M&G Investments Funds

M&G Investment Funds (2) Annual Long Report and audited Financial Statements for the year ended 31 May 2021 Contents Authorised Corporate Director’s Report ...... 1 Directors’ statement ...... 4 Depositary’s Responsibilities and Report...... 5 Independent Auditor’s Report ...... 6 Financial statements and notes...... 9 Authorised Corporate Director’s Reports, including the financial highlights and financial statements and notes for: M&G Gilt & Fixed Interest Income Fund...... 15 M&G Global High Yield Bond Fund ...... 36 M&G Index-Linked Bond Fund ...... 78 M&G Index Tracker Fund ...... 98 M&G Short Dated Corporate Bond Fund ...... 139 M&G UK Income Distribution Fund...... 164 M&G UK Select Fund ...... 204 Other regulatory disclosures ...... 238 Glossary ...... 239

Annual Long Report and audited Financial Statements • May 2021 Authorised Corporate Director’s Report

The Authorised Corporate Director (ACD) of A shareholder is not liable for the debts of the Company M&G Investment Funds (2) presents its Annual Long and will never be liable to make any further payment to Report and audited Financial Statements for the year the Company after paying the purchase price of the ended 31 May 2021. shares.

The audited financial statements of Fund managers M&G Investment Funds (2) and the investment report The following fund managers are employed by M&G FA and audited financial statements and notes of each Limited which is an associate of M&G Securities sub-fund are presented in their individual sections of Limited. this report as set out in the contents page. M&G Gilt & Fixed Interest Income Fund Please note that we have included an explanation of key Miles Tym investment terminology in the ‘Glossary’ (at the back of With effect from 2 November 2020, Miles Tym took over from Matthew this report). Russell as fund manager.

M&G Global High Yield Bond Fund Company information Stefan Isaacs & James Tomlins M&G Investment Funds (2) is an umbrella Open-Ended M&G Index-Linked Bond Fund Investment Company (OEIC) and contains seven Miles Tym sub-funds, hereinafter referred to as ‘funds’ in the rest With effect from 2 November 2020, Miles Tym took over from Ben Lord as of this report. Each fund is a UCITS (Undertakings for fund manager. Collective Investment in Transferable Securities) M&G Index Tracker Fund scheme as defined in the Collective Investment Richard O’Connor Schemes sourcebook, as issued (and amended) by the Financial Conduct Authority (FCA). This OEIC is an M&G Short Dated Corporate Bond Fund Investment Company with Variable Capital (ICVC) Matthew Russell incorporated under the Open-Ended Investment M&G UK Income Distribution Fund Companies Regulations 2001. It is authorised and Elina Symon regulated by the FCA under the Financial Services and With effect from 1 April 2021, Elina Symon took over from Michael Stiasny Markets Act 2000. as fund manager.

The Company was authorised on 1 August 2001 and M&G UK Select Fund was launched on 24 January 2002, following the Rory Alexander conversion of a series of authorised unit trusts. ACD The Company’s principal activity is to carry on business M&G Securities Limited, as an OEIC. The Company is structured as an umbrella 10 Fenchurch Avenue, London EC3M 5AG, UK company, and different funds may be established by Telephone: 0800 390 390 (UK only) the ACD from time to time with the agreement of the Depositary and approval from the FCA. The funds are (Authorised and regulated by the Financial Conduct operated separately and the assets of each fund are Authority. M&G Securities Limited is a member of the managed in accordance with the investment objective Investment Association and of The Investing and Saving and policy applicable to that fund. Alliance).

As at 31 May 2021 none of the funds held shares of the other funds within this OEIC.

Annual Long Report and audited Financial Statements • May 2021 1 Authorised Corporate Director’s Report

Directors of the ACD Important information N J Brooks*, C Dobson (non executive director), On 31 July 2020 the investment objective, policy, N M Donnelly**, S A Fitzgerald, P R Jelfs, approach and benchmark were changed for M&G UK M McGrade (non executive director), L J Mumford Income Distribution Fund. * Appointed 19 May 2021. ** Resigned 30 June 2020. On 15 December 2020 the following share classes were closed within the M&G UK Select Fund and are not Investment manager available for investment: Euro Class ‘A’ Accumulation M&G Investment Management Limited, and Euro Class ‘C’ Accumulation. 10 Fenchurch Avenue, London EC3M 5AG, UK Investors will benefit from a reduction in the annual Telephone: +44 (0)20 7626 4588 charge starting from 15 February 2021. The reduction in (Authorised and regulated by the Financial Conduct annual charge varies across the M&G funds and the Authority) detail was communicated in the shareholder letter Registrar dated 15 January 2021. SS&C Financial Services Europe Ltd, On 19 February 2021 the following share classes were SS&C House, St. Nicholas Lane, Basildon, Essex launched within the M&G UK Select Fund: Sterling SS15 5FS, UK Class ‘PP’ Income and Sterling Class ‘PP’ Accumulation. (Authorised and regulated by the Financial Conduct Authority) On 28 May 2021 the investment objective, policy, approach and benchmark for M&G Index Tracker Fund Depositary were changed. NatWest Trustee & Depositary Services Limited, The World Health Organisation declared the COVID-19 House A, Floor 0, 175 Glasgow Road, Gogarburn, outbreak a pandemic on 11 March 2020. EdinburghEH121HQ,UK (Authorised and regulated by the Financial Conduct The COVID-19 pandemic has been an unprecedented Authority) event. After an initial period of increased market volatility and uncertainty, there has been a marked Independent auditor recovery in global markets, bolstered by supportive Ernst & Young LLP economic policies from governments and positive news Atria One, 144 Morrison Street, Edinburgh EH3 8EX, UK on vaccines for COVID-19.

The ACD continues to monitor the ongoing operational Annual value assessment risks that are posed to the Company and its service providers due to global and local movement restrictions An annual assessment report is available which shows that have been enacted by various governments. the value 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 Investor information context of the overall service delivered to its investors. The Prospectus, Instrument of Incorporation, Key The report can be found at Investor Information Documents, costs and charges www.mandg.co.uk/valueassessment illustration, the latest Annual or Interim Investment Report and Financial Statements as well as a list of purchases and sales are available free of charge on request from the following addresses. The Instrument of Incorporation can also be inspected at our offices or attheofficeoftheDepositary.

2 Annual Long Report and audited Financial Statements • May 2021 Authorised Corporate Director’s Report

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

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

Telephone: 0800 390 390 (UK only)

For security purposes and to improve the quality of our service, we may record and monitor telephone calls. You will require your M&G client reference. Failure to provide this will affect your ability to transact with us.

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

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

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

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

Annual Long Report and audited Financial Statements • May 2021 3 Authorised Corporate Director’s Report

Authorised Corporate Director’s Responsibilities The Authorised Corporate Director (ACD) is required to prepare annual and interim long reports for the Company. The ACD must ensure that the financial statements, contained in this report, for each of the funds are prepared in accordance with the Investment Association Statement of Recommended Practice for Financial Statements of UK Authorised Funds (SORP) and UK Financial Reporting Standards, and give a true and fair view of the net revenue or expenses and net capital gains or losses for the accounting period, and the financial position at the end of that period.

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

Directors’ statement This report has been prepared in accordance with the requirements of the Collective Investment Schemes sourcebook, as issued and amended by the Financial Conduct Authority.

M&G Securities Limited 14 July 2021

4 Annual Long Report and audited Financial Statements • May 2021 Depositary’s Responsibilities and Report

Statement of the Depositary’s The Depositary also has a duty to take reasonable care to ensure that the Company is managed in accordance Responsibilities and Report of the with the Regulations and the Scheme documents in Depositary to the Shareholders of relation to the investment and borrowing powers M&G Investment Funds (2) (‘the applicable to the Company. Company’) for the year ended Having carried out such procedures as we consider necessary to discharge our responsibilities as 31 May 2021 Depositary of the Company, it is our opinion, based on The Depositary must ensure that the Company is the information available to us and the explanations managed in accordance with the Financial Conduct provided, that in all material respects the Company, Authority’s Collective Investment Schemes sourcebook, acting through the AFM: the Open-Ended Investment Companies Regulations i) has carried out the issue, sale, redemption and 2001 (SI2001/1228) (the OEIC Regulations), as cancellation, and calculation of the price of the amended, the Financial Services and Markets Act 2000, Company’s shares and the application of the as amended, (together ‘the Regulations’), the Company’s income in accordance with the Company’s Instrument of Incorporation and Prospectus Regulations and the Scheme documents of the (together ‘the Scheme documents’) as detailed below. Company, and The Depositary must in the context of its role act ii) has observed the investment and borrowing powers honestly, fairly, professionally, independently and in the and restrictions applicable to the Company. interests of the Company and its investors.

The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Company in accordance with the Edinburgh NatWest Trustee and Regulations. 14 July 2021 Depositary Services Limited The Depositary must ensure that:

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

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

• the value of shares in the Company is calculated in accordance with the Regulations;

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

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

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

Annual Long Report and audited Financial Statements• May 2021 5 Independent Auditor’s Report

Independent Auditor’s Report to We believe that the audit evidence we have obtained is sufficientandappropriatetoprovideabasisforour the shareholders of M&G opinion. Investment Funds (2) Conclusions relating to going concern Opinion In auditing the financial statements, we have concluded We have audited the financial statements of M&G that the Authorised Corporate Director’s (“the ACD”) Investment Funds (2) (“the Company”) comprising each use of the going concern basis of accounting in the of its sub-funds for the year ended 31 May 2021, which preparation of the financial statements is appropriate. comprise the Statement of Total Return, the Statement Based on the work we have performed, we have not of Changes in Net Assets Attributable to Shareholders, identified any material uncertainties relating to events the Balance Sheet, the related notes and the or conditions that, individually or collectively, may cast Distribution Tables, and the accounting policies of the significant doubt on the Company’s ability to continue Company, which include a summary of significant as a going concern for a period of 12 months from when accounting policies. The financial reporting framework the financial statements are authorised for issue. that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Our responsibilities and the responsibilities of the ACD Kingdom Generally Accepted Accounting Practice) with respect to going concern are described in the including FRS 102 ‘The Financial Reporting Standard relevant sections of this report. However, because not applicable to the UK and Republic of Ireland’. all future events or conditions can be predicted, this statement is not a guarantee as to the Company’s ability In our opinion, the financial statements: to continue as a going concern. • give a true and fair view of the financial position of the Company comprising each of its sub-funds as Other information at 31 May 2021 and of the net revenue/expense The other information comprises the information and the net capital gains/losses on the scheme included in the Annual Report other than the financial property of the Company comprising each of its statements and our auditor’s report thereon. The ACD is sub-funds for the year then ended; and responsible for the other information contained within the Annual Report. • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Our opinion on the financial statements does not cover Practice. the other information and, except to the extent otherwise explicitly stated in this report, we do not Basis for opinion express any form of assurance conclusion thereon. We conducted our audit in accordance with Our responsibility is to read the other information and, International Standards on Auditing (UK) (“ISAs (UK)”) in doing so, consider whether the other information is and applicable law. Our responsibilities under those materially inconsistent with the financial statements or standards are further described in the Auditor’s our knowledge obtained in the audit or otherwise responsibilities for the audit of the financial statements appears to be materially misstated. If we identify such section of our report below. We are independent of the material inconsistencies or apparent material Company in accordance with the ethical requirements misstatements, we are required to determine whether that are relevant to our audit of the financial statements this gives rise to a material misstatement in the financial in the UK, including the Financial Reporting Council’s statements themselves. If, based on the work we have (the “FRC”) Ethical Standard, and we have fulfilled our performed, we conclude that there is a material other ethical responsibilities in accordance with these misstatement of the other information, we are required requirements. to report that fact.

6 Annual Long Report and audited Financial Statements• May 2021 Independent Auditor’s Report

We have nothing to report in this regard. In preparing the financial statements, the ACD is responsible for assessing the Company’s ability to Opinions on other matters prescribed by continue as a going concern, disclosing, as applicable, therulesoftheCollectiveInvestment matters related to going concern and using the going Schemes sourcebook of the Financial concern basis of accounting unless the ACD either Conduct Authority (the “FCA”) intends to wind up or terminate the Company or to In our opinion: cease operations, or has no realistic alternative but to do so. • the financial statements have been properly prepared in accordance with the Statement of Auditor’s responsibilities for the audit of Recommended Practice relating to Authorised the financial statements Funds, the rules of the Collective Investment Our objectives are to obtain reasonable assurance Schemes Sourcebook of the Financial Conduct about whether the financial statements as a whole are Authority and the Instrument of Incorporation; and free from material misstatement, whether due to fraud • there is nothing to indicate that adequate or error, and to issue an auditor’s report that includes accounting records have not been kept or that the our opinion. Reasonable assurance is a high level of financial statements are not in agreement with assurance but is not a guarantee that an audit those records; and conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. • the information given in the ACD’s report for the Misstatements can arise from fraud or error and are financial year for which the financial statements considered material if, individually or in the aggregate, are prepared is consistent with the financial they could reasonably be expected to influence the statements. economic decisions of users taken on the basis of Matters on which we are required to report these financial statements. by exception Explanation as to what extent the audit We have nothing to report in respect of the following was considered capable of detecting matter in relation to which the Collective Investment Schemes Sourcebook of the Financial Conduct irregularities, including fraud Irregularities, including fraud, are instances of non- Authority requires us to report to you if, in our opinion: compliance with laws and regulations. We design • we have not received all the information and procedures in line with our responsibilities, outlined explanations which, to the best of our knowledge above, to detect irregularities, including fraud. The risk and belief, are necessary for the purposes of our of not detecting a material misstatement due to fraud is audit higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, Responsibilities of the ACD for example, forgery or intentional misrepresentations, As explained more fully in the ACDs responsibilities or through collusion. The extent to which our statement set out on page 4, the ACD is responsible for procedures are capable of detecting irregularities, the preparation of the financial statements and for including fraud is detailed below. However, the primary being satisfied that they give a true and fair view, and responsibility for the prevention and detection of fraud for such internal control as the ACD determines is rests with both those charged with governance of the necessary to enable the preparation of financial entity and management. statements that are free from material misstatement, whether due to fraud or error.

