M&G Smaller Companies Fund a sub-fund of M&G Investment Funds (1) Annual Short Report August 2020 For the year ended 31 August 2020 M&G Japan Smaller Companies Fund Fund information

The Authorised Corporate Director (ACD) of M&G Investment Funds (1) Investment objective presents its Annual Short Report for M&G Japan Smaller Companies Fund The fund aims to provide a higher total return (the combination of capital which contains a review of the fund’s investment activities and investment growth and income), net of the ongoing charge figure, than that of the performance during the period. The ACD’s Annual Long Report and audited Russell/Nomura Mid-Small Cap Index over any five-year period. Financial Statements for M&G Investment Funds (1), incorporating all the sub-funds and a Glossary of terms is available free of charge either from our website at www.mandg.co.uk/reports or by calling M&G Customer Investment policy Relations on 0800 390 390. At least 80% of the fund is invested in the equity securities and equity An annual assessment report is available which shows the value provided to related securities of smaller companies that are incorporated, domiciled, or investors in each of M&G’s UK-based funds. The assessment report do most of their business, in Japan. evaluates whether M&G’s charges are justified in the context of the overall Smaller companies are defined as the bottom half in terms of total market service delivered to its investors. The report can be found at capitalisation of all publicly listed companies in Japan. www.mandg.co.uk/valueassessment. The fund usually holds a concentrated portfolio of fewer than 50 companies. ACD The fund may also invest in other transferable securities directly or via M&G Securities Limited, collective investment schemes (Including funds managed by M&G). 10 Fenchurch Avenue, London EC3M 5AG, UK The fund may also hold cash and near cash for liquidity purposes. Telephone: 0800 390 390, (UK only) Derivatives may be used for efficient portfolio management and hedging. (Authorised and regulated by the Financial Conduct Authority. M&G Securities Limited is a member of the Investment Association and of The Investing and Saving Alliance (formerly Tax Incentivised Savings Investment approach Association)) The fund employs a disciplined approach to investment which concentrates on the analysis and selection of individual companies. Important information The investment approach aims to take advantage of price volatility. The World Health Organisation declared the COVID-19 outbreak a The fund manager believes that stock market mispricing can and often pandemic on 11 March 2020. does occur because psychological factors (i.e. behavioural biases) prevent investors from always assessing investments rationally. As a result, market Global financial markets have been reacting to the outbreak. All markets prices do not always reflect the fundamental value of companies. The fund have incurred increased volatility and uncertainty since the onset of the seeks to profit from such behavioural biases. pandemic. The investment approach filters the fund’s investment universe down to a The ACD has also noted the operational risks that are posed to the focused list of companies whose shares trade on low valuations relative to Company and its service providers due to global and local movement their history and the market. These companies are then subject to rigorous restrictions that have been enacted by various governments. fundamental analysis to attain an understanding of a company’s The COVID-19 pandemic is an unprecedented event and the eventual sustainable earnings. This fundamental analysis leads to a high level of impact on the global economy and markets will largely depend on the scale conviction for each of the companies held in the fund. and duration of the outbreak. The ACD will continue to monitor this The fund manager expects stock selection to be the main driver of situation. performance.

1 2 M&G Japan Smaller Companies Fund Fund information

Benchmark The following table shows the risk number associated with the fund and is basedonSterlingClass‘A’shares. Benchmark: Russell/Nomura Mid-Small Cap Index. The fund is actively managed. The benchmark is a target which the fund Low risk High risk seeks to outperform. The index has been chosen as the fund’s target benchmark as it best reflects the scope of the fund’s investment policy. The target benchmark is used solely to measure the fund’s performance and does not constrain the fund's portfolio construction. Typically lower rewards Typically higher rewards For unhedged share classes, the benchmark is shown in the share class currency. 123456 7

Risk profile The above number: • is based on the rate at which the value of the fund has moved up and The fund invests in the shares of smaller Japan-listed companies and is, down in the past and is based on historical data so may not be a reliable therefore, subject to the price volatility of the Japanese stockmarket and indicator of the future risk profile of the fund. the performance of individual companies. The fund may also be subject to • is not guaranteed and may change over time and the lowest risk number does not mean risk free. fluctuations in currency exchange rates. • has not changed during this period. The fund’s focus is on smaller companies where the share price movement can be more unpredictable and the shares more 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.

