M&G Index Tracker Fund a sub-fund of M&G Investment Funds (2) Interim Short Report November 2020 For the six months ended 30 November 2020 M&G Index Tracker Fund Fund information

The Authorised Corporate Director (ACD) of M&G Investment Funds (2) Investment objective and policy presents its Interim Short Report for M&G Index Tracker Fund which The fund is designed to track the FTSE All-Share Index. The fund manager contains a review of the fund’s investment activities and investment has full discretionary investment management powers within the confines performance during the period. The ACD’s Interim Long Report and of this investment objective of the fund. unaudited Financial Statements for M&G Investment Funds (2), 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 approach M&G Customer Relations on 0800 390 390. The M&G Index Tracker Fund is a UK fund that broadly replicates the FTSE An annual assessment report is available which shows the value provided to All-Share Index*. The fund holds nearly all of the companies in the index investors in each of M&G’s UK-based funds. The assessment report and closely matches the weight that each represents in the FTSE All-Share evaluates whether M&G’s charges are justified in the context of the overall Index. service delivered to its investors. The report can be found at * FTSE® International. FTSE is a joint trademark of the London Stock Exchange www.mandg.co.uk/valueassessment. 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. ACD FTSE International Limited does not sponsor, endorse or promote these products. All copyright in the index values and constituent lists rests with FTSE International M&G Securities Limited, Limited. M&G Securities Limited has obtained full licence from FTSE International 10 Fenchurch Avenue, London EC3M 5AG Limited to use such copyright in the creation of this product. Telephone: 0800 390 390 (Authorised and regulated by the Financial Conduct Authority. M&G Benchmark Securities Limited is a member of the Investment Association and of The Benchmark: FTSE All-Share Index. Investing and Saving Alliance (formerly Tax Incentivised Savings The index is a constraining benchmark for the fund. Association)) The fund is passively managed and aims to track the return of the index. The fund's holdings are therefore unlikely to significantly deviate from the Important information benchmark's constituents. The World Health Organisation declared the COVID-19 outbreak a For unhedged and hedged share classes, the benchmark is shown in the pandemic on 11 March 2020. share class currency. Global financial markets have been reacting to the outbreak. All markets have incurred increased volatility and uncertainty since the onset of the Risk profile pandemic. The fund is designed to track the performance of the FTSE All-Share Index, The ACD has also noted the operational risks that are posed to the which represents a broad spread of UK company shares. Its performance, Company and its service providers due to global and local movement therefore, reflects the price volatility of the UK stockmarket and the restrictions that have been enacted by various governments. performance of individual companies. The COVID-19 pandemic is an unprecedented event and the eventual The fund holds nearly all of the companies in the index and closely matches impact on the global economy and markets will largely depend on the scale the weight that each represents in the FTSE All-Share Index. The fund’s risks and duration of the outbreak. The ACD will continue to monitor this are measured and managed as an integral part of the investment process. situation.

1 2 M&G Index Tracker Fund Fund information

Risk profile

The following table shows the risk number associated with the fund and is based on Sterling Class ‘A’ shares. Low risk High risk

Typically lower rewards Typically higher rewards 123456 7

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 changed during this period. From 1 June 2020 to 23 July 2020 the risk number was 5.