Annual Long Report and audited Financial Statements• May 2021 7 Independent Auditor’s Report

Our approach was as follows: • Due to the regulated nature of the Company, the Senior Statutory Auditor considered the • We obtained an understanding of the legal and experience and expertise of the engagement team regulatory frameworks that are applicable to the to ensure that the team had the appropriate Company and determined that the most significant competence and capabilities to identify non- are United Kingdom Generally Accepted compliance with the applicable laws and Accounting Practice the Investment management regulations. Association’s Statement of Recommended Practice (“IMA SORP”), the FCA Collective A further description of our responsibilities for the audit Investment Schemes Sourcebook, the OEIC of the financial statements is located on the Financial Regulations, the Company’s Instrument of Reporting Council’s website at https://www.frc.org.uk/ Incorporation and the Prospectus. auditorsresponsibilities . This description forms part of our auditor’s report. • We understood how the Company is complying with those frameworks through discussions with Use of our report the ACD and the Company’s administrators and a This report is made solely to the Company’s review of the Company’s documented policies and Shareholders as a body, pursuant to Paragraph 4.5.12 of procedures. the rules of the Collective Investment Schemes • We assessed the susceptibility of the Company’s Sourcebook of the Financial Conduct Authority. Our financial statements to material misstatement, audit work has been undertaken so that we might state including how fraud might occur by considering to the Company’s Shareholders those matters we are the risk of management override, specifically required to state to them in an auditor’s report and for management’s propensity to influence revenue no other purpose. To the fullest extent permitted by law, and amounts available for distribution. We we do not accept or assume responsibility to anyone identified a fraud risk with respect to the other than the Company and the Company’s incomplete or inaccurate income recognition Shareholders as a body, for our audit work, for this through incorrect classification of special report, or for the opinions we have formed. dividends and the resulting impact to amounts available for distribution. We tested the appropriateness of management’s classification of Edinburgh Ernst & Young LLP material special dividends as either a capital or 14 July 2021 Statutory Auditor revenue return and incorporated unpredictability into the nature, timing and extent of our testing.

• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved review of the reporting to the ACD with respect to the application of the documented policies and procedures and review of the financial statements to test compliance with the reporting requirements of the Company.

8 Annual Long Report and audited Financial Statements• May 2021 Financial statements and notes

The financial statements for M&G Investment Funds (2) b. Functional and presentational currency comprise the individual financial statements for each The functional and presentational currency of M&G fund and the notes below. Investment Funds (2) is UK sterling.

c. Exchange rates Notes to the financial statements Transactions in currencies other than each fund’s functional currency are translated at the rate of 1 Statement of compliance exchange ruling on the date of the transaction and The financial statements of M&G Investment Funds (2) where applicable assets and liabilities are have been prepared in compliance with UK Financial translated into the fund’s functional currency at the Reporting Standard 102 (FRS 102) and in accordance rate of exchange ruling as at 12 noon on 28 May with the Statement of Recommended Practice (SORP) 2021 being the last business day of the accounting for Authorised Funds issued by the Investment period. Association in May 2014 and amended in June 2017. Investments in all the funds have been subject to a 2 Summary of significant accounting fair value accounting adjustment at the balance policies sheet date and have been translated into the fund’s functional currency using the rate of a. Basis of preparation exchange ruling as at close of business on 31 May There are no material events that have been 2021. identified that may cast significant doubt on the Company’s ability to continue as a going concern d. Investments – recognition and valuation for the next twelve months from the date these The provisions of both Section 11 and Section 12 of financial statements are authorised for issue. The FRS 102 have been applied in full. All investments ACD believes that the Company has adequate have been designated as fair value through profit resources to continue in operational existence for and loss and recognised initially at fair value, which the foreseeable future and, following is normally the transaction price (excluding consideration of the impact of COVID-19 they transaction costs and accrued interest). continue to adopt the going concern basis in At the end of the reporting period all investments preparing the financial statements. The ACD has have been measured at their fair value using the made an assessment of each fund‘s ability to prices and the portfolio holdings determined at continue as a going concern which is made as at 12 noon on 28 May 2021, being the last valuation the date of issue of these financial statements and point of the accounting period. For all the funds, as considers liquidity, declines in global capital this is materially different from the valuation markets, investor intention, known redemption carried out at close of business on the balance levels, expense projections, key service provider’s sheet date, a fair value accounting adjustment has operational resilience, and the impact of COVID-19. been applied. No fair value adjustment was The financial statements of M&G Investment required for the previous reporting period as there Funds (2) are prepared on a going concern basis, was no material difference between the value of under the historical cost convention as modified by the investments at 12 noon on 29 May 2020 and the revaluation of certain financial assets and the valuation carried out at close of business on liabilities measured at fair value through profit or the balance sheet date. loss. Where separate bid and offer prices are available, the bid price is used for investment assets and the

Annual Long Report and audited Financial Statements• May 2021 9 Financial statements and notes

offer price for investment liabilities. Otherwise, the • Forward currency contracts, for share class single price or most recent transaction price is hedging and investment, are included at a used. Interest accrued is not included in the fair value determined by reference to current value. The methods of determining fair value for forward exchange rates for contracts with the principal classes of investment are: similar maturity profiles.

• Equities and debt securities which are traded e. Recognition of income and expenses on an active market are included at the • Dividends, including ordinary stock dividends, quoted price, which is normally the bid price, from equity investments are recognised when excluding any accrued interest in respect of the security is quoted ex-dividend. bonds. • Distributions from collective investment • Equities traded on the Alternative Investment schemes are recognised when the scheme is Market (AIM), whose liquidity cannot be priced ex-distribution. guaranteed, are included at their quoted bid • Interest on debt securities is recognised on an price as this represents the most objective effective interest rate basis. Bank interest is and appropriate method of valuation. recognised on an accruals basis. • Collective investment schemes operated by • Underwriting commission is recognised when the ACD are included at either their the issue takes place. cancellation price for dual priced funds or their single price for single priced funds. • Revenue from derivatives is recognised on an accruals basis. • Collective investment schemes operated by another manager are included at either their • Fee rebates from investing in other collective bid price for dual priced funds or their single investment schemes are recognised on an price for single priced funds. accruals basis.

• Other equities and debt securities which are • Expenses are recognised on an accruals unquoted or not actively traded on a quoted basis. market are included at a value estimated by f. Treatment of income and expenses the ACD using an appropriate valuation • Any increases or decreases in the fair value of technique, excluding any accrued interest in investments and gains and losses realised on respect of bonds. sales of investments are treated as capital • Exchange traded futures and options are and recognised in net capital gains/(losses). included at the cost of closing out the • The value of any enhancement to a stock contract at the balance sheet date. dividend is treated as capital. • Over the counter equity options, credit default • Ordinary equity dividends, including ordinary swaps, interest rate swaps, asset swaps and stock dividends are treated as revenue. inflation swaps are included at a value • Special dividends, share buy backs or provided by Markit Valuations Limited, an additional share issues may be treated as independent credit derivative price provider. revenue or capital depending on the facts of Their fair value excludes any accrued interest each particular case. in respect of derivatives where the income is revenue in nature.

10 Annual Long Report and audited Financial Statements• May 2021 Financial statements and notes

• Distributions from collective investment • Expenses relating to the purchase and sale of schemes are treated as revenue in nature, investments are treated as capital; all other except for any element of equalisation, which expenses are treated as revenue. represents the average amount of income • Rebates of charges from holdings in collective included in the price paid for the collective investment schemes are treated as revenue or investment scheme, which is treated as capital in accordance with the underlying capital. scheme’s distribution policy. • Debt security interest comprises the coupon g. Tax interest and the difference between the Dividends and similar income receivable are purchase price and the expected maturity recognised at an amount that includes any price spread over its expected remaining life. withholding tax but excludes irrecoverable tax This is treated as revenue with the difference credits. Any withholding tax suffered is shown as adjusting the cost of the shares and treated part of the tax charge. as capital. Tax is accounted for at the appropriate rate of • Other interest income, such as bank interest is corporation tax with relief for double taxation treated as revenue. taken where appropriate. The tax accounting • Underwriting commission is treated as treatment follows the principal amounts involved. revenue, except where the fund is required to Deferred tax is recognised in respect of temporary take up all or some of the shares timing differences that have originated but not underwritten, in which case a proportion of reversed by the balance sheet date. Deferred tax is the commission received is deducted from measured on a non-discounted basis, at the the cost of the shares and treated as capital. average rate of tax expected to apply in the period • Thetreatmentoftheincomeonderivative in which it expects the deferred tax to be realised contracts depends upon the nature of the or settled. A deferred tax asset is only recognised transaction. Both motive and circumstances to the extent that it is more likely than not that the are used to determine whether the returns asset will be recovered. should be treated as capital or revenue. Marginal tax relief has not been taken into account Where positions are undertaken to protect or in respect of expenses offset against capital. enhance capital, and the circumstances support this, the returns are recognised in net h. Allocation of returns to share classes capital gains; similarly where the motives and The annual charge, annual management charge, circumstances are to generate or protect any share class hedging returns and associated revenue, and the circumstances support this, share class hedging charge are directly the returns are included within net revenue attributable to individual share classes. All other before taxation. Where positions generate returns are apportioned to each fund‘s share total returns it will generally be appropriate to classes pro-rata to the value of the net assets of apportion such returns between capital and the relevant share class on the day that the income revenue to properly reflect the nature of the or expenses are recognised. transaction. All available net revenue accounted for in accordance with the above policies and adjusted where relevant by any specific distribution policies

Annual Long Report and audited Financial Statements• May 2021 11 Financial statements and notes

set out in the notes to that fund’s financial In measuring and monitoring market risk, the statements, is distributed to holders of Income global exposure of a fund may be calculated using shares or retained and reinvested for holders of a ‘commitment’ approach or ‘Value at Risk’ (VaR) Accumulation shares. Should expenses and approach. taxation together exceed revenue, there will be no b. Commitment approach distribution and the shortfall will be met from The commitment approach is applied for funds capital. investing only in traditional asset classes, namely Distributions which have remained unclaimed by equities, fixed income, money market instruments shareholders for more than six years are credited and collective investment schemes. to the capital property of the fund. In addition, the approach is applied for funds 3 Risk management policies which use or intend to use derivatives or instruments embedding derivatives, but only for The ACD is responsible for establishing, implementing efficient portfolio management purposes, or in a and maintaining an adequate and documented risk simple way not necessarily restricted to efficient management policy for identifying, measuring and portfolio management. managing all risks to which funds are or might be exposed. Under the commitment approach the global exposure of funds is measured and monitored The Company’s investment activities expose it to using a commitment (adjusted notional) various types of risk which are associated with the methodology. financial instruments and markets in which it invests; market risk, credit risk and liquidity risk. Market risk is considered on a daily basis and forms the foundation of investment oversight These financial statements are designed to enable analysis. This can include for each fund (but is not users to evaluate the nature and extent of those risks limited to) the analysis of factors such as fund and how they are managed. concentration; style, geographical, industry and The following risk management policies are applicable market capitalisation biases; active, systematic and to the funds, with specific risk disclosures set out in the specific risk measurements; active money; and notes to the financial statements of each fund. beta characteristics.

a. Market risk c. Value at Risk approach Market risk is the risk of loss resulting from The Value at Risk (VaR) approach is a methodology fluctuations in the market value of positions in a for estimating the maximum potential loss due to fund’s portfolio attributable to changes in market market risk based on historic market volatilities variables, such as interest rates, exchange rates, and correlations. More particularly, the VaR equity and commodity prices or an issuer’s approach gives a broad indication of the maximum creditworthiness. potential loss at a given confidence level In relation to market risk, processes are applied (probability), over a specific time period under that take account of the investment objective and normal market conditions. policy of each fund. All funds are subject to an Instrument and portfolio modelling techniques are investment oversight process in accordance with basedonmarketacceptedpracticesandare the type and nature of the fund. In addition all subject to regular internal audit (back-testing). funds are monitored for compliance within Market risk factors that are analysed include regulatory limits.

12 Annual Long Report and audited Financial Statements• May 2021 Financial statements and notes

LIBOR/swap rates, government yield curves, equity The table below shows funds using the ‘commitment’ prices, exchange rates, market volatility, credit approach and those using the ‘Value at Risk (VaR)’ spreads and credit default swap (CDS) spreads. approach:

The VaR model is based on a Monte Carlo process Fund Global exposure with actual VaR being reported on the basis of a approach

99% confidence interval over a one month period M&G Gilt & Fixed Interest Income VaR (20 business days). Risk factor history used in the Fund

Monte Carlo process is based on 250 business M&G Global High Yield Bond Fund VaR days. From the variance/covariance matrices, a M&G Index-Linked Bond Fund VaR parametric Monte Carlo scenario set of 5,000 simulations is derived and applied to the M&G Index Tracker Fund Commitment fund. M&G Short Dated Corporate Bond VaR Fund VaR does have limitations in its ability to present M&G UK Income Distribution Fund Commitment valid levels of risk in extreme market conditions. M&G UK Select Fund Commitment Accordingly, the Risk Analysis team also carries out monthly stress testing and scenario based d. Liquidity risk analysis. Stress testing allows for extreme sets of Liquidity risk is the risk that a fund’s holdings market circumstances which may not be reflected cannot be sold, liquidated or closed out at limited in historical data sets thereby enabling further cost in an adequately short time frame and that the assessment of combinations of market movements ability of the scheme to comply at any time with its which may cause serious damage to portfolio obligation to sell and redeem shares is thereby values. The key element to the scenario based compromised. analysis is challenging the correlation assumptions implicit within statistical based models such as The overall liquidity profile for each fund is VaR. reviewed and updated regularly. The liquidity profile takes into account investment, cashflow The stress test and scenario based analysis is and market liquidity considerations. customised for each fund type and the VaR analysis is produced on a daily basis. Investment liquidity considerations include an assessment of asset class liquidity conditions, liquidity of underlying holdings, portfolio construction and concentration, the scale of individual stock ownership and the nature of the investment strategy.

