M&G Smaller Companies Fund a sub-fund of M&G Investment Funds (3)

Interim Short Report December 2020 For the six months ended 31 December 2020 M&G Smaller Companies Fund Fund information

The Authorised Corporate Director (ACD) of The COVID-19 pandemic is an unprecedented event and the M&G Investment Funds (3) presents its Interim Short Report for eventual impact on the global economy and markets will largely M&G Smaller Companies Fund which contains a review of the depend on the scale and duration of the outbreak. The ACD will fund’s investment activities and investment performance during continue to monitor this situation. the period. The ACD’s Interim Long Report and unaudited Financial Statements for M&G Investment Funds (3), incorporating Investment objective 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 The fund aims to deliver a higher total return (the combination of calling M&G Customer Relations on 0800 390 390. capital growth and income) than the Numis Smaller Companies Index (excluding Investment Companies), net of the ongoing An annual assessment report is available which shows the value charge figure, over any five year period. 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 context of the overall service delivered to its investors. The Investment policy report can be found at Atleast80%ofthefundisinvestedinUKsmallercompanies. https://www.mandg.co.uk/valueassessment These are UK listed companies which, at the initial time of purchase, are: ACD • in the bottom 10% (by market capitalisation) of the FTSE All- M&G Securities Limited, Share index, or 10 Fenchurch Avenue, London EC3M 5AG, UK • in the Numis Smaller Companies Index (excluding Investment Telephone: 0800 390 390 (UK only) Companies), or (Authorised and regulated by the Financial Conduct Authority. • listedontheAlternativeInvestmentMarket. M&G Securities Limited is a member of the Investment Association and of The Investing and Saving Alliance (formerly Tax The fund may also invest in collective investment schemes and Incentivised Savings Association)) other transferable securities. Cash and near cash may be held for ancillary purposes and derivatives, including warrants, may be Important information used for efficient portfolio management and hedging purposes. Investors will benefit from a reduction in the annual charge Investment approach starting from 15 February 2021. The reduction in annual charge varies across the M&G funds and the detail was communicated in The fund manager takes a bottom-up approach to stockpicking the shareholder letter dated 15 January 2021. and aims to construct a well-diversified portfolio. A long-term perspective is adopted with particular focus placed on ‘growth The World Health Organisation declared the COVID-19 outbreak a drivers’, competitive advantage, change, quality of management pandemic on 11 March 2020. and valuation. Global financial markets have been reacting to the outbreak. All When a company held by the fund grows such that it no longer markets have incurred increased volatility and uncertainty since has the characteristics of a smaller company, the fund manager the onset of the pandemic. will reduce the holding in a manner and timescale best suited to The ACD has also noted the operational risks that are posed to the meeting the fund’s objective. 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 Low risk High risk Investment Companies).

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 123456 7 is used to measure the fund’s performance and, together with the 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.