3 4 M&G Japan Smaller Companies Fund Investment review

As at 1 September 2020, for the year ended 31 August 2020 Performance review The 12 months under review has been an extraordinary period for both the Performance against objective Japanese stockmarket and the fund. Towards the beginning of the period, a Between 2 September 2019 (the start of the review period) and new fund manager was appointed which resulted in a comprehensive 1 September 2020, the fund’s sterling share classes produced a negative portfolio repositioning as detailed further below. As this repositioning total return (the combination of income and growth of capital). Fund process was reaching its final phases in the middle of the review period, returns were marginally behind the benchmark, the Russell/Nomura Mid- stockmarkets, driven by COVID-19, then entered one of the most volatile Small Cap Index, which fell by -1.6% over the 12 months. and dramatic periods in financial market history. The last two weeks of Over five years, the fund’s sterling share classes produced positive returns March 2020, in particular, marked one of the most extraordinary periods of but underperformed its benchmark, which returned 9.4% pa over this ‘intra-market volatility’ in living memory. Simultaneous liquidations of period. The fund therefore did not meet the current objective over its assets throughout global capital markets resulted in nothing short of specified timeframe of five years. market chaos. For the performance of each share class, please refer to the ‘Long-term In the three-month period ending March 2020, the Japanese stockmarket performance by share class’ table in the ‘Financial highlights’ section of the fell more than 30% intra-quarter, peak to trough. Following unprecedented Annual Long Report and audited Financial Statements for M&G government policy, the market then rallied some 35% from the late-March Investment Funds (1). lows to mid-June and has since been broadly flat. Within this dramatic To give an indication of the performance of the fund, the following table swing in broad market returns, internal market behaviour has been even shows the compound rate of return, per annum, over the period for Sterling more severe. Class ‘A’ (Accumulation) shares. Calculated on a price to price basis with Perhaps unsurprisingly then, returns in the year have been heavily income reinvested. influenced by events linked to COVID-19. The intention of trying to inject more stock-specific risk into the drivers of fund performance has been Long-term performance overwhelmed by how portfolio holdings were equipped to deal with a One Three Five Since global pandemic and unprecedented lockdown. The places in the market year years years launch 02.09.19 01.09.17 01.09.15 where we had found company-specific opportunity and mispricing % [a] %pa %pa %pa pre-COVID, were as it turned out, ill-equipped in the short term to deal with Sterling [b] the pandemic. Class 'A' -2.9 -5.3 +7.9 +6.7 [c] Our real estate holdings found themselves in the eye of the storm, as did [a] Absolute basis. some non-bank financials and industrial holdings. These stocks have [b] Price to price with income reinvested. recovered from the lows, but are still at depressed levels. On the other hand, the market lurched towards quality and growth companies in this period. [c] 15 May 1984, the end of the initial offer period of the predecessor unit trust. This helped many of the fund’s holdings, as we discuss further below. Please note past performance is not a guide to future performance and the (Quality companies are ones which have the ability to generate high value of investments, and the income from them, will fluctuate. This will returns and margins. Growth companies are ones that can grow revenues cause the fund price to fall as well as rise and you may not get back the and/or earnings faster than the market as a whole.) original amount you invested. In the first half of the review period, the fund was performing well versus its benchmark, led in large part by new positions added to the portfolio. At the height of the COVID-19 sell-off in March, the fund underperformed significantly. Since then, it has been outperforming once again and has