Cashflowliquidityismanagedineachfundona daily basis using reports that include subscription and redemption information as well as the impact of trading, derivative lifecycle events and corporate action activity. In addition to the daily reporting, the fund managers are provided with reporting that highlights the impact of reasonably predictable events in the portfolio, including an

Annual Long Report and audited Financial Statements• May 2021 13 Financial statements and notes

allowance for the potential future exposures that movements in credit spreads on individual stocks might result from derivative exposures. and baskets of securities. When a fund buys a credit default swap the default risk associated with Market (or distribution-related) considerations the underlying security transfers to the include an assessment of asset demand, fund counterparty. When a fund sells a credit default growth, client concentration and the persistency of swap the fund assumes the credit risk of the the client base. Supplementary to this, market underlying security. liquidity stress tests are carried out on a monthly basis for all funds.

e. Credit risk For funds exposed to credit risk, the credit rating, yield and maturity of each interest bearing security is considered to determine if the yield fully reflects the risk. The capital value of interest-bearing securities within the funds will fall in the event of the default or perceived increased credit risk of an issuer.

The capital value of interest-bearing securities withinafundmayalsobeaffectedbyinterestrate fluctuations such that when interest rates rise, the capital value of the interest-bearing securities is likely to fall and vice versa.

Funds investing in derivatives are exposed to counterparty risk. This is the risk that the other party to the transaction fails to fulfil their obligations, either by failing to pay or failing to deliver securities. To minimise this risk, carefully selected, financially strong and well-established counterparties are selected following a thorough due diligence review and collateral is posted daily (in the form of cash or high-quality government bonds). Derivative positions are valued on a mark- to-market basis (revalued to reflect prevailing market prices) daily and collateral moves from one counterparty to the other to reflect movements in the unrealised profit or loss. As a result, the maximum loss to the fund would be limited to that day’s price movements in affected derivatives contracts.

For funds in which they are used, credit default swaps are bought and sold in response to detailed credit research to take advantage of anticipated

14 Annual Long Report and audited Financial Statements• May 2021 M&G Gilt & Fixed Interest Income Fund Authorised Corporate Director’s Report

Investment objective Benchmark The fund aims to provide a higher total return (the Benchmark: FTSE Actuaries UK Conventional Gilts All combination of capital growth and income), net of the Stocks Index. ongoing charge figure, than that of the FTSE Actuaries The benchmark is a target which the fund seeks to UK Conventional Gilts All Stocks Index over any five- outperform. The index has been chosen as the fund’s year period. benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to Investment policy measure the fund’s performance and does not constrain the fund‘s portfolio construction. At least 70% of the fund is invested, directly or through derivatives, in investment grade short, medium and The fund is actively managed. long-dated gilts. These securities are issued or The fund manager has complete freedom in choosing guaranteed by the UK government, and denominated in which assets to buy, hold and sell in the fund. The sterling. fund’s holdings may deviate significantly from the Other investments may include transferable securities, benchmark’s constituents. cash, and near cash, directly or via collective investment For unhedged share classes, the benchmark is shown in schemes (including funds managed by M&G). the share class currency. Derivatives may be used for investment purposes, efficient portfolio management and hedging. Risk profile The fund invests in fixed income securities, or bonds, Investment approach issued by the UK government. It is, therefore, subject to The fund is diversified across a range of UK the price volatility of the UK government bond market. It government debt securities. The fund’s investment is also influenced by developments in the broader approach is based on the principle that returns from global government bond market. UK government bonds government bonds are driven by a combination of are highly liquid securities, meaning they are normally macroeconomic factors such as expectations on traded with relative ease. interest rates, inflation and economic growth. As The fund’s exposure to debt securities may be gained different factors dominate returns at different stages of through the use of derivatives. In association with the the economic cycle, the manager applies a flexible use of derivatives, including those instruments not investment approach, adjusting fund duration as traded through an exchange, collateral is deposited in deemed appropriate. order to mitigate the risk that a counterparty may The fund manager seeks to take advantage of ‘relative default on its obligations or become insolvent. value’ opportunities within the UK government bond Portfolio diversification is key in managing liquidity and market, which involves buying the bonds that offer the default risks as well as reducing market risk. The fund’s best value. risks are measured and managed as an integral part of Individual credit selection is carried out with the the investment process. assistance of an in-house team of credit analysts to complement the fund manager‘s views.

Annual Long Report and audited Financial Statements • May 2021 15 M&G Gilt & Fixed Interest Income Fund Authorised Corporate Director’s Report

The following table shows the risk number associated Performance review with the fund and is based on Sterling Class ‘A’ shares. UK government bonds (also known as gilts) delivered

Low risk High risk negative returns in the 12 months to the end of May 2021. Investors turned away from government bonds Typically lower rewards Typically higher rewards during periods of greater optimism regarding the economy and the progress of the coronavirus 1234 567 pandemic, leading to greater risk appetite at times, such as in August 2020. Other times, gilts were The above number: supported when investors turned to their perceived ‘safe haven’ characteristics during periods of • is based on the rate at which the value of the fund uncertainty – for example, when progress in the Brexit has moved up and down in the past and is based trade negotiations seemed unlikely. on historical data so may not be a reliable indicator ofthefutureriskprofileofthefund. Early summer 2020 saw signs that the rate of coronavirus infection was slowing and some lockdown • is not guaranteed and may change over time and restrictions in certain parts of the global economy were the lowest risk number does not mean risk free. eased, leading to improved risk appetite. This positive • has not changed during this period. mood turned more cautious later in the summer and autumn due to concerns about a second wave of the virus and the effect on prospects for the global Investment review economy. Uncertainty ahead of the US presidential As at 1 June 2021, for the year ended 31 May 2021 election also weighed on risk appetite in the autumn, Performance against objective with Joe Biden ultimately emerging victorious. Between 1 June 2020 (the start of the review period) In December, investor sentiment was supported by the and 1 June 2021, the M&G Gilt & Fixed Interest Income rapid rollout of the UK vaccination programme, although Fund’s Sterling Class ‘A’ and ‘I’ shares delivered a total the emergence of some highly infectious strains of the return (the combination of income and growth of virus caused unease and gilts gained over the month. A capital) of -7.9% and -7.7%, respectively. The fund was source of uncertainty for many months, the UK and behind its benchmark, the FTSE Actuaries UK European Union continued trade negotiations up to the Conventional Gilts All Stocks Index, which returned wire, finally securing a last-minute trade deal at the end -7.4% over the same period. of the year.

Over five years, the fund delivered a positive return, but In January, and more notably in February, yields in major did not meet its objective as the fund trailed the government bonds rose sharply (and prices fell) due to benchmark index, which returned 2.8% pa over this expectations of a significant fiscal stimulus in the US period. potentially leading to higher inflation. Greater optimism On 2 November 2020, Miles Tym was appointed fund regarding the economy and the generally smooth manager of the M&G Gilt & Fixed Interest Income Fund. rollout of vaccines in developed economies also The fund’s investment objective and policy remain contributed to the sell-off in government bonds. In unchanged. addition to previous significant rescue packages earlier in the pandemic, in the spring US President Biden duly For the performance of each share class, please refer pushed a US$1.9 trillion fiscal package through the to the ‘Long-term performance by share class’ table in Senate. the ‘Financial highlights’ section of this report.

16 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Authorised Corporate Director’s Report

Risky assets subsequently saw positive performance expressed annually as a percentage based on the due to an improvement in the economic outlook and investment’s cost, its current market value or face value. with the US Federal Reserve indicating they were in no Bond yields move inversely to bond prices.) More rush to roll back monetary stimulus. In the UK, the recently, we have moved duration to slightly government announced an extension to its furlough underweight, relative to the benchmark. scheme that pays 80% of employee’s wages until Following the change in fund manager, we sold longer- September, although at a lower rate from July. dated exposures to debt issued by companies, as we Nevertheless, gilts gained modestly in April. believed valuations had become increasingly expensive. The UK vaccination programme continued to proceed We will look for better opportunities in the future to re- positively and restrictions were partially eased in May, enter credit positions – as these loans are also known. although the emergence of a particularly transmissible We also reduced the fund’s exposure to 10-year variant of the virus tempered optimism to an extent. maturities and added back five- and 15-year maturities.

Against the backdrop of the third population lockdown, In January 2021, we added exposure to the 30-year gilts the UK economy shrank in the first three months of relative to the benchmark, as this part of the maturity 2021, but activity subsequently picked up once spectrum became cheaper ahead of an upcoming new restrictions eased, thanks to strong retail spending. issuance of gilts. However, the economy remains smaller than before the More recently, we started to increase risk in the fund by start of the pandemic. reducing the exposure to long-dated nominal gilts into UK consumer price inflation as measured by the more intermediate 15-year nominal gilts at attractive Consumer Prices Index (CPI) rose sharply to 1.5% in valuations. The economy is recovering strongly and we April 2021 from 0.7% the previous month, largely due to feel it is increasingly likely that the Bank of England will price rises being compared with falls at the start of the need to start reining in its supportive quantitative pandemic. In our view, inflation is likely to increase easing bond purchase programme, ending it altogether periodically in the short term due to supply disruptions by the end of the year. In our view, the removal of and imbalances between supply and demand in the support and the continued requirement of large and recovery phase of the economy. ongoing debt issuance programmes from the government will result in the long end of the market In the period under review, gilts with the longest time becoming cheaper. Continuing with this theme, we have until repayment (+15 years) declined the most (-13.1%), reduced the overall exposure to interest rate risk by while returns from gilts maturing in less than five years selling long-dated bonds into cash, as we expect were broadly flat. interest rates to move higher. Investment activities We will continue to focus on an active gilt-specific The fund has been positioned with lower sensitivity to approach and seek to take advantage of pricing movements in interest rates (in other words, it has a anomalies between gilts of differing maturities. shorter duration relative to the benchmark) for much of the past few years. However, in early 2020, we moved Outlook to a neutral duration stance in response to the provision The UK economy is starting to show signs of of huge support from the Bank of England, which improvement in the manufacturing and construction pledged to buy all the newly issued government debt. In sectors, despite having effectively been in lockdown our view, this move will put a cap on how far bond since November 2020. Economic activity has been yields will rise and we did not want to be short duration assisted by the successful vaccine rollout and steps by in this kind of environment. (Yields refer to the income companies to adapt to COVID-19 restrictions and the received from an investment. The yield is usually new post-Brexit environment.

Annual Long Report and audited Financial Statements • May 2021 17 M&G Gilt & Fixed Interest Income Fund Authorised Corporate Director’s Report

Given the huge increase in household savings during the course of the pandemic, there is expected to be a significant rise in consumer spending once the restrictions are lifted. However, a highly infectious strain of the virus, which was originally identified in India, is causing concern in the UK and may impede progress.

Longer term, the full impact of the pandemic on the economy may weigh on the recovery as government support ends, while the authorities are also likely to raise taxes to pay for the significant sums spent to bolster the economy.

Investors tend to turn to gilts during periods of volatility as they are seen as representing lower risk than other asset classes. We therefore believe that UK government bonds should prove attractive to investors in the event of any market volatility.

Miles Tym Fund manager

An employee of M&G FA Limited which is an associate of M&G Securities Limited. With effect from 2 November 2020, Miles Tym took over from Matthew Russell 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.

18 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income 518,743 97.50 98.63

Debt securities 518,743 97.50 98.63

‘AAA’ credit rated bonds 37,831 7.11 7.09

£3,500,000 FMS Wertmanagement 1.125% 07/09/2023 3,567 0.67

£28,000,000 KfW 1.125% 07/12/2021 28,136 5.29

£6,000,000 Nordic Investment Bank 1.125% 15/12/2023 6,128 1.15

‘AA’ credit rated bonds 480,912 90.39 87.87

£4,225,473 PRS Finance 1.75% 24/11/2026 4,453 0.84

£69,050,711 UK Treasury 0.125% 31/01/2024 68,995 12.97

£22,606,687 UK Treasury 0.125% 30/01/2026 22,380 4.20

£49,139,996 UK Treasury 0.25% 31/07/2031 45,971 8.64

£139,719,223 UK Treasury 0.625% 31/07/2035 130,202 24.47

£36,672,946 UK Treasury 0.625% 22/10/2050 30,611 5.75

£4,829,789 UK Treasury 0.875% 22/10/2029 4,886 0.92

£30,897,601 UK Treasury 0.875% 31/01/2046 27,985 5.26

£54,965,048 UK Treasury 1.25% 31/07/2051 54,097 10.17

£17,753,880 UK Treasury 1.625% 22/10/2054 19,365 3.64

£2,036,753 UK Treasury 1.75% 22/07/2057 2,330 0.44

£49,420,458 UK Treasury 3.75% 07/09/2021 49,906 9.38

£14,640,000 UK Treasury 4.25% 07/06/2032 19,731 3.71

Bondswithnocreditrating 0 0.00 3.67

Currency 0 0.00 (0.01)

Forward currency contracts 0 0.00 (0.01)

Portfolio of investments 518,743 97.50 98.62

Cash equivalents 12,151 2.28 0.57

‘AAA’ rated money market fundsa 12,151 2.28 0.57

12,151,000 Northern Trust Global Fund - Sterling 12,151 2.28

Totalportfolio(notes2c&2donpage9) 530,894 99.78 99.19

Net other assets/(liabilities) 1,154 0.22 0.81

Net assets attributable to shareholders 532,048 100.00 100.00

All securities are on an official stock exchange listing except where referenced. a Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk.

