests into alternative assets and the US market. Mortgage has reduced its debt and is trading at a much lower valuation than Advice Bureau also supported performance thanks to the strength pre-COVID-19 levels. of the housing market and an increased market share. Veterinary services provider CVS Group added further value. CVS is under More recently, new investments included price comparison new management and its veterinary surgeries were allowed to website MoneySuperMarket.com, online retailer musicMagpie and stay open during the pandemic. These factors, coupled with automotive fluid-handling firm TI Fluid Systems. Shares in increased pet ownership, resulted in a strong performance by the MoneySuperMarket.com have been weak due to reduced credit business and the shares. card activity because of the pandemic as well as concerns about a review of insurance pricing. The firm has a strong balance sheet, In contrast, detractors included RWS, a provider of intellectual while two of its competitors have been acquired recently. property and transaction services, healthcare software developer musicMagpie, which buys and sells recycled technology hardware, EMIS and public services provider Serco Group. books and CDs, has some good partners, notably Apple and Asda, RWS joined the portfolio in connection with its acquisition of andhasapresenceinboththeUKandtheUS.SharesinTIFluid language translation and content management firm SDL, which Systems have been under pressure due to concerns about the was already held in the portfolio. Shares in RWS fell following the move to electric vehicles but we feel the firm has been deal and whilst the company has continued to trade in line with misunderstood by investors. expectations, in an environment where many companies are Turning to disposals, we closed some positions early in the period issuing positive trading updates, RWS’s shares have failed to as we felt their outlooks had become less attractive against the participate in the market rally. EMIS lagged the broader market backdrop of the pandemic. For example, we sold recruitment rally, although there was no specific company news, while Serco’s consultant PageGroup, and the position in James Fisher & Sons, leisure and transportation business came under pressure due to as mentioned above. We also closed the positions in Softcat, a the pandemic. LondonMetric Property REIT and marine value-added reseller of software products, and Blue Prism Group, engineering services James Fisher & Sons were further a manufacturer of robotic process automation software, which detractors. Defensive stock LondonMetric was out of favour in a have both performed well and in our opinion are approaching fair buoyant market, while James Fisher was hurt by COVID-19-related value. delays and excessive debt. Around the start of 2021, we sold a number of positions that had Investment activities recently left the benchmark. We feel they had also reached In the first half of the period under review, we mainly focused on reasonable value and their disposals released funds for new investing in companies whose prospects are likely to be investment ideas. Such sales involved miniature wargaming strengthened, or at least not hampered, by the pandemic. New manufacturing firm Games Workshop, bookmaker William Hill, holdings at this time included bike supplier Halfords, food business-to-business media firm Ascential and global speciality manufacturer Premier Foods and luxury watches retailer Watches insurer Lancashire Holdings. Towards the end of the period, we of Switzerland. Halfords and Premier Foods both benefited as sold the holding in Halfords, mentioned above, which has people spent more time at home during the pandemic, while performed strongly as cycling and motoring have been popular Watches of Switzerland has traded very well due to pent-up during the pandemic. demand.
7 8 M&G Smaller Companies Fund Fund information
Outlook We are cautiously optimistic regarding the outlook for the near to medium term, with this view subject to the pace of the reopening of the economy and virus-related developments. In particular, the highly transmissible Delta strain of the virus is a cause for concern. Nevertheless, UK monetary and fiscal policies are supportive and there is significant pent-up demand to bolster the domestic economy. Internationally, many countries are making progress with vaccination programmes, which bodes well for the global economy and stockmarkets too.
We will continue to seek out companies that appear to be well placed to thrive in the post-pandemic climate with a focus on identifying good value opportunities in quality companies with stronger balance sheets than their immediate competitors.
On 1 July 2021, James Taylor was appointed fund manager of the M&G Smaller Companies Fund, replacing Garfield Kiff, who remains in the management team as co-deputy fund manager alongside Hilary Aldridge. The fund’s investment objective and policy remain unchanged.
Garfield Kiff Fund manager
An employee of M&G FA Limited which is an associate of M&G Securities Limited. Please note that effective from 1 July 2021, James Taylor replaced Garfield Kiff as fund manager. 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.