3 4 M&G Index Tracker Fund Investment review

As at 1 December 2020, for the six months ended Price swings – This is a dilution adjustment within the share price, which 30 November 2020 aims to protect existing shareholders from a dilution in performance resulting from deals placed to buy or sell shares. This pricing method has Performance against objective the effect of moving the single price up or down from the mid-price. Most of The M&G Index Tracker Fund is designed to track the FTSE All-Share Index. the fund’s apparent underperformance was due to a price swing at the start Between 1 June 2020 (the start of the review period) and 1 December and end of the period under review. 2020, the fund’s Sterling Class ‘A’, ‘C’ and ‘I’ shares produced a total return Fund charges – The fees we charge for managing the fund, as well as the (the combination of income and growth of capital) of 6.4%, 6.7% and 6.5%, costs incurred when we buy and sell underlying investments, will mean the respectively in sterling terms. Meanwhile, the fund’s benchmark, the FTSE fund’s return after charges is below that of the index (which does not reflect All-Share Index, produced a total return of 7.5% over the same period. the costs of investing). For the performance of each share class, please refer to the ‘Long-term Timing – This reflects the fact that the fund is priced at midday while the performance by share class’ table in the ‘Financial highlights’ section of the index is priced at close of business day. Interim Long Report and unaudited Financial Statements for M&G Tracking difference – This refers to the difference in performance, positive Investment Funds (2). or negative, due to the fund not fully replicating the composition of the To give an indication of the performance of the fund, the following table index. shows the compound rate of return, per annum, over the period for Sterling As the fund tracks the index, its overall performance can largely be Class ‘A’ (Accumulation) shares. Calculated on a price to price basis with explained by market developments over the period under review. It is worth income reinvested. noting that, in a global economy, the fates of individual markets are often Long-term performance closely connected to each other. As a result, the performance and prospects of the UK stockmarket tend to be affected by developments around the Six Three Five Since months years years launch world. 01.06.20 01.12.17 01.12.15 Against the backdrop of the coronavirus pandemic, the UK stockmarket % [a] %pa %pa %pa was volatile for much of the period under review. Ongoing measures from Sterling [b] Class 'A' +6.4 -0.5 +4.0 +4.3 [c] the government and the Bank of England to provide support were welcomed by investors, while promising results from a number of vaccine [a] Absolute basis. projects led to strong gains towards the end of the period under review. [b] Price to price with income reinvested. Following heavy falls in spring 2020 due to the emergence and spread of [c] 27 February 1998, the launch date of the predecessor unit trust. COVID-19, global stockmarkets rallied in early summer, with sentiment boosted by huge monetary and fiscal stimulus. Signs that the rate of Please note past performance is not a guide to future performance and the infection may be slowing, the partial easing of lockdown restrictions in value of investments, and the income from them, will fluctuate. This will certain parts of the global economy and hopeful reports of a vaccine or cause the fund price to fall as well as rise and you may not get back the treatment for the virus provided further support. original amount you invested. As the summer progressed, a lack of progress in the Brexit negotiations Performance review dampened sentiment, leading to weakness in the domestic stockmarket. Meanwhile, a resurgence of COVID-19 in several countries, including the There are several factors that can result in the fund underperforming or UK, led to the imposition of localised restrictions, which threatened to derail outperforming the benchmark index over specific periods. the economic recovery and further weighed on investor sentiment.