Annual Long Report and audited Financial Statements • May 2021 19 M&G Gilt & Fixed Interest Income Fund Financial highlights

Fund performance Long-term performance by share class To give an indication of the performance of the fund, Please note past performance is not a guide to future the following table shows the compound rate of return, performance and the value of investments, and the per annum, over the period. Calculated on a price to income from them, will fluctuate. This will cause the price basis with income reinvested. fund price to fall as well as rise and you may not get back the original amount you invested. Share One Three Five Since class year years years launch The following chart and tables reflect the key financial 01.06.20 01.06.18 01.06.16 information of a representative share class, Sterling %a %pa %pa %pa

Class ‘A’ (Accumulation) shares. As different share Sterlingb classes have different attributes, for example charging Class ‘A’ -7.9 +1.7 +2.0 +6.4c structures and minimum investments, please be aware d that their performance may be different. For more Class ‘I’ -7.7 +2.0 +2.3 +2.6 information on the different share classes in this fund a Absolute basis. b please refer to the Prospectus for M&G Investment Price to price with income reinvested. c 9 December 1980, the end of the initial offer period of the predecessor Funds (2), which is available free of charge either from unit trust. d our website at www.mandg.co.uk/prospectuses or by 3 August 2012, the launch date of the share class. calling M&G Customer Relations.

Fund level performance

Fund net asset value as at 31.05.21 31.05.20 31.05.19 £’000 £’000 £’000

Fund net asset value (NAV) 532,048 597,519 559,869

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

December 1980 = 100, plotted monthly Chart date 1 June 2021

3,000

2,000 1,500

1,000

700

500

300

200 150 120 100 90 81 8589 93 97 01 05 0913 17 21

Sterling Class ‘A’ (Accumulation) shares* FTSE Actuaries UK Conventional Gilts All Stocks Index

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

20 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial highlights

Operating charges and portfolio • Ongoing charges from underlying funds: Ongoing transaction costs charges on holdings in underlying funds that are We explain below the payments made to meet the not rebated. From 1 August 2019 charges from ongoing costs of investing and managing the fund, underlying funds (excluding Investment Trust comprising operating charges and portfolio transaction Companies and Real Estate Investment Trusts) will costs. be rebated.

• Administration: Charge paid for administration • Indirect portfolio transaction costs: ‘Dealing services in addition to investment management – spread’ – the difference between the buying and any surplus from this charge will be retained by selling prices of the fund’s investments; some M&G. From 1 August 2019 this charge is rolled into types of investment, such as fixed interest the annual charge. securities, have no direct transaction costs and only the dealing spread is paid. • Oversight and other independent services: Charges paid to providers independent of M&G for Investments are bought or sold by a fund when services which include depositary, custody and changes are made to the investment portfolio and in audit. From 1 August 2019 these charges will be response to net flows of money into or out of the fund paid by M&G and rolled into the annual charge. from investors buying and selling shares in the fund.

Annual Long Report and audited Financial Statements • May 2021 21 M&G Gilt & Fixed Interest Income Fund Financial highlights

To protect existing investors, portfolio transaction costs Sterling Class ‘A’ Income share incurred as a result of investors buying and selling performance shares in the fund are recovered from those investors The share class was launched on 9 December 1980. through a ‘dilution adjustment’ to the price they pay or receive. As the fund invests mainly in fixed interest fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p securities, the direct transaction costs paid on other Opening NAV 108.96 100.40 98.07 investments are too small to be reflected in the table below. To give an indication of the indirect portfolio Return before operating (7.82) 10.39 4.56 charges dealing costs the table below shows the average portfolio dealing spread. Operating charges (0.58) (0.63) (0.89) Return after operating (8.40) 9.76 3.67 Further information on this process is in the Prospectus, charges which is available free of charge on request either from Distributions (0.80) (1.20) (1.34) our website at www.mandg.co.uk/prospectuses or by calling M&G Customer Relations. Closing NAV 99.76 108.96 100.40 Direct transaction costs UK p UK p UK p Portfolio transaction costs Costs before dilution 0.00 0.00 0.00 adjustments as at 31 May 2021 2020 2019 Averagea Indirect portfolio %%% % Dilution adjustmentsa 0.00 0.00 0.00 transaction costs Total direct transaction costs 0.00 0.00 0.00 Average portfolio 0.05 0.13 0.07 0.08 dealing spread Performance and charges % % %

a Average of first three columns. Direct portfolio transaction 0.00 0.00 0.00 costsb

Operating chargesc 0.55 0.61 0.91

Specific share class performance Return after charges -7.71 +9.72 +3.74

The following tables show the performance of each Distribution yield 0.75 0.91 1.32 share class. All ‘Performance and charges’ percentages Other information represent an annual rate except for the ‘Return after Closing NAV (£’000) 26,215 32,599 33,890 operating charges’ which is calculated as a percentage of the opening net asset value per share (NAV). ‘Dilution Closing NAV (%) 4.93 5.46 6.05 adjustments’ are only in respect of direct portfolio Number of shares 26,277,140 29,918,429 33,755,518

transaction costs. Highest share price (UK p) 109.36 111.67 100.74

Lowest share price (UK p) 98.37 98.67 94.16

22 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial highlights

Sterling Class ‘A’ Accumulation share Sterling Class ‘I’ Income share performance performance The share class was launched on 9 December 1980. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 633.67 577.27 556.19 Opening NAV 1,247.12 1,146.29 1,116.92

Return before operating (45.62) 60.02 26.13 Return before operating (89.63) 118.86 51.99 charges charges

Operating charges (3.35) (3.62) (5.05) Operating charges (3.45) (4.29) (7.33)

Return after operating (48.97) 56.40 21.08 Return after operating (93.08) 114.57 44.66 charges charges

Distributions (1.31) (3.32) (2.65) Distributions (9.16) (13.74) (15.29)

Retained distributions 1.31 3.32 2.65 Closing NAV 1,144.88 1,247.12 1,146.29

Closing NAV 584.70 633.67 577.27 Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 0.00 0.00 0.01 adjustments Costs before dilution 0.00 0.00 0.00 adjustments Dilution adjustmentsa 0.00 0.00 0.00

Dilution adjustmentsa 0.00 0.00 0.00 Total direct transaction costs 0.00 0.00 0.01

Total direct transaction costs 0.00 0.00 0.00 Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.00 0.00 0.00 costsb Direct portfolio transaction 0.00 0.00 0.00 costsb Operating chargesc 0.29 0.36 0.66

Operating chargesc 0.55 0.61 0.91 Return after charges -7.46 +9.99 +4.00

Return after charges -7.73 +9.77 +3.79 Distribution yield 0.75 0.91 1.32

Distribution yield 0.20 0.36 0.43 Other information

Other information Closing NAV (£’000) 27,307 35,316 37,391

Closing NAV (£’000) 371,348 390,008 335,149 Closing NAV (%) 5.13 5.91 6.68

Closing NAV (%) 69.80 65.27 59.86 Number of shares 2,385,107 2,831,768 3,261,897

Number of shares 63,510,666 61,547,258 58,057,391 Highest share price (UK p) 1,251.90 1,277.47 1,150.22

Highest share price (UK p) 635.98 647.83 577.27 Lowest share price (UK p) 1,128.71 1,128.76 1,073.32

Lowest share price (UK p) 575.51 572.38 535.78

Annual Long Report and audited Financial Statements • May 2021 23 M&G Gilt & Fixed Interest Income Fund Financial highlights

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

for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p

Opening NAV 1,360.23 1,236.08 1,187.96

Return before operating (98.04) 128.80 55.96 charges

Operatingcharges (3.77) (4.65) (7.84)

Return after operating (101.81) 124.15 48.12 charges

Distributions (6.26) (10.31) (8.63)

Retained distributions 6.26 10.31 8.63

Closing NAV 1,258.42 1,360.23 1,236.08

Direct transaction costs UK p UK p UK p

Costs before dilution 0.00 0.00 0.01 adjustments

Dilution adjustmentsa 0.00 0.00 0.00

Total direct transaction costs 0.00 0.00 0.01

Performance and charges % % %

Direct portfolio transaction 0.00 0.00 0.00 costsb

Operating chargesc 0.29 0.36 0.66

Returnaftercharges -7.48 +10.04 +4.05

Distribution yield 0.50 0.61 0.68

Other information

Closing NAV (£’000) 107,178 139,596 153,439

Closing NAV (%) 20.14 23.36 27.41

Number of shares 8,516,848 10,262,745 12,413,361

Highest share price (UK p) 1,365.44 1,389.85 1,236.07

Lowest share price (UK p) 1,237.69 1,228.05 1,145.41

24 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 (46,980) 51,595

Revenue 5 4,342 6,703

Expenses 6 (2,720) (3,052)

Net revenue/(expense) before taxation 1,622 3,651

Taxation 7 22 (20)

Net revenue/(expense) after taxation 1,644 3,631

Total return before distributions (45,336) 55,226

Distributions 8 (1,897) (3,957)

Change in net assets attributable to shareholders from (47,233) 51,269 investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 597,519 559,869

Amounts received on issue of shares 39,166 104,658

Amounts paid on cancellation of shares (58,855) (121,580)

(19,689) (16,922)

Dilution adjustments 35 110

Change in net assets attributable to shareholders from (47,233) 51,269 investment activities (see above)

Retained distributions on Accumulation shares 1,415 3,192

Unclaimed distributions 11

Closing net assets attributable to shareholders 532,048 597,519

Annual Long Report and audited Financial Statements • May 2021 25 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 518,743 589,314

Current assets

Debtors 9 1,494 5,008

Cash and bank balances 10 431 162

Cash equivalents 12,151 3,393

Total assets 532,819 597,877

Liabilities

Investment liabilities 0(36)

Creditors

Distribution payable (94) (170)

Other creditors 11 (677) (152)

Total liabilities (771) (358)

Net assets attributable to shareholders 532,048 597,519

26 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

2 Distribution policy In determining the amount available for distribution to Income shares, the annual charge is offset against capital, increasing the amount available for distribution whilst restraining capital performance to an equivalent extent.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities (47,573) 55,051

Derivative contracts 595 (3,420)

Currency gains/(losses) (2) (36)

Net capital gains/(losses) (46,980) 51,595

4 Portfolio transactions and associated costs The following tables show portfolio transactions and their associated transaction costs. For more information about the nature of the costs please see the section on ‘Operating charges and portfolio transaction costs’ on pages 21 to 22.

2021 2020 for the year to 31 May £’000 £’000

a) Purchases

Debt securitiesa 1,135,937 616,637

b) Sales

Debt securities 1,152,051 628,280

2021 %of 2020 %of £’000 average NAV £’000 average NAV

c) Direct portfolio transaction costs

Commissions paid

Derivatives 0 0.00 1 0.00

Taxes paid

Derivatives 0 0.00 1 0.00

Total direct portfolio transaction costs 0 0.00 2 0.00

Annual Long Report and audited Financial Statements • May 2021 27 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

d) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.05 0.13

a These transaction types do not attract direct portfolio transaction costs. b Average portfolio dealing spread at the balance sheet date.

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 110

Derivative revenue (3) (34)

Interest distributions 324

Interest on debt securities 4,336 6,701

Rebate of ongoing charges from underlying funds 5 2

Total revenue 4,342 6,703

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 2,726 2,279

Annual management chargea 0620

Administration chargea 0140

2,726 3,039

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 06

Other expenses

Audit fee (including VAT)a 02

Interest payable (4) 4

Safe custody chargea (2) 1

(6) 7

Total expenses 2,720 3,052

a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019. As of 1 August 2019 these charges have been replaced by the single annual charge. Audit fees for the financial year ending 2021 were £11,000 (2020: £11,000) (including VAT), which are covered by the annual charge.

28 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax (22) 20

Deferred tax (note 7c) 00

Total taxation (22) 20

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 1,622 3,651

Corporation tax at 20% 324 730

Effects of:

Interest distributions (324) (730)

Withholding tax (22) 20

Total tax charge (note 7a) (22) 20

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset in the current financial year (2020: same). 8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Interest distributions £’000 £’000 £’000 £’000

First interim 148 583 221 687

Second interim 134 472 207 984

Third interim 83 110 181 842

Final 94 250 170 679

Total net distributions 1,874 3,971

Income deducted on cancellation of shares 38 103

Income received on issue of shares (15) (117)

Distributions 1,897 3,957

Net revenue/(expense) per statement of total return 1,644 3,631

Expenses offset against capital 253 326

Distributions 1,897 3,957 a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

Annual Long Report and audited Financial Statements • May 2021 29 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

9Debtors

2021 2020 as at 31 May £’000 £’000

Debt security interest receivable 1,494 5,006

Distributions receivable 02

Total debtors 1,494 5,008

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Cash held as bank balances 431 162

Total cash and bank balances 431 162

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 602 50

Annual charge payable 75 86

Bank overdraft interest payable 04

Expenses payable 012

Total other creditors 677 152

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

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

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 29,918,429 717,691 (4,358,980) 26,277,140

Class ‘A’ Accumulation 61,547,258 5,681,565 (3,718,157) 63,510,666

Class ‘I’ Income 2,831,768 36,652 (483,313) 2,385,107

Class ‘I’ Accumulation 10,262,745 228,865 (1,974,762) 8,516,848

30 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 14.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 0.55 0.55

Class ‘I’ 0.30 0.25 a The amounts shown are the maximum annual charge. M&G will apply a discount of 0.02% for every £1 billion of a fund’s net asset value. This is assessed quarterly and implemented on a forward basis no later than 13 business days after quarter end.