3 4 M&G Smaller Companies Fund Investment review

As at 4 January 2021, for the six months ended 31 December 2020 Performance review Following heavy falls in spring 2020 due to the emergence and Performance against objective spread of COVID-19, global stockmarkets rallied in early summer. Between 1 July 2020 (the start of the review period) and 4 January Sentiment was boosted by huge monetary and fiscal stimulus, 2021, the M&G Smaller Companies Fund delivered a positive total signs that the rate of infection may be slowing and hopeful reports return (the combination of income and growth of capital) across all of a vaccine or treatment for the virus. As the summer progressed, of its share classes. Fund performance was ahead of a a lack of progress in the Brexit negotiations dampened investors’ comparative index, the Numis Smaller Companies excluding mood, leading to weakness in the domestic stockmarket. Investment Companies Index, which returned 27.2%. Meanwhile, a resurgence of the virus in several countries, including the UK, led to the imposition of localised restrictions, The fund met its investment objective of delivering a higher total which threatened to derail the economic recovery and further return than the Numis Smaller Companies excluding Investment weighedonmarkets. Companies Index over any five year period for all share classes. The index returned 6.3% pa in the five years to 4 January 2021. In early November, the UK entered its second lockdown with the aim of curbing a second wave of the virus. Against a backdrop of For the performance of each share class, please refer to the pandemic-related economic damage and the UK’s imminent ‘Long-term performance by share class’ table in the 'Financial departure from the European Union (EU), the Bank of England highlights' section of the Interim Long Report and unaudited added to an already considerable bond-buying stimulus, Financial Statements for M&G Investment Funds (3). increasing it by a larger-than-expected £150 billion, which was To give an indication of the performance of the fund, the following well received by investors. table shows the compound rate of return, per annum, over the Global stockmarkets gained strongly in November due to positive period for Sterling Class ‘A’ (Accumulation) shares. Calculated on news on COVID-19 vaccines, followed by regulatory approval in a price to price basis with income reinvested. the UK for two of the vaccines in December. In addition, the US Long-term performance presidential election result was seen as supportive for markets and global trade. In the UK, investor sentiment also received a Share class Six Three Five Since boost from the finalising of the trade deal with the EU on months years years launch Christmas Eve. Towards the end of December, market sentiment 01.07.20 02.01.18 04.01.16 was dampened by the emergence of two highly infectious %a %pa %pa %pa coronavirus strains and the bulk of the UK moving into tighter Sterlingb restrictions. Shortly after the end of the period under review, the UK moved back into lockdown for the third time during the Class 'A' +28.1 +3.6 +8.0 +12.1c pandemic. a Absolute basis. The most recent gains in share prices easily outweighed earlier b Price to price with income reinvested. volatility and the fund performed strongly over the six-month c 27 September 1967, the end of the initial offer period of the predecessor period. Significant contributors to the fund’s performance unit trust. included digital marketing company Kin and Carta, Tyman, a supplier of engineered components to the door and window Please note past performance is not a guide to future industry, and Inspecs, a provider of frames for spectacles. performance and the value of investments, and the income from them, will fluctuate. This will cause the fund price to fall as well as Kin and Carta has increased its focus on digital transformation, a rise and you may not get back the original amount you invested. growing market that has been boosted by the pandemic. Tyman has strong cashflows and has upgraded its earnings expectations thanks to strong trading momentum. Meanwhile, Inspecs made

5 6 M&G Smaller Companies Fund Investment review

some acquisitions during the period that were well received by away from public transport. Another new holding, food investors. The deals have enabled the firm to expand its manufacturer Premier Foods, is benefiting as consumers eat at geographic reach and customer scope. home more, leading to stronger trading and the ability to reduce debt more quickly. Luxury watches retailer Watches of Switzerland Other contributors included IT support firm Computacenter, which was another entrant to the portfolio. The company has seen very benefited from an increased need for workers to access resilient trading on the back of pent-up demand. technology from home during the pandemic, as well as its exposure to large corporate customers. We also started a position in Volution, a provider of ventilation solutions for corporate and domestic settings. The company is Elsewhere, independent oil & gas exploration and development benefiting from the recovery in the housing market and increased firm Cairn Energy benefited from the higher oil price. In addition, a expenditure on energy efficient infrastructure. It also has a long-standing tax dispute with the Indian government was manufacturing turnaround plan that should improve profitability. resolved in its favour. Café bar chain Loungers added further value Software reseller Bytes Technology was another new entrant. due to the re-opening of cafés after the initial lockdown and the Bytes sells software to small- and medium-sized enterprises and government’s ‘Eat out to help out’ initiative, aimed at boosting the is trading strongly as companies increasingly invest in their IT economy. A holding in corporate foreign exchange specialist infrastructure. Convenience food manufacturer Greencore also Alpha FX was also helpful, with the firm upgrading its joined the portfolio during the period. Greencore’s food-to-go performance expectations thanks to strong trading. business is driven by people buying take-away sandwiches from In contrast, detractors from fund performance included RWS, convenience stores and travel-hubs. We supported the company’s which provides intellectual property and translation services. The financing measures based on our expectations of a return to holding in RWS had entered the portfolio in connection with its greater mobility once the pandemic is more under control. acquisition of language translation and content management firm In terms of disposals, we sold holdings in recruitment consultant SDL, an existing position in the portfolio. Shares in RWS declined PageGroup, whose shares have been fairly resilient, and pub following the deal and failed to participate in the rally late in the company Wetherspoons. In our opinion, prospects for PageGroup period. are difficult, given the challenging outlook for the economy and A holding in public services provider Serco Group also cost some employment. Similarly, the outlook for Wetherspoons has performance over the six months. Shares in the company drifted deteriorated in our view, and we feel there are better ways to lower following strong performance earlier in the year. The access the consumer market. Other disposals included James company’s leisure and transportation businesses also came under Fisher, as mentioned earlier. We sold the holdings in Softcat, a pressure due to the pandemic. value-added reseller of software products, and Blue Prism, a manufacturer of robotic process automation software, which have Other detractors included homeware retailer Dunelm and marine both performed well and in our opinion are close to fair value. engineering services firm James Fisher & Sons. Shares in Dunelm had performed strongly earlier in the year as the firm benefited Outlook from the population lockdown but the stock did not participate in the recent stockmarket rebound. Meanwhile, James Fisher was After a challenging year, we are cautiously optimistic as we enter hurt by COVID-19-related delays and excessive debt. 2021. In terms of Brexit, the UK has avoided a ‘no-deal’ scenario and the last-minute trade deal with the EU should provide greater Investment activities clarity. Three new vaccines against COVID-19 have been approved for use in the UK and an ambitious vaccination roll-out programme We continued to focus on investing in companies whose is under way, leading to hopes that a return to something prospects are likely to be strengthened, or not hampered, by the approaching normality may be feasible in the near to medium pandemic. For example, we started a new holding in bike supplier term. Halfords, which also has a motor accessories business. Halfords stands to benefit as people spend more time at home and shy