5 6 M&G Index Tracker Fund Investment review

Performance review Turning to individual stocks, leading performers included mining firms Rio In early November, the UK entered its second lockdown with the aim of Tinto, Glencore and Anglo American, as well as Ferguson, an Anglo- curbing a second wave of the virus. Against a backdrop of pandemic- American multinational plumbing and heating products distributor. In related economic damage and the UK’s imminent departure from the contrast, significant detractors over the six months included European Union (EU), the Bank of England added to an already pharmaceutical company GlaxoSmithKline, British American Tobacco and considerable bond-buying stimulus, increasing it by a greater-than- energy firm BP. expected £150 billion, which was well received by investors. Global Investment activities stockmarkets were also greatly bolstered by positive news on a number of vaccines against COVID-19 and greater optimism about the potential for Anglo-Dutch consumer goods firm Unilever has simplified its parent economic recovery. company structure, moving from two legal entities into a single holding company. In a significant transaction, we bought additional Unilever shares The recent rally outweighed the declines in the summer/autumn and the to reflect this restructuring. As a result of the reorganisation, the combined UK stockmarket, and in turn the fund, gained over the six-month period. Unilever now represents the largest company on the UK stockmarket. We Following a profound slump in activity in the first six months of the year, funded this purchase by decreasing holdings across the entire portfolio. taking the country into recession, the UK economy rebounded strongly in Some of the most significant transactions, which were in proportion to the the third quarter of 2020. However, the domestic economy remains smaller individual stocks’ weightings in the FTSE All-Share Index, involved reducing than before the onset of the pandemic. Furthermore, the last quarter of the the holdings in pharmaceutical firms AstraZeneca and GlaxoSmithKline, year is likely to come under pressure due to the effect of the second banking and financial services group HSBC and British American Tobacco. lockdown and restrictive measures. A number of companies raised funds by issuing shares during the period In this environment, inflation figures have been somewhat erratic over the and we participated in this activity by buying shares in companies such as year to date, with the Consumer Prices Index (CPI) reaching a high of 1.8% International Airlines Group, engineering company Rolls Royce and hotel in January, a low of 0.2% in August and standing at 0.7% in November. In operator Whitbread to reflect the change in their index weight. Other other data, unemployment levels in the UK rose to 4.8% in the three months companies raising funds included property investment and development to September as coronavirus-related restrictions in the economy forced company Segro, paper-based packaging firm Smurfit Kappa, homebuilder many businesses to close or lay off staff. A large number of people remain Taylor Wimpey and Hikma Pharmaceuticals. on the government’s furlough scheme, which provides financial aid to During the period under review, SDL, a language software and services firm people unable to work because of the pandemic, but this is due to finish at held in the portfolio, was bought by RWS Holdings. In connection with this the end of April 2021. purchase, we received shares in RWS, an intellectual property support At a sector level, share prices were generally in negative territory for much services company. of the period under review, although most industries rallied in late October/ Meanwhile, some holdings in the portfolio have performed strongly November due to investors’ increased risk appetite. Mining stocks fared well recently and we topped up the positions to reflect movements in their over the six months as they benefited from rising commodity prices, relative weighting in the index. Specific examples include online betting reflecting increased demand from China. Despite low interest rates and a firm 888 Holdings and electrical products retailer AO World. weak economy, banks also performed relatively well over the review period. Meanwhile, energy stocks lagged behind, due to the low oil price. Other Outlook laggards included tobacco, pharmaceuticals and utilities. The UK has lagged most major regional stockmarkets this year, leaving it at a substantial relative discount and leading to opportunities for long-term investors. In the short term, the domestic market’s progress is being impeded by the impact of the virus on the economy.

7 8 M&G Index Tracker Fund Investment review

Outlook Nevertheless, the government and the Bank of England continue to provide a huge package of measures to support the economy and the UK stockmarket is likely to benefit from any improvement in global economic activity, with China already recording some strong industrial growth. Recent advances in a number of projects to develop vaccines against COVID- 19 have been very encouraging. A gradual vaccination rollout programme is getting under way in the UK, leading to hopes that a return to something approaching normality may be feasible in the near to medium term. The UK has gained regulatory approval for an initial vaccine and the rollout programme began in early December. Meanwhile, from the end of the year the UK will no longer follow EU rules and, regardless of the final shape of the UK’s post-Brexit trade relationship with the EU, the new year should at least start to bring greater clarity.

Richard O’Connor Fund manager

An employee of M&G FA 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.

9 10 M&G Index Tracker Fund Investment review

Classification of investments % of fund as at 30.11.20 31.05.20 The table below shows the percentage holding per sector. EQUITY DERIVATIVES Equity futures contracts 0.05 0.46 % of fund CASH EQUIVALENTS as at 30.11.20 31.05.20 'AAA' rated money market funds [b] 0.55 1.93 EQUITIES Software & computer services 0.95 1.33 [a] [a] The comparative sector weightings have been re-analysed to reflect changes to Technology hardware & equipment 0.10 0.09 the sector classifications. Telecommunications service providers 2.20 2.44 [b] Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with Medical equipment & services 0.95 1.07 Pharmaceuticals & biotechnology 8.71 10.61 the aim of reducing counterparty risk. Banks 7.30 6.94 [a] Finance & credit services 0.18 0.15 [a] Investment banking & brokerage services 3.99 4.11 [a] Equity investment instruments 6.82 6.23 Life insurance 3.26 2.95 Non-life insurance 1.19 1.02 Real estate investment & services 0.36 0.42 [a] Real estate investment trusts 2.44 2.34 [a] Automobiles & parts 0.02 0.01 Household goods & home construction 3.71 3.84 Leisure goods 0.16 0.14 Personal goods 5.87 2.75 Media 3.50 3.31 [a] Retailers 2.25 2.17 [a] Travel & leisure 4.53 3.86 Beverages 3.54 3.77 Food producers 0.71 0.72 Tobacco 3.46 4.47 Personal care, drug & grocery stores 1.96 2.11 Construction & materials 1.50 1.47 [a] Aerospace & defence 1.63 1.55 Electronic & electrical equipment 0.80 0.80 General industrials 1.63 1.47 [a] Industrial engineering 1.14 0.99 [a] Industrial support services 5.71 5.43 [a] Industrial transportation 0.33 0.26 Industrial materials 0.38 0.37 Industrial metals & mining 7.06 6.32 Precious metals & mining 0.44 0.47 Chemicals 0.78 0.72 Non-renewable energy 7.40 8.31 Electricity 0.75 0.71 Gas, water & multi-utilities 2.29 2.58 Unquoted / unlisted 0.00 0.00