15 Related parties M&G Securities Limited, as Authorised Corporate Director (ACD), is a related party and acts as principal on all the transactions of shares in the fund except with in specie transactions, where M&G Securities Limited acts as an agent. The aggregate monies received through issues, and paid on cancellations, are disclosed in the ‘Statement of change in net assets attributable to shareholders’ and note 8. Amounts due to/from M&G Securities Limited in respect of share transactions at the year end are disclosed in notes 9 and 11 where applicable.

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

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 57.25% (2020: 52.32%) of the fund’s shares.

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

17 Fair value analysis Financial instruments have been measured at their fair value and have been classified below using a hierarchy that reflects the significance of the inputs used in measuring their fair value:

Level 1: Unadjusted quoted price in an active market for an identical instrument This includes instruments such as publicly traded equities, highly liquid bonds (e.g. Government bonds) and exchange traded derivatives (e.g. futures) for which quoted prices are readily and regularly available.

Level 2: Valuation technique using observable market data This includes instruments such as over-the-counter (OTC) derivatives, debt securities, convertible bonds, mortgage-backed securities, asset-backed securities and open-ended funds which have been valued using models with observable market data inputs.

Annual Long Report and audited Financial Statements • May 2021 31 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

Level 3: Valuation technique using unobservable inputs This refers to instruments which have been valued using models with unobservable data inputs. This includes single broker-priced instruments, suspended/unquoted securities, private equity, unlisted closed-ended funds and open-ended funds with restrictions on redemption rights. However no such financial instruments were held.

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 476,459 0 504,716 0

Level 2 42,284 0 84,598 (36)

Level3 0000

518,743 0 589,314 (36)

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

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

19 Market risk sensitivity and exposure VaR is the risk measurement methodology used to assess the fund’s leverage and market risk volatility. When VaR is calculated as a percentage of the net asset value it may not be greater than the VaR limit set for the fund.

The VaR limit set during the financial year to 31 May 2021 was 18% (2020: 15%).

The lowest, highest and average VaR, as well as utilisation of VaR with reference to the limit above, are calculated during the financial years ended 31 May 2021 and 31 May 2020.

for the year to 2021 2021 2020 2020 31 May %ofVaR Utilisation %ofVaR Utilisation of VaRa of VaRa 18% 15%

Lowest 4.77 26.50 2.99 19.93

Highest 7.47 41.50 8.18 54.53

Average 5.91 32.82 4.44 29.62

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

32 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

20 Credit risk The fund is exposed to credit risk both through the credit quality of the investments it holds and through the derivative positions with counterparties. The table below shows the credit quality of the investments held in the portfolio.

2021 2020 as at 31 May £’000 £’000

Investment grade securities 518,743 567,360

Unrated securities 0 21,952

Other investments 0(34)

Total 518,743 589,278

The table below shows the exposure to counterparties. Collateral is posted daily, in the form of cash or high-quality government bonds, to minimise this exposure. There is no exposure to counterparties to disclose for the current year.

Forward currency contracts as at 31 May 2020 £‘000

Barclays Bank (31)

HSBC (8)

National Australia Bank 4

Standard Chartered Bank 1

State Street Bank 1

UBS (1)

Total (34)

21 Leverage risk Funds using VaR approaches are required to disclose the level of leverage employed during the financial reporting period.

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

The lowest, highest and average level of leverage employed and utilisation of the leverage level calculated during the financial years ended 31 May 2021 and 31 May 2020 are disclosed in the table below.

for the year to 2021a 2021a 2020a 2020a 31 May £’000 %b £’000 %b

Lowest 0 0.00 0 0.00

Highest 56,896 9.48 67,905 12.00

Average 8,865 1.50 20,383 3.60 a Leverage has been calculated using the Gross Sum of Notional Approach for derivative positions only (including forward currency contracts) and excludes all physical holdings. b Expressed as a percentage over fund valuation.

Annual Long Report and audited Financial Statements • May 2021 33 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

22 Interest distribution tables This fund pays quarterly interest distributions and the following table sets out the distribution periods.

Quarterly distribution periods

Start End Xd Payment

First interim 01.06.20 31.08.20 01.09.20 31.10.20

Second interim 01.09.20 30.11.20 01.12.20 31.01.21

Third interim 01.12.20 28.02.21 01.03.21 30.04.21

Final 01.03.21 31.05.21 01.06.21 31.07.21

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

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

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

Sterling Class ‘A’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.0807 0.1657 0.2464 0.3220

Second interim 0.0918 0.1390 0.2308 0.3166

Third interim 0.0392 0.1074 0.1466 0.2904

Final 0.0775 0.0980 0.1755 0.2731

Sterling Class ‘A’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.3060 0.2856 0.5916 0.7380

Second interim 0.0848 0.3833 0.4681 1.0020

Third interim 0.0104 0.0310 0.0414 0.8701

Final 0.1196 0.0849 0.2045 0.7082

34 Annual Long Report and audited Financial Statements • May 2021 M&G Gilt & Fixed Interest Income Fund Financial statements and notes

Sterling Class ‘I’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 1.3577 1.4637 2.8214 3.6770

Second interim 1.2175 1.4269 2.6444 3.6169

Third interim 0.7150 0.9667 1.6817 3.3225

Final 0.9862 1.0255 2.0117 3.1237

Sterling Class ‘I’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 1.0760 1.0155 2.0915 2.3425

Second interim 0.6989 1.1636 1.8625 2.9393

Third interim 0.3762 0.5312 0.9074 2.6579

Final 0.7542 0.6458 1.4000 2.3733

Annual Long Report and audited Financial Statements • May 2021 35 M&G Global High Yield Bond Fund Authorised Corporate Director’s Report

Investment objective environment, including the likely path of economic growth, inflation and interest rates. The fund aims to provide a higher total return (the combination of capital growth and income), net of the Individual credit selection is carried out with the ongoing charge figure, than that of the ICE BofAML assistance of an in-house team of credit analysts to Global High Yield Index (GBP Hedged) over complement the fund manager‘s views. any five-year period. Benchmark Investment policy Benchmark: ICE BofAML Global High Yield Index (GBP At least 80% of the fund is invested, directly or Hedged). indirectly through derivatives, in below investment The benchmark is a target which the fund seeks to grade corporate debt securities. These securities can outperform. be issued by companies from anywhere in the world, including emerging markets. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment Other investments may include: policy. The benchmark is used solely to measure the • asset-backed securities; and fund’s performance and does not constrain the fund‘s portfolio construction. • other transferable securities, government bonds, cash, and near cash, directly or via collective The fund is actively managed. investment schemes (including funds managed by The fund manager has complete freedom in choosing M&G). which investments to buy, hold and sell in the fund. The There are no credit quality restrictions applicable to the fund’s holdings may deviate significantly from the fund‘s investments. benchmark’s constituents.

The fund aims to hedge any non-sterling assets back to For unhedged share classes, the benchmark is shown in sterling. the share class currency.

Derivatives may be used for investment purposes, For currency hedged share classes, the benchmark is efficient portfolio management and hedging. hedged to the share class currency.

Investment approach Risk profile The fund is globally diversified across a range of below The fund invests mainly in higher yielding fixed income investment grade (high yield) debt securities from a securities, which may be denominated in sterling, variety of sectors and geographies. The fund manager European currencies and other major global currencies. focuses on the analysis of individual bond issues while It is, therefore, subject to the price volatility of the remaining aware of macroeconomic developments. global bond market as well as the performance of Emphasis is placed upon investigating the ability of a individual issuers. In addition, the fund is subject to bond issuer to meet its interest payments, especially fluctuations in currency exchange rates. during unfavourable economic conditions. The fund’s focus on higher yielding debt securities The fund manager has the flexibility to adjust the fund’s implies that it may experience greater volatility than a credit exposure, sector positioning and regional fund that invests primarily in investment grade debt allocations depending on the assessment of current market valuations and the macroeconomic

36 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Authorised Corporate Director’s Report

securities as higher risk assets could potentially Over five years, the fund delivered a positive return, but experience a degree of illiquidity in times of market did not meet its objective as the fund trailed the distress. benchmark index, which returned 6.0% pa over this period. The fund’s exposure to debt securities may be gained through the use of derivatives. In association with the For the performance of each share class, please refer use of derivatives, including those instruments not to the ‘Long-term performance by share class’ table in traded through an exchange, collateral is deposited in the ‘Financial highlights’ section of this report. order to mitigate the risk that a counterparty may Performance review default on its obligations or become insolvent. During the 12 months under review, high yield bond Portfolio diversification is key in managing liquidity and markets continued to enjoy a significant performance default risks as well as reducing market risk. The fund’s recovery following the COVID-19-induced sell-off just risks are measured and managed as an integral part of before the start of the review period in March 2020. The the investment process. onset of the pandemic caused one of the most volatile periods ever for risk assets. However, uncertainty and The following table shows the risk number associated volatility gradually eased as a strong recovery in with the fund and is based on Sterling Class ‘A’ shares. financial markets took hold, despite social restrictions Low risk High risk and national lockdowns causing immense economic damage around the world. Typically lower rewards Typically higher rewards High yield bonds are loans paying fixed interest issued 1234 567 by companies with a low credit rating. Credit ratings are independent assessments of a borrower’s ability to The above number: repay loans. Bonds from low-rated companies are considered riskier than those issued by companies with • is based on the rate at which the value of the fund a high credit rating. They therefore pay a higher rate of has moved up and down in the past and is based interest than their higher-rated counterparts, to on historical data so may not be a reliable indicator compensate investors for the greater possibility that the ofthefutureriskprofileofthefund. issuer might be unable to meet its obligations, or in • is not guaranteed and may change over time and other words, default. the lowest risk number does not mean risk free. The yield refers to the interest received from a bond • has not changed during this period. and is usually expressed annually as a percentage based on the investment’s cost, its current market value Investment review or its face value. The unprecedented levels of government and central As at 1 June 2021, for the year ended 31 May 2021 bank support seen in many developed countries Performance against objective contributed to a rapid reversal in investor sentiment for Between 1 June 2020 (the start of the review period) risk assets throughout much of 2020, despite a slew of and 1 June 2021, the M&G Global High Yield Bond Fund extremely poor economic data that reflected the delivered a positive total return (the combination of severity of the COVID-19 crisis. High yield bond income and growth of capital) across its sterling share valuations increased, as falling infection and death classes. The fund lagged its benchmark, the ICE rates and a reprioritisation towards reopening BofAML Global High Yield Index (GBP Hedged), which economies buoyed market sentiment. At times, the returned 14.2% over the same period. market seemed somewhat at odds with some of the

Annual Long Report and audited Financial Statements • May 2021 37 M&G Global High Yield Bond Fund Authorised Corporate Director’s Report

corporate default rate forecasts, As a result, we were compensation when investing in more cyclical and not willing to add excessive market risk in the fund. lower-rated parts of the market. In many cases, we didn’t feel sufficiently compensated for the level of risk A resurgence in COVID-19 cases in the autumn and present in many cyclical credits in the CCC rated space, winter months (and the subsequent return of which is why we focused our cyclical exposure on restrictions on individuals and businesses) and stalling issuers with healthy balance sheets or on new debt US stimulus negotiations caused some credit market issues with a stronger overall security package. volatility to return. However, all risk markets received a significant boost in November following news of The fund maintained a smaller duration than that of the successful COVID-19 vaccine trials, followed by news of benchmark throughout much of the period. (Duration is an increased likelihood of a more market-friendly US a measure of the sensitivity of a fixed income security election outcome. High yield bonds moved into positive (bond) or bond fund to changes in interest rates. The territory on a year-to-date basis, capping an impressive longer a bond or bond fund’s duration, the more recovery. Decisive government and central bank policy sensitive it is to interest rate movements.) This action, a relatively muted default environment and the supported the fund’s performance as US and other smoothing effect of bond coupons all helped to support government bond yields started rising at the start of returns during the period. 2021. However, CCC rated issuers also performed well during the first quarter of 2021, and this is an area The main theme within bond markets at the start of where we maintained our cautious approach, 2021 was a sharp steepening of the US Treasury yield hampering the fund’s relative returns somewhat. curve as fresh fiscal stimulus measures and the rapid rollout of vaccination programmes began to heighten Investment activities expectations of higher short-term economic growth Given the huge levels of uncertainty surrounding the and inflation. This acted as a headwind for most fixed pandemic and the economic recovery, and the rapid income assets, although the performance of global high recovery in bond valuations, we decided to maintain a yield bonds remained remarkably resilient during the cautious stance throughout much of the recovery phase period, thanks to their lower sensitivity to rising US in 2020 – underweight cyclical sectors, emerging yields. A vaccine-fuelled rebound in the global economy markets and CCC rated debt. This acted as a drag on and a commodity market rally continued to support returns at times, although as a resurgence in COVID- investors’ appetite for the asset class into the early 19 cases gathered pace in the autumn and national summer months. lockdowns returned, some of our more defensive exposure benefited fund performance. The fund delivered a strongly positive return across its share classes over the 12-month review period, but it We remained more selective at the lower end of the underperformed its benchmark, the ICE BofAML Global credit rating scale as we were not wholly convinced that High Yield Index (GBP Hedged). the interventions of the authorities could save the capital structures of some companies. We have kept In essence, the fund did not capture the rebound in overall market risk close to the benchmark but have credit markets to the same extent as the benchmark, selectively added to cyclical areas of the market when largely as a result of its more cautious stance. We we felt adequately compensated for taking on proceeded with caution throughout much of the period, additional risk. and having a tilt towards defensive sectors such as healthcare and packaging businesses held us back Given the success of government and central bank from fully participating in the recovery at times. We policy intervention, and with vaccine progress didn’t avoid other sectors entirely but, largely driven by becoming clearer, we started to add more cyclical our bottom-up process, we required a higher level of issuers as the period progressed. For example, we

38 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Authorised Corporate Director’s Report

gradually reduced our below-benchmark exposure to Stefan Isaacs & James Tomlins the US market by participating in some attractively Co-fund managers priced US new issue deals. We also partially closed out Employees of M&G FA Limited which is an associate of M&G Securities our below-benchmark exposure to cyclical ‘fallen Limited. angels’ – investment grade issuers that had been 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 downgraded to high yield bond status. 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 We began positioning the fund to take advantage of a Financial Adviser. potential rebound in economic growth in the new year; for example, we purchased issuers such as UK retailer Matalan and health club provider PureGym. We also began to reduce our below-benchmark exposure to the quickly rebounding energy sector. Around the same time, we participated in several new issues in the primary market, including TI Automotive, Altice, Tereos, United Airlines, US Salt, Dufry, Oriflame and Center Parcs. Generally speaking, these were names we expected to benefit from the continued reopening of many developed market economies.