5 6 M&G Japan Smaller Companies Fund Investment review

Performance review Masahiro Yamashita. At this very depressed valuation, we would not be now regained much of the performance lost during that exceptional surprised to see merger and acquisition activity, which could release value. February and March period. For the review period as a whole though, the Shares in the company rallied towards the end of the review period and we fund lagged behind the Russell/Nomura Mid-Small Cap Index and recorded remain invested. a negative total return due to the strength of sterling relative to the Sparx Group was added in the fourth quarter of 2019. We believe the Japanese yen over the 12 months. medium-term earnings power of this company is under-appreciated by the Forum Engineering was the fund’s largest detractor. Forum is a business market. In addition, the company has financial investments worth, we that dispatches specialist engineers as contract workers and was listed at believe, in excess of its entire market capitalisation. We also believe the the end of February 2020. We invested believing that the company venture business has unrealised performance fees worth another 50% of its occupies an interesting space in a consolidating market and has the current market capitalisation. Meanwhile, the company’s business platform prospect of modest structural growth, neither of which were reflected in the is scalable and offers long-run growth prospects. We think the stock remains valuation, which was well supported by significant net cash. As it turns out, a well-managed, undiscovered gem in the small-cap universe in Japan. dispatching temporary workers is a tough business in a global lockdown. Several of the fund’s top contributors, including JMDC, Fujimi, Kintetsu With significant net cash holdings, however, we feel the company can World Express and StemRIM were additions to the portfolio following the weather this period of economic disruption. We added at the recent lows fund manager change in September 2019. At the point of entry, each of and we remain holders. these companies offered growth, discounted valuations and a quality Another industrial stock, Nippon Thompson, also hurt returns. Despite signs management team. of recovery early in the year, it now seems likely that following the outbreak We took part in the initial public offering (IPO) of technology company of COVID-19, the company’s near-term earnings will remain under pressure JMDC in December 2019. JMDC is a high-growth company and perhaps for longer than we initially anticipated. Nonetheless, we feel strongly that not, by historic standards, a typical holding for the fund. However, having the next upturn in the economic cycle should see record earnings thanks to followed JMDC before it was listed, we were positive on the management an improvement in margin structure and because the company has ample team and the business fundamentals. We believed that poor market capacity to satisfy growing end markets without the need for further conditions were resulting in a depressed IPO valuation, allowing us to invest investment. at initial listing at close to a 50% discount to comparable companies. The Some holdings in the financial sector also detracted, including credit stock has more than doubled since its IPO. services provider Credit Saison and asset manager Sparx Group. Despite Fujimi is a world-leading supplier of slurries used in the manufacture of significant evidence of cultural change, Credit Saison shares currently trade silicon wafers and semiconductor devices. In its target product niches, the on a very low multiple of its recurring earnings. Moreover, a large company boasts global market shares of between 30% and 90%. The percentage of its market capitalisation is accounted for by its cross- business is well run by an owner-manager chief executive who we rate holdings. If we adjust for these cross-holdings, we believe the market highly. We invested in the company when its market capitalisation was very capitalisation is a little more than £1 billion. This makes for an attractive well supported by a strong net cash position, offering margin of safety, and investment in our view, for a company that has one of Japan’s largest credit when the market was unduly focused on short-term business weakness and card franchises and has several other growing consumer-facing businesses. ignoring secular growth trends. The stock performed strongly shortly after We believe the market is missing the impressive re-invigoration of the we invested as earnings continued to positively surprise. In the COVID-19 company’s commercial strategy taking place under the leadership of sell-off in March 2020 we added to the holding, before it swiftly recovered and went on to set a new record high in its share price. The stock has risen