7 8 M&G Smaller Companies Fund Investment review

However, the timing of the economic recovery is uncertain and it is too early to gauge the longer lasting impact of the pandemic on individual sectors. Meanwhile, 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.

As always, we will continue to focus on good value opportunities in stocks that are structurally advantaged and currently misunderstood by investors. In our view, investors often take a short-term approach, rather than looking to the longer term, and this can present attractive opportunities for patient investors. We will also seek to identify companies that appear to be better placed to survive the current crisis and emerge as stronger businesses.

Garfield Kiff 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 Smaller Companies Fund Investment review

Classification of investments %offund The table below shows the percentage holding per sector. as at 31.12.20 30.06.20

% of fund Equities (continued) as at 31.12.20 30.06.20 Industrial engineering 1.25 1.47a Equities Industrial support services 12.48 10.57a Software & computer services 13.52 17.00a Industrial transportation 1.61 3.15 Technology hardware & equipment 2.04 1.93a Industrial metals & mining 2.26 2.39a Telecommunications equipment 0.76 0.73a Chemicals 3.21 2.31 Telecommunications service providers 1.30 1.54 Non-renewable energy 2.54 2.30 Medical equipment & services 0.00 0.96 Cash Equivalents Pharmaceuticals & biotechnology 0.26 0.00a 'AAA' rated money market fundsb 2.18 5.88 Finance & credit services 3.48 3.13 a The comparative sector weightings have been re-analysed to reflect a Investment banking & brokerage services 7.00 7.62 changes to the sector classifications. b Uncommitted surplus cash is placed into ‘AAA’ rated money market funds Non-life insurance 2.14 2.74 with the aim of reducing counterparty risk. Real estate investment & services 2.02 2.06

Real estate investment trusts 3.17 3.78

Consumer services 1.26 1.02

Household goods & home construction 4.23 3.50a

Leisure goods 1.08 0.91

Personal goods 3.31 0.91

Media 3.33 4.43a

Retailers 2.78 2.66

Travel & leisure 3.45 3.76

Beverages 2.05 2.16

Food producers 2.14 0.00

Personal care, drug & grocery stores 1.14 0.59a

Construction & materials 9.86 8.16

Aerospace & defence 2.99 3.50

General industrials 1.51 1.82

11 12 M&G Smaller Companies Fund Investment review

Top ten portfolio transactions Largest sales £’000 for the six months to 31 December 2020 Computacenter 5,846