11 12 M&G Index Tracker Fund Investment review

Top ten portfolio transactions for the six months to 30 November 2020 Largest purchases £’000 Unilever 14,641 Rolls-Royce 1,355 Hammerson 792 International Consolidated Airlines 771 Whitbread 375 HSBC 199 Helios Towers 193 Flutter Entertainment 191 Hargreaves Lansdown 191 Taylor Wimpey 174 Other purchases 3,933

Total purchases 22,815

Largest sales £’000 Rolls-Royce 941 AstraZeneca 731 Hammerson 663 HSBC 572 GlaxoSmithKline 483 Diageo 475 Rio Tinto 450 British American Tobacco 429 Royal Dutch Shell 'A' 381 BP 358 Other sales 11,863

Total sales 17,346

Purchases and sales exclude the cost and proceeds of ‘AAA’ rated money market funds.

13 14 M&G Index Tracker 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. February 1998 = 100, plotted monthly Chart date 1 December 2020 The following chart and tables reflect the key financial information of a 350 representative share class, Sterling Class ‘A’ (Accumulation) shares. As different share classes have different attributes, for example charging 300 structures and minimum investments, please be aware that their 260 performance may be different. For more information on the different share 230 classes in this fund please refer to the Prospectus for M&G Investment 200 Funds (2), which is available free of charge either from our website at 180 www.mandg.co.uk/prospectuses or by calling M&G Customer Relations. 160 140 Index tracking 120 100 The tracking difference between the fund’s investment return and that of 90 the FTSE All-Share Index for the 12 month period ending 80 30 November 2020 was -0.04% (31 May 2020: +0.24%). The investment 70 returns are calculated gross of fees using end of day pricing in order to be 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 1718 19 20 comparable with the index. Sterling Class ‘A’ (Accumulation) shares* The historic tracking error of the investment return of the fund relative to FTSE All-Share Index the FTSE All-Share Index for the period ending 30 November 2020 was * Income reinvested Source: Morningstar, Inc. and M&G +0.25% (31 May 2020: +0.14%), which falls within the predicted tracking To give an indication of how the fund has performed during the period the error range of 0.00% to 0.30%. Historic tracking error is a measure of the table on the following page shows the performance of Sterling Class ‘A’ monthly volatility of the investment returns relative to the index over a (Accumulation) shares. 36 month period. All ‘Performance and charges’ percentages represent an annual rate except The differences are due to the fund not fully replicating the FTSE All-Share for the ‘Return after operating charges’ which is calculated as a percentage Index. of the opening net asset value per share (NAV). ‘Dilution adjustments’ are only in respect of direct portfolio transaction costs. Fund level performance

Fund net asset value 30.11.20 31.05.20 31.05.19 as at £'000 £'000 £'000 Fund net asset value (NAV) 468,583 446,907 511,085