7 8 M&G Japan Smaller Companies Fund Investment review

Performance review officer. JSR is another example of a company on an attractive valuation, by some 50% since the March lows, but remains attractively valued. We are strong balance sheet, quality management and product franchises, and a actively engaged with management regarding their merger and credible long-term growth outlook. We see this as a core holding. acquisition plans and are encouraging more assertive capital allocation. Investment activities Kintetsu World Express is a company we have covered for many years. The To recap from the interim report, in September 2019, M&G recruited a genesis of this recent investment dates to 2015 when the company dedicated Asia Pacific Equities team – a clear reflection of its strategic acquired APL Logistics. The transaction made some strategic sense, but put commitment to the region. Based in Asia and London, the team members the balance sheet under stress. Following a few integration difficulties, the bring significant expertise to M&G’s investment capabilities in the region. market punished the stock, sending it down by some 50% from the Co-headed by Carl Vine and David Perrett, the team has since assumed pre-acquisition levels. In 2017 and 2018, the share price recovered as APL management of M&G’s Japanese and Asian equity strategies. Carl Vine was gradually being absorbed. In 2019, some near-term profit issues took over the M&G Japan Smaller Companies Fund on 20 September 2019. caused the shares to revisit their five-year lows. We took this opportunity to invest, happy with structural improvements under the new chief executive Following the fund manager change in September, we have been and comforted by the fact that the company had largely executed its goals increasing exposure to what we believe are mispriced business franchises, since the APL acquisition. Having added further to the position following where we see a disproportionate probability that either corporate action or the market lows in March, the stock has been a key performer for the fund. M&G engagement can unlock significant value. We have been following the stem-cell space for several years and have been The aim of the changes is so the portfolio can benefit from the excited by StemRIM’s novel approach to stem-cell therapy. Following a company-specific balance sheet and operational restructuring trends that significant sell-off amidst general market weakness in March and April, we are accelerating across the Japanese corporate landscape, especially in the added the stock to the portfolio in May. At our entry price, the company’s small to medium-sized company space. net cash balance represented nearly half of its market capitalisation, The stocks we added to the portfolio in the first half do not necessarily fit offering an unusual margin of safety in this high-growth area. Furthermore, neatly into thematic buckets, however, they can broadly be split into three we took additional comfort from the fact that StemRIM’s JV partner, categories. The first is cyclicals (that is, companies whose earnings are , a company that features StemRIM’s technology prominently in sensitive to the economic cycle), including Nippon Thompson, its own long-term pipeline, was also buying additional shares at similar Motors, and SUMCO. Isuzu is a world-leading commercial vehicle prices to us. manufacturer and SUMCO is a leading supplier of silicon wafers. We were Other significant contributors were CKD Corporation and JSR Corporation, able to buy the shares in these companies at prices which we believe are both of which were held throughout the review period. CKD, a manufacturer very attractive. of components used in factory automation-machinery, enjoyed very strong We also identified some mispriced growth and quality names such as JMDC performance as investors have started to realise that the company is not (which has now been sold), Sparx and . In each case, we feel the purely a cyclical, but a growth cyclical. Success in penetrating the US market future growth story is poorly understood, mispriced or that the quality and provides the company with international growth opportunities for several resilience of the business is not reflected in current valuations. years, in our view. Finally, we added stocks we believe are going through corporate reforms Meanwhile, technology materials business JSR outperformed as investors that can unlock significant value for investors. These are companies such as have focused on the structural growth part of the business, and ongoing Mitsubishi Logisnext, Tokyo Broadcasting System, and Fujimi; we are reform under the stewardship of a new chief executive and chief financial looking to engage with such companies to unlock value for our investors.