9 10 M&G Smaller Companies Fund Investment review
Classification of investments %offund The table below shows the percentage holding per sector. as at 30 June 2021 2020 Cash equivalents % of fund b as at 30 June 2021 2020 'AAA' rated money market funds 1.69 5.88
Equities a The comparative sector weightings have been re-analysed to reflect Software & computer services 15.68 17.40a changes to the sector classifications. b Uncommitted surplus cash is placed into ‘AAA’ rated money market funds Technology hardware & equipment 2.32 1.93a with the aim of reducing counterparty risk. Telecommunications equipment 0.64 0.73a Telecommunication service providers 0.95 1.54 Medical equipment & services 0.00 0.96 Pharmaceuticals & biotechnology 0.25 0.00a Finance & credit services 2.14 3.13 Investment banking & brokerage services 7.77 7.62a Non-life insurance 0.50 2.74 Real estate investment & services 2.13 2.06 Real estate investment trusts 1.11 3.78 Automobiles & parts 1.14 0.00 Consumer services 1.63 1.02 Household goods & home construction 3.24 3.50a Leisure goods 0.00 0.91 Personal goods 3.74 0.91 Media 1.78 4.03a Retailers 4.77 2.66 Travel & leisure 4.14 3.76 Beverages 1.79 2.16 Food producers 2.14 0.00 Personal care, drug & grocery stores 1.37 0.59a Construction & materials 9.90 8.16 Aerospace & defence 3.51 3.50 General industrials 1.46 1.82 Industrial engineering 1.72 1.47a Industrial support services 16.44 11.66a Industrial transportation 0.00 2.06a Industrial metals & mining 2.15 2.39a Chemicals 3.01 2.31 Non-renewable energy 1.61 2.30
11 12 M&G Smaller Companies Fund Investment review
Top ten portfolio transactions for the year to 30 June 2021
Largest purchases £’000 Premier Foods 5,354 Moneysupermarket.com 4,057 MusicMagpiea 3,989 Knightsa 3,758 Chemring 3,613 Volution 3,370 Restaurant 3,346 RPS 3,298 TI Fluid Systems 3,294 Watches of Switzerland 3,270 Other purchases 30,586 Total purchases 67,935
Largest sales £’000 Future 8,984 LondonMetric Property 8,328 Computacenter 7,995 Countryside Properties 6,885 Sabre Insurance 6,703 Ascential 6,484 Polypipe 6,294 Softcat 5,625 Sanne 4,958 Tyman 4,746 Other sales 158,553 Total sales 225,555 a AIM quoted. Purchases and sales exclude the cost and proceeds of ‘AAA’ rated money market funds.
13 14 M&G Smaller Companies Fund Financial highlights
Fund performance Performance since launch Please note past performance is not a guide to future To give an indication of how the fund has performed since launch, performance and the value of investments, and the income from the chart below shows total return of Sterling Class ‘A’ them, will fluctuate. This will cause the fund price to fall as well as (Accumulation) shares. rise and you may not get back the original amount you invested. September 1967 = 100, plotted monthly The following chart and tables reflect the key financial information Chart date 1 July 2021 of a representative share class, Sterling Class ‘A’ (Accumulation) shares. As different share classes have different attributes, for 50,000 example charging structures and minimum investments, please be 30,000 aware that their performance may be different. For more 20,000 information on the different share classes in this fund please refer 10,000 to the Prospectus for M&G Investment Funds (3), which is 5,000 available free of charge either from our website at www.mandg.co.uk/prospectuses or by calling M&G Customer 3,000 2,000 Relations. 1,200 Fund level performance 700 400 Fund net asset value as at 30.06.21 30.06.20 30.06.19 £’000 £’000 £’000 200 Fund net asset value (NAV) 313,366 366,850 414,010 100 69 73 77 81 85 89 9397 01 05 09 13 17 21
Sterling Class ‘A’ (Accumulation) shares*
Source: Morningstar, Inc. and M&G *Income reinvested
15 16 M&G Smaller Companies Fund Financial highlights
Ten-year performance Sterling Class ‘A’ Accumulation share performance Please note that the comparator benchmark’s total return is not The share class was launched on 27 September 1967. available from fund launch. Therefore a ten-year comparable performance chart is shown below. for the year to 30 June 2021 2020 2019 Change in NAV per share UK p UK p UK p Ten years, 1 July 2011 = 100, plotted monthly Opening NAV 836.30 921.63 949.64 Chart date 1 July 2021 Return before operating 405.98 (72.54) (13.18) charges 300 Operating charges (13.29) (12.79) (14.83) Return after operating 392.69 (85.33) (28.01) charges 250 Distributions (5.18) (4.42) (13.73) Retained distributions 5.18 4.42 13.73 200 Closing NAV 1,228.99 836.30 921.63 Direct transaction costs UK p UK p UK p 160 Costsbeforedilution 0.83 0.98 1.44 adjustments 120 Dilution adjustmentsa (0.83) (0.16) (0.05) 100 Total direct transaction costs 0.00 0.82 1.39 80 Performance and charges % % % 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Direct portfolio transaction 0.00 0.10 0.15 Sterling Class ‘A’ (Accumulation) shares* costsb Numis Smaller Companies excluding Investment Companies Index Operating chargesc 1.31 1.38 1.66 Source: Morningstar, Inc. and M&G *Income reinvested Return after charges +46.96 -9.26 -2.95 Historic yield 0.41 0.53 1.50 To give an indication of how the fund has performed during the Other information period the table on the following page shows the performance of Closing NAV (£’000) 37,294 27,767 33,354 Sterling Class ‘A’ (Accumulation) shares. Closing NAV (%) 11.90 7.57 8.06 All ‘Performance and charges’ percentages represent an annual Number of shares 3,034,506 3,320,255 3,619,045 rate except for the ‘Return after operating charges’ which is Highest share price (UK p) 1,258.57 1,102.81 965.67 calculated as a percentage of the opening net asset value per share (NAV). ‘Dilution adjustments’ are only in respect of direct Lowest share price (UK p) 820.40 649.14 784.06 portfolio transaction costs. a In respect of direct portfolio transaction costs. b Historic yields for the current year are calculated as at 9 July 2021. As a percentage of average net asset value. c Following the change in charging structure, you may see variances between the comparative and current year figures.