Largest purchases £’000 Softcat 5,625

Premier Foods 5,354 Future 5,606

Watches of Switzerland 3,270 Polypipe 5,285

Volution 2,771 Sanne 4,958

Greencore 1,866 Ascential 4,563

Bytes Technology 1,704 James Fisher & Sons 4,482

IG Designa 1,466 SDL 4,385

Synairgena 1,296 Sabre Insurance 4,054

Lancashire 1,257 Dunelm 3,970

Inspecsa 1,241 Other sales 128,296 Vistry Group 1,195 Total sales 177,070

Other purchases 5,916 a AIM quoted. Total purchases 27,336 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 To give an indication of how the fund has performed since launch, Please note past performance is not a guide to future the chart below shows total return of Sterling Class ‘A’ performance and the value of investments, and the income from (Accumulation) shares. them, will fluctuate. This will cause the fund price to fall as well as rise and you may not get back the original amount you invested. September 1967 = 100, plotted monthly Chart date 4 January 2021 The following chart and tables reflect the key financial information of a representative share class, Sterling Class ‘A’ (Accumulation) 50,000 shares. As different share classes have different attributes, for 30,000 example charging structures and minimum investments, please be 20,000 aware that their performance may be different. For more 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 3,000 www.mandg.co.uk/prospectuses or by calling M&G Customer 2,000 Relations. 1,200 700 Fund level performance 400

Fund net asset value as at 31.12.20 30.06.20 30.06.19 200 £'000 £'000 £'000 100 Fund net asset value (NAV) 280,327 366,850 414,010 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 Historic yields for the current year are calculated as at Please note that the comparator benchmark’s total return is not 15 January 2021. available from fund launch. Therefore a ten-year comparable Sterling Class 'A' Accumulation share performance performance chart is shown below. The share class was launched on 27 September 1967. Ten years, 4 January 2011 = 100, plotted monthly Chart date 4 January 2021 Change in NAV per share Six months Year to Year to to 31.12.20 30.06.20 30.06.19 UK p UK p UK p 300 Opening NAV 836.30 921.63 949.64 Return before operating charges 226.70 (72.54) (13.18) 250 Operating charges (6.14) (12.79) (14.83) Return after operating charges 220.56 (85.33) (28.01)

200 Distributions 0.00 (4.42) (13.73) Retained distributions 0.00 4.42 13.73

160 Closing NAV 1,056.86 836.30 921.63 Direct transaction costs UK p UK p UK p

120 Costs before dilution adjustments 0.29 0.98 1.44 a 100 Dilution adjustments (0.29) (0.16) (0.05) 90 Total direct transaction costs 0.00 0.82 1.39 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Performance and charges % % % Sterling Class ‘A’ (Accumulation) shares* Direct portfolio transaction costsb 0.00 0.10 0.15 Numis Smaller Companies excluding Investment Companies Index Operating chargesc 1.35 1.38 1.66 Source: Morningstar, Inc. and M&G *Income reinvested Return after charges +26.37 -9.26 -2.95 Historic yield 0.00 0.53 1.50 To give an indication of how the fund has performed during the Other information period the table below shows the performance of Sterling Class Closing NAV (£'000) 33,742 27,767 33,354 ‘A’ (Accumulation) shares. Closing NAV (%) 12.04 7.57 8.06 All ‘Performance and charges’ percentages represent an annual Number of shares 3,192,612 3,320,255 3,619,045 rate except for the ‘Return after operating charges’ which is Highest share price (UK p) 1,065.39 1,102.81 965.67 calculated as a percentage of the opening net asset value per Lowest share price (UK p) 820.40 649.14 784.06 share (NAV). ‘Dilution adjustments’ are only in respect of direct portfolio transaction costs. a In respect of direct portfolio transaction costs. b 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 short- commission and taxes. term cost to the fund, generally they can deliver longer term • Indirect portfolio transaction costs: ‘Dealing spread’ – the 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: Ongoing charges on part of the dilution adjustment relating to direct portfolio holdings in underlying funds that are not rebated. From transaction costs. To give an indication of the indirect portfolio 1 August 2019 charges from underlying funds (excluding dealing costs the table also shows the average portfolio dealing Investment Trust Companies and Real Estate Investment spread. Trusts) will be 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

Direct Sixmonthsto Year to Year to Averagea portfolio 31.12.20 30.06.20 30.06.19 transaction %%%% costsb

Broker commission 0.01 0.02 0.03 0.02

Taxes 0.05 0.10 0.13 0.09

Costsbeforedilution 0.06 0.12 0.16 0.11 adjustments

Dilution adjustmentsc (0.06) (0.02) (0.01) (0.03)

Total direct portfolio 0.00 0.10 0.15 0.08 transaction costs

as at 31.12.20 30.06.20 30.06.19 Averagea Indirect portfolio % % % % transaction costs

Average portfolio 0.94 1.20 0.67 0.94 dealing spread 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

Email us with queries† [email protected]

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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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