9 10 M&G Japan Smaller Companies Fund Investment review

Investment activities In the final months of the period under review, we initiated new positions in Holdings that were sold included OKI Electric, Sankyo Tateyama, Sanrio, DIP, Modalis and Sakai Moving Service. Sanrio owns the intellectual Hamakyorex and United Arrows. In each case, we felt the underlying property for the Hello Kitty franchise. We intend to work with the company businesses faced structural headwinds and valuations were not especially to encourage improved commercialisation of its character IP. attractive versus other opportunities where our conviction is higher. DIP is an online recruitment platform. Having tripled operating profits in In March, we took advantage of the chaotic market conditions and the past five years, we feel this owner-managed business is well placed for accelerated the exit of some micro-cap, less liquid names, and reinvested in ongoing structural growth, given its strong market position and the trend in larger, more liquid, higher quality stocks that had also been heavily sold off. increasing digitisation. We believe the current share price offers a This is in addition to incremental changes we made to increase our compelling entry point for a growth company. exposure to some core holdings. Modalis Therapeutics was bought at the time of its IPO. This is one of only We were particularly excited to add to our real estate exposure. This two examples globally of a listed gene-editing franchise. The stock came to includes purchases of Japanese real estate investment trusts (JREITs) market with imminent milestone payments equivalent to its market whose share prices were driven down by forced selling from Japanese capitalisation, offering unusual margin of safety for investors and yet regional banks. another example of mispriced growth in Japan’s small-cap IPO market. The stock’s share price promptly doubled following its debut. In March and April, when auto industry valuations reached the lows of the global financial crisis, we started to add companies we thought had been While Sakai’s share price has been very weak following the COVID-19 unduly punished by the market. We bought shares in companies that we pandemic, we feel its business is primed to rebound quickly and its core considered are structurally attractive, long-term winners with balance earnings power remains intact. As the most efficient, largest player in a sheets strong enough to weather the recession. These new names include highly fragmented market, we feel the longer term prospects for structural , Subaru, Toyo Tire and Motor. The panic sell-off caused growth is appealing. by COVID-19 also gave us an opportunity to invest in biotechnology Outlook company StemRIM. Notwithstanding the uncertainties caused by the coronavirus, we believe Other new holdings we added included Orix JREIT, Musashi Seimitsu current valuations in Japanese companies are undemanding and economic Industry and . The investment in Orix JREIT is based on our view policy is now extremely supportive and interest rates are at very low levels. that the current share price reflects an overly pessimistic market perception of future earnings potential. As active managers, we are increasingly excited by the investment opportunities we see in the stockmarket today. Not only do we believe we In the case of Musashi, we believe exciting growth drivers are in the early can add value as stock pickers, but we can also leverage M&G’s long stages of emerging. The market believes the core business will shrink over tradition of engaging with management, which can be its own catalyst for time, but we think it will, in fact, grow. Moreover, the company’s venture value realisation. holdings hold some highly attractive assets that, if marked-to-market, are worth a significant portion of the company’s market capitalisation, The Abe administration has presided over an unprecedented state-led providing support for the share price. campaign to cajole corporate Japan into raising returns on capital. Whilst we saw recently that Shinzo Abe is stepping down as the prime minister of The investment in electronic components manufacturer Taiyo Yuden Japan, his departure does not leave us unduly concerned that his work will reflects our belief that the market is overlooking the potential for a suddenly be undone. significant improvement in the quality of the company’s earnings and the brighter outlook for earnings growth. These are expected to be driven by Profit margin improvement has been under way for some time, but the love company-specific technology achievements and accelerating digitisation affair with cash and assets has remained firmly entrenched. The Corporate trends in the company’s core markets. Governance Code, the Stewardship Code, the revamped Companies Act,

11 12 M&G Japan Smaller Companies Fund Investment review

Outlook and the revised Fair Merger & Acquisition guidelines are all now bearing down upon corporate Japan, forcing behavioural change. A tipping point has now been reached. We believe we are in the early stages of a process in which long-trapped value is being released from balance sheets. Company engagement is encouraged and rewarded. Regular meetings with company directors allow us to identify whether a company’s strategy is aligned with our interests as long-term shareholders. Our active engagement with companies helps us to encourage positive change. Constructive dialogue, during which suggestions on the best ways to unlock value for shareholders emerge, takes place regularly. We continue to see valuations in smaller Japanese companies as highly supportive for prospective returns. More importantly, the significant variation in valuation between stocks, combined with continued restructuring at the company level, leaves us excited about the opportunity to add additional value through our stockpicking approach.

Carl Vine Fund manager

An employee of M&G FA Limited (formerly M&G Limited) which is an associate of M&G Securities Limited. At the start of the review period, Johan du Preez was the 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.

13 14 M&G Japan Smaller Companies Fund Investment review

Classification of investments Top ten portfolio transactions for the year to 31 August 2020 The table below shows the percentage holding per sector. Largest purchases ¥’000 % of fund Nippon Thompson 632,182 Fuji Electric 452,172 as at 31 August 2020 2019 Isuzu Motors 404,173 EQUITIES Sparx 401,261 Technology hardware & equipment 3.52 8.58 JMDC 398,397 Medical equipment & services 0.00 4.36 Credit Saison 378,889 Pharmaceuticals & biotechnology 1.14 0.00 Forum Engineering 378,287 Banks 1.34 4.02 Nomura Real Estate 375,905 Finance & credit services 8.71 5.70 SUMCO 367,454 Real estate investment & services 3.95 0.00 Fujimi 351,729 Real estate investment trusts 3.49 0.00 Automobiles & parts 12.07 9.40 Other purchases 6,471,566 Household goods & home construction 1.01 4.97 Leisure goods 0.00 2.98 Total purchases 10,612,015 Personal goods 0.00 0.55 Largest sales ¥’000 Media 5.35 2.67 Retailers 0.00 3.05 Miraca 499,864 Travel & leisure 5.86 0.00 Credit Saison 474,032 Beverages 1.78 3.29 Lawson 467,207 Food producers 0.00 3.18 Dowa 452,990 Personal care, drug & grocery stores 0.00 4.25 Motor 448,549 Construction & materials 11.39 12.40 446,680 Electronic & electrical equipment 4.99 2.70 DIC 397,785 General industrials 3.12 0.00 JMDC 395,559 Industrial engineering 13.16 6.98 Iida 388,528 Industrial support services 7.70 5.35 Sumitomo Riko 368,847 Industrial transportation 4.92 3.86 Other sales 7,874,345 Industrial metals & mining 0.00 4.04 Chemicals 6.57 8.35 Total sales 12,214,386