15 16 M&G Index Tracker Fund Financial highlights

Historic yields for the current period are calculated as at 11 December Operating charges and portfolio transaction 2020. costs Sterling Class 'A' Accumulationshare performance We explain below the payments made to meet the ongoing costs of The share class was launched on 27 February 1998. investing and managing the fund, comprising operating charges and Six months to Year to Year to portfolio transaction costs. 30.11.20 31.05.20 31.05.19 Change in NAV per share UK p UK p UK p Opening NAV 121.24 135.04 140.68 Operating charges Return before operating charges and after Operating charges include payments made to M&G and to providers direct portfolio transaction costs 8.32 (13.19) (4.93) Operating charges (0.28) (0.61) (0.71) independent of M&G: Return after operating charges 8.04 (13.80) (5.64) • Annual charge: Charge paid to M&G covering the annual cost of M&G Distributions (1.48) (4.30) (5.06) managing and administering the fund and the costs of third parties providing services to the fund. From 1 August 2019, this charge rolls all Retained distributions 1.48 4.30 5.06 costs that make up the operating charges into one annual charge. Closing NAV 129.28 121.24 135.04 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 0.03 0.02 0.02 • Extraordinary legal and tax expenses: Costs that specifically relate to legal [a] Dilution adjustments (0.01) (0.02) (0.02) or tax claims that are both exceptional and unforeseeable. Such expenses are Total direct portfolio transaction costs 0.02 0.00 0.00 uncommon, and would not be expected in most years. Although they result in Performance and charges % % % a short-term cost to the fund, generally they can deliver longer term benefits Direct portfolio transaction costs [b] 0.03 0.00 0.01 for investors. Operating charges [c] 0.45 0.45 0.53 • Investment management: Charge paid to M&G for investment Return after operating charges +6.63 -10.22 -4.01 management of the fund. From 1 August 2019 this charge forms part of Historic yield 2.41 3.40 3.66 Effect on yield of charges offset against capital 0.00 0.00 0.00 the annual charge. • Other information Administration: Charge paid for administration services in addition to investment management – any surplus from this charge will be retained Closing NAV (£'000) 157,344 147,691 188,380 Closing NAV percentage of total fund NAV (%) 33.58 33.05 36.86 by M&G. From 1 August 2019 this charge is rolled into the annual Number of shares 121,707,633 121,815,006 139,499,585 charge. Highest share price (UK p) 130.36 150.01 143.03 • Oversight and other independent services: Charges paid to providers Lowest share price (UK p) 112.93 96.78 122.00 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 [b] As a percentage of average net asset value. into the annual charge. • [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.

17 18 M&G Index Tracker Fund Financial highlights

Operating charges Portfolio transaction costs Six These charges do not include portfolio transaction costs or any entry and months to Year to Year to 30.11.20 31.05.20 31.05.19 Average [a] exit charges (also known as initial and redemption charges). The charging Direct portfolio transaction costs [b] %%%% structures of share classes may differ, and therefore the operating charges Broker commission 0.00 0.00 0.00 0.00 may differ. Taxes 0.04 0.01 0.02 0.02 Operating charges are in line with the ongoing charges shown in the Key Costs before dilution adjustments 0.04 0.01 0.02 0.02 Investor Information Document, other than where there have been Dilution adjustments [c] (0.01) (0.01) (0.01) (0.01) extraordinary legal or tax expenses, or an estimate has been used for the Total direct portfolio transaction costs 0.03 0.00 0.01 0.01 ongoing charge because a material change has made the operating charges unreliable as an estimate of future charges. as at 30 November 30.11.20 31.05.20 31.05.19 Average [a] Indirect portfolio transaction costs %%%% Portfolio transaction costs Average portfolio dealing spread 0.11 0.14 0.08 0.11 Portfolio transaction costs are incurred by funds when buying and selling [a] Average of first three columns. investments. These costs vary depending on the types of investment, their [b] As a percentage of average net asset value. market capitalisation, country of exchange and method of execution. They [c] In respect of direct portfolio transaction costs. Please see the section above this are made up of direct and indirect portfolio transaction costs: table for an explanation of dilution adjustments. • Direct portfolio transaction costs: Broker execution commission and taxes. • 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 below 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. 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.

19 20

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