Outlook Going forward, we continue to see what in our view are several supportive factors for high yield bonds as an asset class. Firstly, a benign environment for corporate defaults and a strong post-pandemic outlook remain firmly in place. In other words, the backdrop for companies still looks attractive. Secondly, assets that can provide a yield over and above the rate of inflation are becoming increasingly attractive to investors in the current environment. Lastly, demand remains strong for fixed income assets that are less sensitive to government bond sell-offs (high yield bonds have some sensitivity, but are generally much less sensitive than investment grade and government bonds). However, these factors need to be carefully balanced with valuation-related risks, given that bond valuations have recovered a lot of their ground over the past year. We believe an active investment approach remains paramount in this environment to ensure the risk/ reward profiles of companies are correctly assessed and companies with improving credit fundamentals are selected where this information is not yet reflected in bond prices.

Annual Long Report and audited Financial Statements • May 2021 39 M&G Global High Yield Bond Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities 0 0.00 0.01

377 Chaparral Energy Warrants 01/10/2024 0 0.00

377 Chaparral Energy Warrants 01/10/2025 0 0.00

680,748 Coderea 00.00

8,212,459 K2016470219 South Africaa 00.00

48,841,504 New World Resourcesa 00.00

10,218 SandRidge Energy Warrants 4/10/2022 A 0 0.00

4,302 SandRidge Energy Warrants 4/10/2022 B 0 0.00

Fixed income 1,409,423 97.52 97.42

Debt securities 1,409,249 97.51 97.34

‘AA’ credit rated bonds 53,378 3.69 6.74

£49,000,000 UK Treasury 0.625% 07/06/2025 49,780 3.44

US$5,000,000 US Treasury 1.125% 28/02/2025 3,598 0.25

‘A’ credit rated bonds 0 0.00 0.73

‘BBB’ credit rated bonds 56,550 3.91 12.78

US$12,100,000 Cheniere Corpus Christi 5.875% 31/03/2025 9,773 0.68

US$2,322,000 EMC 8.1% 15/07/2036 2,415 0.17

US$11,000,000 HCA 4.5% 15/02/2027 8,773 0.61

US$2,729,000 Lear 3.5% 30/05/2030 2,043 0.14

£2,855,000 Legal & General Var. Rate 5.375% 27/10/2045 3,276 0.23

US$5,511,000 Lenovo 5.875% 24/04/2025 4,402 0.30

€2,700,000 Merck Var. Rate 1.625% 25/06/2079 2,386 0.17

US$6,000,000 NGPL PipeCo 4.875% 15/08/2027 4,824 0.33

US$7,135,000 PVH 4.625% 10/07/2025 5,628 0.39

€3,532,000 Smurfit Kappa Treasury ULC 1.5% 15/09/2027 3,189 0.22

US$6,245,000 Stora Enso 7.25% 15/04/2036 5,824 0.40

€2,955,000 TOTAL Var. Rate 3.369% Perpetual 2,788 0.19

US$1,661,496 United Airlines ‘B’ Shares 4.875% 15/01/2026 1,229 0.08

‘BB’ credit rated bonds 695,938 48.15 44.56

€5,000,000 ABN AMRO Bank Var. Rate 4.75% Perpetual 4,703 0.33

US$5,065,000 American Airlines 5.5% 20/04/2026 3,760 0.26

€5,810,000 Arrow Global Finance FRN 2.875% 01/04/2025 4,981 0.35

£3,000,000 B&M European Value Retail 3.625% 15/07/2025 3,081 0.21

40 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BB’ credit rated bonds (continued)

€5,200,000 Banco Bilbao Vizcaya Argentaria Var. Rate 6% Perpetual 4,873 0.34

€5,636,000 Belden 3.375% 15/07/2027 4,970 0.34

€1,400,000 Belden 3.875% 15/03/2028 1,253 0.09

£4,815,000 Bellis Acquisition 3.25% 16/02/2026 4,813 0.33

US$13,940,000 Berry Global 4.875% 15/07/2026 10,345 0.72

US$2,345,000 BNP Paribas Var. Rate 4.625% Perpetual 1,680 0.12

€2,697,000 Canpack 2.375% 01/11/2027 2,368 0.16

US$11,250,000 Cascades USA 5.125% 15/01/2026 8,412 0.58

US$1,304,000 Cemex 7.375% 05/06/2027 1,034 0.07

US$6,400,000 Cheniere Energy Partners 4.5% 01/10/2029 4,753 0.33

US$14,614,000 Cheniere Energy Partners 5.625% 01/10/2026 10,697 0.74

US$6,000,000 CIFI 5.25% 13/05/2026 4,349 0.30

US$3,250,000 CIFI 6.55% 28/03/2024 2,404 0.17

€4,432,000 Citycon Var. Rate 3.625% Perpetual 3,777 0.26

€1,836,000 Colfax 3.25% 15/05/2025 1,591 0.11

€8,200,000 Commerzbank Var. Rate 6.125% Perpetual 7,657 0.53

US$8,882,000 Continental Resources 5.75% 15/01/2031 7,329 0.51

€7,765,000 CPI Property Var. Rate 4.875% Perpetual 6,982 0.48

US$3,665,000 Crown Americas Capital 4.25% 30/09/2026 2,763 0.19

€5,120,000 Crown European 3.375% 15/05/2025 4,736 0.33

US$17,820,000 CSC 4.125% 01/12/2030 12,273 0.85

US$5,000,000 CSC 4.5% 15/11/2031 3,501 0.24

US$4,897,000 CSC 5.5% 15/04/2027 3,617 0.25

€1,689,000 Drax Finco 2.625% 01/11/2025 1,507 0.11

US$2,800,000 Drax Finco 6.625% 01/11/2025 2,035 0.14

US$7,136,000 DT Midstream 4.375% 15/06/2031 5,047 0.35

US$15,000,000 Endeavor Energy Resources / EER Finance 6.625% 11,151 0.77 15/07/2025

US$3,500,000 Energy Transfer Var. Rate 6.25% Perpetual 2,143 0.15

€4,673,000 Eurofins Scientific Var. Rate 2.875% Perpetual 4,109 0.29

€5,000,000 Eurofins Scientific Var. Rate 3.25% Perpetual 4,541 0.31

Annual Long Report and audited Financial Statements • May 2021 41 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BB’ credit rated bonds (continued)

US$37,207,000 Ford Motor 9% 22/04/2025 31,849 2.20

£4,418,000 GKN 4.625% 12/05/2032 4,730 0.33

US$6,250,000 Greenko Solar Mauritius 5.55% 29/01/2025 4,528 0.31

€3,735,000 Grifols 2.25% 15/11/2027 3,259 0.23

US$5,300,000 Hanesbrands 4.625% 15/05/2024 3,955 0.27

US$6,968,000 Hanesbrands 4.875% 15/05/2026 5,247 0.36

US$7,640,000 HCA 5.375% 01/09/2026 6,088 0.42

€2,692,000 INEOS Quattro Finance 2 2.5% 15/01/2026 2,321 0.16

€4,200,000 Infineon Technologies Var. Rate 3.625% Perpetual 3,910 0.27

€2,271,000 Infrastrutture Wireless Italiane 1.875% 08/07/2026 2,041 0.14

US$1,625,000 International Game Technology 4.125% 15/04/2026 1,177 0.08

€6,000,000 Intertrust 3.375% 15/11/2025 5,268 0.37

€8,860,000 Intrum 3.5% 15/07/2026 7,709 0.53

US$3,558,000 Jazz Securities 4.375% 15/01/2029 2,577 0.18

US$19,000,000 KB Home 4.8% 15/11/2029 14,363 0.99

€7,800,000 KBC Var. Rate 4.25% Perpetual 7,077 0.49

€3,400,000 Koninklijke KPN Var. Rate 2% Perpetual 2,941 0.20

€5,000,000 Kraft Heinz Foods 2.25% 25/05/2028 4,654 0.32

US$15,760,000 Kraft Heinz Foods 4.25% 01/03/2031 12,290 0.85

US$6,327,000 KUO 5.75% 07/07/2027 4,639 0.32

US$5,000,000 KWG 6.3% 13/02/2026 3,573 0.25

US$6,000,000 L Brands 6.625% 01/10/2030 4,811 0.33

€8,000,000 Leonardo 2.375% 08/01/2026 7,167 0.50

€11,948,000 Levi Strauss 3.375% 15/03/2027 10,606 0.73

US$2,755,000 Levi Strauss 3.5% 01/03/2031 1,909 0.13

US$246,000 Levi Strauss 5% 01/05/2025 177 0.01

€7,647,000 Lloyds Banking Var. Rate 4.947% Perpetual 7,201 0.50

€7,400,000 Mahle 2.375% 14/05/2028 6,323 0.44

US$2,883,000 Marriott Ownership Resorts 6.125% 15/09/2025 2,157 0.15

US$2,871,000 Melco Resorts Finance 5.375% 04/12/2029 2,140 0.15

42 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BB’ credit rated bonds (continued)

US$3,478,000 Meritage Homes 3.875% 15/04/2029 2,546 0.18

US$4,800,000 Millicom International Cellular 4.5% 27/04/2031 3,524 0.24

US$4,140,000 Millicom International Cellular 6.625% 15/10/2026 3,095 0.21

£7,121,000 Nationwide Building Society Var. Rate 5.875% Perpetual 7,813 0.54

€11,555,000 Netflix 3.625% 15/05/2027 11,391 0.79

€2,000,000 Netflix 3.625% 15/06/2030 2,033 0.14

US$8,000,000 Network i2i Var. Rate 3.975% Perpetual 5,636 0.39

US$7,000,000 Network i2i Var. Rate 5.65% Perpetual 5,219 0.36

US$2,600,000 Norddeutsche Landesbank-Girozentrale 6.25% 1,929 0.13 10/04/2024

£7,350,000 Ocado 4% 15/06/2024 7,423 0.51

US$24,240,000 Occidental Petroleum 3.5% 15/08/2029 15,990 1.11

US$3,439,000 Occidental Petroleum 4.4% 15/04/2046 2,069 0.14

US$3,000,000 Occidental Petroleum 4.625% 15/06/2045 1,865 0.13

US$1,747,000 Occidental Petroleum 5.5% 01/12/2025 1,321 0.09

US$6,750,000 Occidental Petroleum 6.625% 01/09/2030 5,404 0.37

US$13,700,000 Olin 5% 01/02/2030 10,189 0.71

€1,400,000 Orano 4.875% 23/09/2024 1,362 0.09

US$11,040,000 Petrobras Global Finance 6.9% 19/03/2049 9,000 0.62

€4,000,000 Petroleos Mexicanos 2.75% 21/04/2027 3,176 0.22

€6,100,000 Petroleos Mexicanos 4.75% 26/02/2029 5,214 0.36

US$26,190,000 Petroleos Mexicanos 6.5% 13/03/2027 19,585 1.36

US$10,000,000 Petroleos Mexicanos 6.625% 15/06/2035 6,752 0.47

US$6,700,000 Petroleos Mexicanos 6.84% 23/01/2030 4,856 0.34

€11,992,000 Playtech 4.25% 07/03/2026 10,614 0.74

€12,730,000 Q-Park I 2% 01/03/2027 10,400 0.72

US$4,758,000 Rede D‘or Finance 4.95% 17/01/2028 3,525 0.24

€3,000,000 Repsol International Finance Var. Rate 4.5% 25/03/2075 2,804 0.19

€5,000,000 Rolls-Royce 1.625% 09/05/2028 3,970 0.28

€6,710,000 Rolls-Royce 4.625% 16/02/2026 6,235 0.43

€8,475,000 Sappi Papier 3.625% 15/03/2028 7,317 0.51

Annual Long Report and audited Financial Statements • May 2021 43 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BB’ credit rated bonds (continued)

€5,400,000 Schaeffler 2.75% 12/10/2025 4,921 0.34

US$4,758,000 Sealed Air 5.125% 01/12/2024 3,646 0.25

US$4,054,000 Service Corporation International 3.375% 15/08/2030 2,754 0.19

US$7,054,000 Simpar Europe 5.2% 26/01/2031 5,012 0.35

US$19,651,000 Sirius XM Radio 5% 01/08/2027 14,468 1.00

US$3,729,329 S-JETS 2017-1 5.682% 15/08/2042 2,392 0.17

US$4,610,000 Société Générale Var. Rate 7.875% Perpetual 3,617 0.25

US$15,637,000 Southwestern Energy 7.75% 01/10/2027 11,912 0.82

US$10,000,000 Targa 4% 15/01/2032 6,978 0.48

US$3,523,000 Taylor Morrison Communities 5.125% 01/08/2030 2,660 0.18

US$6,750,000 Taylor Morrison Communities 5.875% 15/06/2027 5,334 0.37

US$10,352,000 TEGNA 4.625% 15/03/2028 7,441 0.52

US$3,500,000 TEGNA 5% 15/09/2029 2,514 0.17

€5,200,000 Telefónica Europe Var. Rate 4.375% Perpetual 4,828 0.33

€3,000,000 Teva Pharmaceutical Finance Netherlands II 1.25% 2,530 0.18 31/03/2023

€1,540,000 Teva Pharmaceutical Finance Netherlands II 1.625% 1,181 0.08 15/10/2028