15 16 M&G Japan Smaller Companies Fund Financial highlights

Fund performance Performance since launch Please note past performance is not a guide to future performance and the To give an indication of how the fund has performed since launch, the chart value of investments, and the income from them, will fluctuate. This will below shows total return of Sterling Class ‘A’ (Accumulation) shares. cause the fund price to fall as well as rise and you may not get back the original amount you invested. May 1984 = 100, plotted monthly Chart date 1 September 2020 The following chart and tables reflect the key financial information of a representative share class, Sterling Class ‘A’ (Accumulation) shares. As 1,600 1,300 different share classes have different attributes, for example charging 1,000 structures and minimum investments, please be aware that their 800 performance may be different. For more information on the different share classes in this fund please refer to the Prospectus for M&G Investment 600 Funds (1), which is available free of charge either from our website at 400 www.mandg.co.uk/prospectuses or by calling M&G Customer Relations. 300

Fund level performance 200 150 Fund net asset value 2020 2019 2018 100 as at 31 August ¥'000 ¥'000 ¥'000 80 Fund net asset value (NAV) 9,226,228 10,191,282 34,438,426 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Sterling Class ‘A’ (Accumulation) shares* Russell/Nomura Mid-Small Cap Index**

* Income reinvested ** Prior to 27 March 2013 the benchmark was the Japan TSE Second Section Index. Thereafter it is the Russell/Nomura Mid-Small Cap Index. Source: Morningstar, Inc. and M&G

To give an indication of how the fund has performed during the period the table on the next page shows the performance of Sterling Class ‘A’ (Accumulation) shares. All ‘Performance and charges’ percentages represent an annual rate except for the ‘Return after operating charges’ which is calculated as a percentage of the opening net asset value per share (NAV). ‘Dilution adjustments’ are only in respect of direct portfolio transaction costs.