17 18 M&G Smaller Companies Fund Operating charges and portfolio transaction costs
We explain below the payments made to meet the ongoing costs These charges do not include portfolio transaction costs or any of investing and managing the fund, comprising operating entry and exit charges (also known as initial and redemption charges and portfolio transaction costs. charges). The charging structures of share classes may differ, and therefore the operating charges may differ. Operating charges Operating charges are in line with the ongoing charges shown in Operating charges include payments made to M&G and to the Key Investor Information Document, other than where there providers independent of M&G: have been extraordinary legal or tax expenses, or an estimate has • Annual charge: Charge paid to M&G covering the annual cost been used for the ongoing charge because a material change has of M&G managing and administering the fund and the costs of made the operating charges unreliable as an estimate of future third parties providing services to the fund. From 1 August charges. 2019, this charge rolls all costs that make up the operating charges into one annual charge. Portfolio transaction costs For every £1 billion of a fund’s net asset value, a discount of Portfolio transaction costs are incurred by funds when buying and 0.02% will be applied to that fund’s annual charge (up to a selling investments. These costs vary depending on the types of maximum of 0.12%). investment, their market capitalisation, country of exchange and method of execution. They are made up of direct and indirect • Extraordinary legal and tax expenses: Costs that specifically portfolio transaction costs: relate to legal or tax claims that are both exceptional and unforeseeable. Such expenses are uncommon, and would not • Direct portfolio transaction costs: Broker execution be expected in most years. Although they result in a commission and taxes. short-term cost to the fund, generally they can deliver longer • Indirect portfolio transaction costs: ‘Dealing spread’ – the term benefits for investors. difference between the buying and selling prices of the fund’s • Investment management: Charge paid to M&G for investment investments; some types of investment, such as fixed interest management of the fund. From 1 August 2019 this charge securities, have no direct transaction costs and only the forms part of the annual charge. dealing spread is paid.
• Administration: Charge paid for administration services in Investments are bought or sold by a fund when changes are made addition to investment management – any surplus from this to the investment portfolio and in response to net flows of money charge will be retained by M&G. From 1 August 2019 this into or out of the fund from investors buying and selling shares in charge is rolled into the annual charge. the fund.
• Oversight and other independent services: Charges paid to To protect existing investors, portfolio transaction costs incurred providers independent of M&G for services which include as a result of investors buying and selling shares in the fund are depositary, custody and audit. From 1 August 2019 these recovered from those investors through a ‘dilution adjustment’ to charges will be paid by M&G and rolled into the annual charge. the price they pay or receive. The table below shows direct portfolio transaction costs paid by the fund before and after that • Ongoing charges from underlying funds: From 1 August part of the dilution adjustment relating to direct portfolio 2019 ongoing charges from underlying funds managed by the transaction costs. To give an indication of the indirect portfolio ACD (excluding Investment Trust Companies and Real Estate dealing costs the table also shows the average portfolio dealing Investment Trusts) will be rebated. Holdings in all other spread. underlying funds are not rebated.
19 20 M&G Smaller Companies Fund Operating charges and portfolio transaction costs
Further information on this process is in the Prospectus, which is available free of charge on request either from our website at www.mandg.co.uk/prospectuses or by calling M&G Customer Relations.
Portfolio transaction costs
for the year to 30 June 2021 2020 2019 Averagea Direct portfolio transaction %%% % costsb Broker commission 0.02 0.02 0.03 0.02 Taxes 0.06 0.10 0.13 0.10 Costsbeforedilution 0.08 0.12 0.16 0.12 adjustments Dilution adjustmentsc (0.08) (0.02) (0.01) (0.04) Total direct portfolio transaction 0.00 0.10 0.15 0.08 costs as at 30 June 2021 2020 2019 Averagea Indirect portfolio % % % % transaction costs Average portfolio dealing spread 0.93 1.20 0.67 0.93 a Average of first three columns. b As a percentage of average net asset value. c In respect of direct portfolio transaction costs. Please see the section above this table for an explanation of dilution adjustments.
21 22 Contact
Customer relations* 0800 390 390
Write to us** M&G Securities Limited PO Box 9039 Chelmsford CM99 2XG
Our website www.mandg.co.uk
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M&G Securities Limited is authorised and regulated by the Financial Conduct Authority and provides investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England number 90776.
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