€1,351,000 Teva Pharmaceutical Finance Netherlands II 4.5% 1,214 0.08 01/03/2025

US$9,945,000 Teva Pharmaceutical Finance Netherlands III 3.15% 6,592 0.46 01/10/2026

US$2,500,000 Teva Pharmaceutical Finance Netherlands III 6.75% 1,903 0.13 01/03/2028

US$5,710,000 UBS Var. Rate 7% Perpetual 4,619 0.32

US$4,254,000 United Airlines 4.375% 15/04/2026 3,098 0.22

US$2,611,000 United Airlines 4.625% 15/04/2029 1,900 0.13

US$6,344,000 Videotron 5.375% 15/06/2024 4,856 0.34

£5,000,000 Virgin Media Secured Finance 4.125% 15/08/2030 4,966 0.34

£5,000,000 Virgin Media Secured Finance 5% 15/04/2027 5,203 0.36

£5,000,000 Virgin Media Secured Finance 5.25% 15/05/2029 5,287 0.37

US$5,000,000 Virgin Media Secured Finance 5.5% 15/05/2029 3,755 0.26

44 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BB’ credit rated bonds (continued)

US$3,450,000 Vivo Energy Investments 5.125% 24/09/2027 2,584 0.18

US$10,910,000 Vodafone Var. Rate 7% 04/04/2079 9,219 0.64

US$9,000,000 Wanda Properties International 7.25% 29/01/2024 6,273 0.43

US$5,400,000 Wanda Properties Overseas 6.875% 23/07/2023 3,737 0.26

€7,918,000 WMG Acquisition 2.75% 15/07/2028 6,944 0.48

US$13,700,000 Yingde Gases Investment 6.25% 19/01/2023 9,883 0.68

US$5,442,000 Yum! Brands 4.625% 31/01/2032 3,977 0.28

€1,000,000 ZF Europe Finance 3% 23/10/2029 892 0.06

€5,000,000 ZF Finance 3.75% 21/09/2028 4,669 0.32

‘B’ credit rated bonds 458,426 31.72 20.65

US$7,639,000 ADES International 8.625% 24/04/2024 5,593 0.39

US$1,752,000 Albertsons 3.5% 15/03/2029 1,183 0.08

US$9,200,000 Albertsons 5.875% 15/02/2028 6,885 0.48

€3,000,000 Altice France 3.375% 15/01/2028 2,535 0.17

€2,732,000 Altice France 4% 15/07/2029 2,364 0.16

€2,903,000 Altice France 4.125% 15/01/2029 2,528 0.17

€7,370,000 Altice France 5.875% 01/02/2027 6,740 0.47

US$967,000 Altice France 7.375% 01/05/2026 707 0.05

US$1,048,000 Antero Resources 5.375% 01/03/2030 739 0.05

€4,000,000 Antolin-Irausa 3.25% 30/04/2024 3,439 0.24

€11,842,000 Ardagh Packaging Finance / Ardagh USA 2.125% 10,152 0.70 15/08/2026

€5,000,000 Ardagh Packaging Finance 2.125% 15/08/2026 4,289 0.30

US$2,000,000 Ardagh Packaging Finance 4.125% 15/08/2026 1,439 0.10

€23,400,000 Avantor Funding 3.875% 15/07/2028 21,187 1.47

US$2,385,000 Avis Budget Finance 5.25% 15/03/2025 1,708 0.12

€5,263,000 Axalta Coating Systems Dutch 3.75% 15/01/2025 4,601 0.32

€3,800,000 Banco de Sabadell Var. Rate 6.5% Perpetual 3,338 0.23

£2,719,000 Barclays Var. Rate 5.875% Perpetual 2,885 0.20

US$5,200,000 Barclays Var. Rate 8% Perpetual 4,153 0.29

US$1,743,000 Bausch Health 5% 15/02/2029 1,121 0.08

Annual Long Report and audited Financial Statements • May 2021 45 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘B’ credit rated bonds (continued)

US$5,000,000 Bausch Health 5% 30/01/2028 3,291 0.23

US$10,173,000 Bausch Health 7% 15/01/2028 7,335 0.51

£5,000,000 Boparan Finance 7.625% 30/11/2025 4,708 0.33

€5,250,000 Boxer Parent 6.5% 02/10/2025 4,809 0.33

US$4,500,000 Caesars Entertainment 6.25% 01/07/2025 3,338 0.23

US$10,000,000 CCO / CCO Capital 4.25% 01/02/2031 7,016 0.49

US$1,800,000 CCO / CCO Capital 4.5% 15/08/2030 1,287 0.09

US$2,021,000 CCO Holdings Capital 4% 01/03/2023 1,437 0.10

US$11,006,000 CCO Holdings Capital 5.125% 01/05/2027 8,113 0.56

US$7,857,000 CCO Holdings Capital 5.75% 15/02/2026 5,715 0.40

US$2,596,000 Charter Communications Operating 4.5% 01/05/2032 1,842 0.13

€5,445,000 Cidron Aida Finco 5% 01/04/2028 4,737 0.33

€6,695,000 CMA CGM 5.25% 15/01/2025 5,893 0.41

€4,000,000 Cogent Communications 4.375% 30/06/2024 3,510 0.24

£1,898,000 CPUK Finance 4.5% 28/08/2027 1,909 0.13

£2,534,000 CPUK Finance 6.5% 28/08/2026 2,681 0.19

US$2,000,000 CSC 5.75% 15/01/2030 1,469 0.10

US$1,900,000 CSC 7.5% 01/04/2028 1,464 0.10

€5,900,000 Dana Financing Luxembourg 3% 15/07/2029 5,150 0.36

US$9,692,000 DaVita 3.75% 15/02/2031 6,537 0.45

€4,250,000 Dufry One 3.375% 15/04/2028 3,598 0.25

€5,100,000 Gamma Bidco 5.125% 15/07/2025 4,486 0.31

US$4,470,000 Genesis Energy 8% 15/01/2027 3,225 0.22

€794,000 Gruenenthal 3.625% 15/11/2026 697 0.05

£5,000,000 Heathrow Finance 4.375% 01/03/2027 5,140 0.36

£5,000,000 Heathrow Finance 5.25% 01/03/2024 5,263 0.36

€3,761,784 Hellas Telecom III 0% 01/01/2049b 00.00

£4,000,000 Iceland Bondco 4.375% 15/05/2028 3,764 0.26

£6,700,000 Iceland Bondco 4.625% 15/03/2025 6,579 0.45

€1,484,000 INEOS Quattro Finance 1 3.75% 15/07/2026 1,301 0.09

46 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘B’ credit rated bonds (continued)

€4,758,000 Intesa Sanpaolo Var. Rate 6.25% Perpetual 4,456 0.31

€5,091,000 Iqera 4.25% 30/09/2024 4,379 0.30

£7,000,000 Jaguar Land Rover Automotive 5% 15/02/2022 7,142 0.49

US$8,701,000 Jaguar Land Rover Automotive 7.75% 15/10/2025 6,659 0.46

US$6,000,000 Kaisa 11.25% 16/04/2025 4,240 0.29

US$5,000,000 Kaisa 9.375% 30/06/2024 3,479 0.24

US$10,000,000 Kenbourne Invest 4.7% 22/01/2028 7,079 0.49

US$2,400,000 LCPR Senior Secured Financing 5.125% 15/07/2029 1,732 0.12

US$9,000,000 LCPR Senior Secured Financing 6.75% 15/10/2027 6,795 0.47

€6,076,000 Lincoln Financing 3.625% 01/04/2024 5,273 0.36

US$1,881,000 Liquid Telecommunications Financing 5.5% 04/09/2026 1,372 0.09

US$10,193,000 Macy‘s Retail 5.875% 01/04/2029 7,634 0.53

US$3,000,000 Mauser Packaging Solutions 5.5% 15/04/2024 2,120 0.15

US$2,390,000 MGM China 4.75% 01/02/2027 1,731 0.12

US$2,820,000 MHP 7.75% 10/05/2024 2,123 0.15

US$9,500,000 Nielsen Finance 5.625% 01/10/2028 7,062 0.49

€1,807,000 OI European 2.875% 15/02/2025 1,578 0.11

US$4,903,000 Oriflame Investment 5.125% 04/05/2026 3,483 0.24

US$2,750,000 Owens-Brockway Glass Container 6.375% 15/08/2025 2,143 0.15

US$860,000 Owens-Brockway Glass Container 6.625% 13/05/2027 654 0.04

€4,858,000 Paprec FRN 3.5% 31/03/2025 4,162 0.29

US$3,739,000 Par Pharmaceutical 7.5% 01/04/2027 2,684 0.19

€4,184,000 PCF 4.75% 15/04/2026 3,637 0.25

US$1,497,000 Performance Food 5.5% 15/10/2027 1,100 0.08

€3,600,000 Picard FRN 3% 30/11/2023 3,089 0.21

US$13,497,000 Pilgrim‘s Pride 4.25% 15/04/2031 9,575 0.66

€3,995,000 Pinnacle Bidco 5.5% 15/02/2025 3,481 0.24

€2,365,000 PLT VII Finance 4.625% 05/01/2026 2,111 0.15

US$4,293,000 Post 5.5% 15/12/2029 3,217 0.22

£3,851,000 Premier Foods Finance 3.5% 15/10/2026 3,854 0.27

Annual Long Report and audited Financial Statements • May 2021 47 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘B’ credit rated bonds (continued)

£4,147,000 Premier Foods Finance 6.25% 15/10/2023 4,212 0.29

£295,000 Premier Foods Finance FRN 5.0834% 15/07/2022 295 0.02

US$5,042,000 Prestige Brands 3.75% 01/04/2031 3,403 0.24

US$810,000 Range Resources 8.25% 15/01/2029 633 0.04

US$4,993,000 Renewable Energy 5.875% 01/06/2028 3,654 0.25

US$6,616,000 Sally Capital 5.625% 01/12/2025 4,797 0.33

US$4,764,000 SCIH Salt 4.875% 01/05/2028 3,337 0.23

US$1,340,000 Simmons Foods 4.625% 01/03/2029 948 0.07

US$2,283,000 SM Energy 10% 15/01/2025 1,819 0.13

US$5,000,000 Sprint 7.25% 15/09/2021 3,570 0.25

US$16,790,000 Sprint 7.875% 15/09/2023 13,373 0.92

US$3,750,000 Staples 7.5% 15/04/2026 2,737 0.19

£5,043,000 Stonegate Pub Co Financing 2019 8.25% 31/07/2025 5,300 0.37

€7,865,625 Summer BidCo 9% 15/11/2025 6,895 0.48

US$6,250,000 Sunac China 6.5% 10/01/2025 4,515 0.31

US$3,200,000 Sunac China 6.65% 03/08/2024 2,334 0.16

US$6,100,000 Tenet Healthcare 4.875% 01/01/2026 4,423 0.31

US$6,200,000 Tenet Healthcare 5.125% 01/11/2027 4,535 0.31

€4,011,000 Tereos 7.5% 30/10/2025 3,684 0.25

US$4,156,000 Terex 5% 15/05/2029 3,040 0.21

€7,000,000 TI Automotive Finance 3.75% 15/04/2029 6,055 0.42

€3,146,000 TK Elevator Midco 4.375% 15/07/2027 2,832 0.20

US$4,392,000 Townsquare Media 6.875% 01/02/2026 3,273 0.23

€5,602,000 Trivium Packaging Finance 3.75% 15/08/2026 4,906 0.34

US$6,000,000 Uber Technologies 7.5% 15/05/2025 4,551 0.31

€8,000,000 UniCredit Var. Rate 5.375% Perpetual 7,159 0.49

£4,000,000 Virgin Media Vendor Financing Notes III 4.875% 4,073 0.28 15/07/2028

US$2,573,000 Wynn Macau 5.625% 26/08/2028 1,897 0.13

US$4,000,000 Yuzhou 6.35% 13/01/2027 2,376 0.16

48 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘B’ credit rated bonds (continued)

US$7,880,000 Yuzhou 7.85% 12/08/2026 4,833 0.33

€19,104,000 Ziggo 4.25% 15/01/2027 17,043 1.18

‘CCC’ credit rated bonds 142,832 9.89 7.03

€4,500,000 Altice France 4% 15/02/2028 3,748 0.26

€7,750,000 Altice France 8% 15/05/2027 7,240 0.50

€4,450,000 ARD Finance 5% 30/06/2027 3,908 0.27

£1,196,000 Ardagh Packaging Finance 4.75% 15/07/2027 1,216 0.08

US$5,000,000 Ascent Resources Utica 8.25% 31/12/2028 3,828 0.27

€4,360,000 Banca Monte dei Paschi di Siena Var. Rate 2030 8.5% 3,811 0.26 10/09/2030

US$3,000,000 Bombardier 7.5% 15/03/2025 2,127 0.15

US$3,100,000 Bombardier 7.875% 15/04/2027 2,213 0.15

€3,400,000 Casino Guichard-Perrachon 4.048% 05/08/2026 2,837 0.20

€10,697,000 Casino Guichard-Perrachon 6.625% 15/01/2026 9,744 0.67

US$7,577,000 CRC Finco 5.25% 15/10/2025 5,375 0.37

US$7,222,000 Del Monte Foods 11.875% 15/05/2025 5,816 0.40

€6,230,000 Eagle Intermediate Global 5.375% 01/05/2023 4,932 0.34

US$1,384,000 Endo 6% 30/06/2028 673 0.05

£2,152,000 House Of Fraser Funding 0% 30/12/2050c 95 0.01

US$3,000,000 iHeartCommunications 8.375% 01/05/2027 2,253 0.16

€5,394,000 Italmatch Chemicals FRN 4.75% 30/09/2024 4,465 0.31

US$5,306,000 Ithaca Energy North Sea 9.375% 15/07/2024 3,769 0.26

£8,000,000 Matalan Finance 6.75% 31/01/2023 7,268 0.50

US$5,100,000 Mauser Packaging Solutions 7.25% 15/04/2025 3,526 0.24

€3,501,908 Newco 8% 15/12/2022 3,068 0.21

€3,902,000 Nouryon 6.5% 01/10/2026 3,507 0.24

US$3,200,000 Nouryon 8% 01/10/2026 2,378 0.17

€6,834,000 Scientific Games International 5.5% 15/02/2026 5,919 0.41

US$7,211,000 SCIH Salt 6.625% 01/05/2029 5,039 0.35

€878,013 Selecta 10% 01/07/2026 702 0.05

€562,961 Selecta 12% 01/10/2026 247 0.02

Annual Long Report and audited Financial Statements • May 2021 49 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘CCC’ credit rated bonds (continued)