17 18 M&G Japan Smaller Companies Fund Financial highlights

Performance since launch Operating charges and portfolio transaction costs Historic yields for the current year are calculated as at 11 September 2020. We explain below the payments made to meet the ongoing costs of Sterling Class 'A' Accumulation share performance investing and managing the fund, comprising operating charges and The share class was launched on 15 May 1984. portfolio transaction costs. for the year to 31 August 2020 2019 2018 Change in NAV per share UK p UK p UK p Opening NAV 514.41 602.18 582.86 Operating charges Return before operating charges and after Operating charges include payments made to M&G and to providers direct portfolio transaction costs 1.64 (78.78) 29.43 Operating charges (7.15) (8.99) (10.11) independent of M&G: • Return after operating charges (5.51) (87.77) 19.32 Annual charge: Charge paid to M&G covering the annual cost of M&G managing and administering the fund and the costs of third parties Distributions (4.78) (3.84) (0.99) providing services to the fund. From 1 August 2019, this charge rolls all Retained distributions 4.78 3.84 0.99 costs that make up the operating charges into one annual charge. Closing NAV 508.90 514.41 602.18 For every £1 billion of a fund’s net asset value, a discount of 0.02% will Direct portfolio transaction costs UK p UK p UK p be applied to that fund’s annual charge (up to a maximum of 0.12%). Costs before dilution adjustments 0.52 0.24 0.28 • Extraordinary legal and tax expenses: Costs that specifically to legal Dilution adjustments [a] (0.06) (0.24) (0.15) or tax claims that are both exceptional and unforeseeable. Such Total direct portfolio transaction costs 0.46 0.00 0.13 expenses are uncommon, and would not be expected in most years. Performance and charges % % % Although they result in a short-term cost to the fund, generally they can deliver longer term benefits for investors. Direct portfolio transaction costs [b] 0.09 0.00 0.03 Operating charges [c] 1.40 1.67 1.68 • Investment management: Charge paid to M&G for investment Return after operating charges -1.07 -14.58 +3.31 management of the fund. From 1 August 2019 this charge forms part of Historic yield 0.92 0.18 0.17 the annual charge. Effect on yield of charges offset against capital 0.00 0.00 0.00 • Administration: Charge paid for administration services in addition to Other information investment management – any surplus from this charge will be retained Closing NAV (¥'000) 821,695 935,664 1,500,595 by M&G. From 1 August 2019 this charge is rolled into the annual Closing NAV percentage of total fund NAV (%) 8.91 9.18 4.36 Number of shares 1,152,023 1,403,903 1,729,898 charge. Highest share price UK p 563.69 615.44 646.78 • Oversight and other independent services: Charges paid to providers Lowest share price UK p 380.70 481.95 556.19 independent of M&G for services which include depositary, custody and [a] In respect of direct portfolio transaction costs. audit. From 1 August 2019 these charges will be paid by M&G and rolled into the annual charge. [b] As a percentage of average net asset value. • [c] Following the change in charging structure, you may see variances between the Ongoing charges from underlying funds: Ongoing charges on comparative and current year figures. holdings in underlying funds that are not rebated. From 1 August 2019 charges from underlying funds (excluding Investment Trust Companies and Real Estate Investment Trusts) will be rebated.

19 20 M&G Japan Smaller Companies Fund Financial highlights

Operating charges 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/ These charges do not include portfolio transaction costs or any entry and prospectuses or by calling M&G Customer Relations. exit charges (also known as initial and redemption charges). The charging Portfolio transaction costs structures of share classes may differ, and therefore the operating charges [a] may differ. for the year to 31 August 2020 2019 2018 Average Direct portfolio transaction costs [b] %%%% Operating charges are in line with the ongoing charges shown in the Key Broker commission 0.10 0.02 0.05 0.06 Investor Information Document, other than where there have been Taxes 0.00 0.00 0.00 0.00 extraordinary legal or tax expenses, or an estimate has been used for the Costs before dilution adjustments 0.10 0.02 0.05 0.06 ongoing charge because a material change has made the operating Dilution adjustments [c] (0.01) (0.02) (0.02) (0.02) charges unreliable as an estimate of future charges. Total direct portfolio transaction costs 0.09 0.00 0.03 0.04

Portfolio transaction costs as at 31 August 2020 2019 2018 Average [a] Indirect portfolio transaction costs %%%% Portfolio transaction costs are incurred by funds when buying and selling Average portfolio dealing spread 0.45 0.24 0.25 0.31 investments. These costs vary depending on the types of investment, their [a] market capitalisation, country of exchange and method of execution. They Average of first three columns. are made up of direct and indirect portfolio transaction costs: [b] As a percentage of average net asset value. • Direct portfolio transaction costs: Broker execution commission and [c] In respect of direct portfolio transaction costs. Please see the section above this taxes. table for an explanation of dilution adjustments. • Indirect portfolio transaction costs: ‘Dealing spread’ – the difference between the buying and selling prices of the fund’s investments; some types of investment, such as fixed interest securities, have no direct transaction costs and only the dealing spread is paid. Investments are bought or sold by a fund when changes are made to the investment portfolio and in response to net flows of money into or out of the fund from investors buying and selling shares in the fund. To protect existing investors, portfolio transaction costs incurred as a result of investors buying and selling shares in the fund are recovered from those investors through a ‘dilution adjustment’ to the price they pay or receive. The table on the next page shows direct portfolio transaction costs paid by the fund before and after that part of the dilution adjustment relating to direct portfolio transaction costs. To give an indication of the indirect portfolio dealing costs the table also shows the average portfolio dealing spread.

21 22 Contact

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