€1,125,923 Selecta 12% 01/10/2026 562 0.04

€4,862,189 Selecta 8% 01/04/2026 4,235 0.29

€5,000,000 Sigma Holdco 5.75% 15/05/2026 4,123 0.29

US$3,944,000 Staples 10.75% 15/04/2027 2,840 0.20

€8,295,000 Superior Industries International 6% 15/06/2025 7,221 0.50

€3,028,000 Techem Verwaltungsgesellschaft 674 6% 30/07/2026 2,696 0.19

US$5,125,000 Tenet Healthcare 6.125% 01/10/2028 3,754 0.26

US$3,145,000 Transocean 11.5% 30/01/2027 2,203 0.15

US$9,970,000 Triton Water 6.25% 01/04/2029 7,032 0.49

US$4,003,000 Trivium Packaging Finance 8.5% 15/08/2027 3,028 0.21

€4,143,000 Verisure 5.25% 15/02/2029 3,671 0.25

US$2,462,000 Zayo 6.125% 01/03/2028 1,763 0.12

‘CC’ credit rated bonds 2,125 0.15 0.24

US$11,868,000 Alpha 9% 10/02/2025 2,125 0.15

‘C’ credit rated bonds 0 0.00 0.12

€50,000 Lehman Brothers 0% 26/09/2040b 00.00

Bonds with no credit rating 0 0.00 4.49

US$1,191,000 JCPenney 6.375% 15/10/2036b 00.00

US$680,586 K2016470219 South Africa 3% 31/12/2022b 00.00

US$951,595 Seventy Seven Energy 6.5% 15/07/2022b 00.00

Debt derivatives 174 0.01 0.08

Credit default swaps 0 0.00 0.05

Interest rate futures 174 0.01 0.03

242 10 Year US Treasury Note Sep 2021 102 0.01

(274) Euro-Bobl Future Jun 2021 72 0.00

Currency 20,040 1.39 (1.13)

Forward currency contracts 20,040 1.39 (1.13)

€11,206,512 Bought for £9,707,068 (expires 02.06.21) (81) 0.00

€(566,692,413) Sold for £490,310,717 (expires 02.06.21) 3,541 0.25

US$23,386,888 Bought for £16,597,526 (expires 02.06.21) (102) (0.01)

50 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Currency (continued)

Forward currency contracts (continued)

US$(1,109,639,238) Sold for £799,358,072 (expires 02.06.21) 16,682 1.15

Portfolio of investments 1,429,463 98.91 96.30

Cash equivalents 9,343 0.65 2.80

‘AAA’ rated money market fundsd 9,343 0.65 2.80

9,343,000 Northern Trust Global Fund - Sterling 9,343 0.65

Total portfolio (notes 2c & 2d on page 9) 1,438,806 99.56 99.10

Net other assets/(liabilities) 6,371 0.44 0.90

Net assets attributable to shareholders 1,445,177 100.00 100.00

All securities are on an official stock exchange listing except where referenced. a Unlisted/unquoted. b Defaulted bond. c Suspended. d Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk.

Annual Long Report and audited Financial Statements • May 2021 51 M&G Global High Yield Bond Fund Financial highlights

Fund performance Fund performance against the comparator Please note past performance is not a guide to future benchmark performance and the value of investments, and the We are unable to show the fund’s performance against income from them, will fluctuate. This will cause the the comparator benchmark from inception, as the fund fund price to fall as well as rise and you may not get was previously managed against a different comparator back the original amount you invested. benchmark. Therefore, the graph below shows the performance of the fund from the period where the The following charts and tables reflect the key financial fund was managed against the ICE BofAML Global High information of a representative share class, Sterling Yield Index (GBP Hedged). Class ‘A’ (Accumulation) shares. As different share classes have different attributes, for example charging From 30 September 2011 = 100, plotted monthly structures and minimum investments, please be aware Chart date 1 June 2021

that their performance may be different. For more 200 information on the different share classes in this fund 180 please refer to the Prospectus for M&G Investment 170 Funds (2), which is available free of charge either from 160 our website at www.mandg.co.uk/prospectuses or by 150 calling M&G Customer Relations. 140 130 Fund level performance 120 110 Fund net asset value as at 31.05.21 31.05.20 31.05.19 £’000 £’000 £’000 100

Fund net asset value (NAV) 1,445,177 1,015,049 1,058,635 90 20112012 2013 2014 2015 2016 2017 2018 2019 2020 Performance since launch Sterling Class ‘A’ (Accumulation) shares* ICE BofAML Global High Yield Index (GBP Hedged) To give an indication of how the fund has performed since launch, the chart below shows total return of Source: Morningstar, Inc. and M&G * Income reinvested Sterling Class ‘A’ (Accumulation) shares.

October 1998 = 100, plotted monthly Chart date 1 June 2021

300

250

210

180

150

130

110 100 95 99 01 0305 07 0911 13 15 17 19 21

Sterling Class ‘A’ (Accumulation) shares*

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

52 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial highlights

Long-term performance by share class • Extraordinary legal and tax expenses: Costs that To give an indication of the performance of the fund, specifically relate to legal or tax claims that are both the following table shows the compound rate of return, exceptional and unforeseeable. Such expenses are per annum, over the period. Calculated on a price to uncommon, and would not be expected in most years. price basis with income reinvested. Although they result in a short-term cost to the fund, generally they can deliver longer term benefits for Share One Three Five Since investors. class year years years launch 01.06.20 01.06.18 01.06.16 • Investment management: Charge paid to M&G for %a %pa %pa %pa investment management of the fund. From Sterlingb 1 August 2019 this charge forms part of the annual Class ‘A’ +11.8 +3.8 +4.5 +5.5c charge.

Class ‘I’ +12.4 +4.3 +5.1 +5.2d • Administration: Charge paid for administration Class ‘PP’ +12.5 n/a n/a +4.9e services in addition to investment management –

Class ‘R’ +12.1 +4.0 +4.8 +4.9d any surplus from this charge will be retained by M&G. From 1 August 2019 this charge is rolled into Class ‘X’ +11.8 +3.8 +4.5 +4.9f the annual charge. a Absolute basis. b Price to price with income reinvested. • Oversight and other independent services: c 1 October 2002, the launch date of the share class. Charges paid to providers independent of M&G for d 3 August 2012, the launch date of the share class. e 8 April 2019, the launch date of the share class. services which include depositary, custody and f 16 October 1998, the end of the initial offer period of the predecessor audit. From 1 August 2019 these charges will be unit trust. paid by M&G and rolled into the annual charge.

Annual Long Report and audited Financial Statements • May 2021 53 M&G Global High Yield Bond Fund Financial highlights

Portfolio transaction costs Further information on this process is in the Prospectus, Portfolio transaction costs are incurred by funds when which is available free of charge on request either from buying and selling investments. These costs vary our website at www.mandg.co.uk/prospectuses or by depending on the types of investment, their market calling M&G Customer Relations. capitalisation, country of exchange and method of Portfolio transaction costs execution. They are made up of direct and indirect

portfolio transaction costs: as at 31 May 2021 2020 2019 Averagea • Indirect portfolio %%% % Direct portfolio transaction costs: Broker transaction costs execution commission and taxes. Average portfolio 0.58 1.03 0.84 0.82 • Indirect portfolio transaction costs: ‘Dealing dealing spread

spread’ – the difference between the buying and a Average of first three columns. 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. As the fund invests mainly in fixed interest securities, the direct transaction costs paid on other investments are too small to be reflected in the table below. To give an indication of the indirect portfolio dealing costs the table shows the average portfolio dealing spread.

54 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial highlights

Specific share class performance Sterling Class ‘A’ Accumulation share The following tables show the performance of each performance share class. All ‘Performance and charges’ percentages The share class was launched on 1 October 2002. represent an annual rate except for the ‘Return after for the year to 31 May 2021 2020 2019 operating charges’ which is calculated as a percentage Change in NAV per share UK p UK p UK p of the opening net asset value per share (NAV). ‘Dilution Opening NAV 129.77 133.40 130.02 adjustments’ are only in respect of direct portfolio Return before operating 17.32 (1.98) 5.24 transaction costs. charges

Sterling Class ‘A’ Income share Operating charges (1.57) (1.65) (1.86) Return after operating 15.75 (3.63) 3.38 performance charges The share class was launched on 1 October 2002. Distributions (4.71) (5.43) (4.81) for the year to 31 May 2021 2020 2019 Retained distributions 4.71 5.43 4.81 Change in NAV per share UK p UK p UK p Closing NAV 145.52 129.77 133.40 Opening NAV 44.34 48.04 49.25 Direct transaction costs UK p UK p UK p Return before operating 5.84 (0.63) 1.94 charges Costs before dilution 0.00 0.00 0.00 adjustments Operating charges (0.53) (0.58) (0.69) Dilution adjustmentsa 0.00 0.00 0.00 Return after operating 5.31 (1.21) 1.25 charges Total direct transaction costs 0.00 0.00 0.00

Distributions (2.10) (2.49) (2.46) Performance and charges % % %

Closing NAV 47.55 44.34 48.04 Direct portfolio transaction 0.00 0.00 0.00 costsb Direct transaction costs UK p UK p UK p Operating chargesc 1.13 1.22 1.41 Costs before dilution 0.00 0.00 0.00 adjustments Return after charges +12.14 -2.72 +2.60

Dilution adjustmentsa 0.00 0.00 0.00 Distribution yield 3.37 4.37 3.79

Total direct transaction costs 0.00 0.00 0.00 Other information

Performance and charges % % % Closing NAV (£’000) 271,957 283,159 250,671

Direct portfolio transaction 0.00 0.00 0.00 Closing NAV (%) 18.82 27.90 23.68 costsb Number of shares 186,892,045 218,200,075 187,906,510 Operating chargesc 1.12 1.22 1.41 Highest share price (UK p) 146.43 143.16 135.30 Return after charges +11.98 -2.52 +2.54 Lowest share price (UK p) 131.06 111.36 125.99 Distribution yield 4.35 5.50 5.20

Other information

Closing NAV (£’000) 63,048 56,794 60,257

Closing NAV (%) 4.35 5.59 5.69

Number of shares 132,599,814 128,073,793 125,436,058

Highest share price (UK p) 48.44 49.86 49.81

Lowest share price (UK p) 44.79 38.62 46.33

Annual Long Report and audited Financial Statements • May 2021 55 M&G Global High Yield Bond Fund Financial highlights

Sterling Class ‘I’ Income share Sterling Class ‘I’ Accumulation share performance performance The share class was launched on 3 August 2012. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 956.67 1,031.08 1,050.92 Opening NAV 1,378.00 1,409.31 1,365.39

Return before operating 126.11 (13.62) 41.34 Return before operating 184.18 (21.20) 55.19 charges charges

Operating charges (6.61) (7.23) (8.48) Operating charges (9.72) (10.11) (11.27)

Return after operating 119.50 (20.85) 32.86 Return after operating 174.46 (31.31) 43.92 charges charges

Distributions (45.51) (53.56) (52.70) Distributions (57.18) (64.90) (58.99)

Closing NAV 1,030.66 956.67 1,031.08 Retained distributions 57.18 64.90 58.99

Direct transaction costs UK p UK p UK p Closing NAV 1,552.46 1,378.00 1,409.31

Costs before dilution 0.00 0.00 0.00 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.01 0.01 0.01 Dilution adjustmentsa 0.00 0.00 0.00 adjustments

Total direct transaction costs 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.01 0.01 0.01

Direct portfolio transaction 0.00 0.00 0.00 Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating chargesc 0.65 0.70 0.81 costsb

Return after charges +12.49 -2.02 +3.13 Operating chargesc 0.65 0.70 0.81

Distribution yield 4.35 5.50 5.20 Return after charges +12.66 -2.22 +3.22

Other information Distribution yield 3.77 4.85 4.39

Closing NAV (£’000) 88,537 88,147 108,981 Other information

Closing NAV (%) 6.13 8.68 10.29 Closing NAV (£’000) 86,544 91,223 116,584

Number of shares 8,590,299 9,213,979 10,569,588 Closing NAV (%) 5.99 8.99 11.01

Highest share price (UK p) 1,048.77 1,074.31 1,062.86 Number of shares 5,574,636 6,619,946 8,272,395

Lowest share price (UK p) 966.27 832.56 992.00 Highest share price (UK p) 1,562.29 1,518.08 1,429.11

Lowest share price (UK p) 1,391.79 1,181.41 1,327.60

56 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial highlights

Sterling Class ‘PP’ Income share Sterling Class ‘PP’ Accumulation share performance performance The share class was launched on 5 August 2019. The share class was launched on 8 April 2019.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 91.37 100.00 n/a Opening NAV 97.60 99.67 100.00

Return before operating 12.04 (4.02) n/a Return before operating 13.05 (1.50) (0.22) charges charges

Operating charges (0.50) (0.43) n/a Operating charges (0.55) (0.57) (0.11)

Return after operating 11.54 (4.45) n/a Return after operating 12.50 (2.07) (0.33) charges charges

Distributions (4.35) (4.18) n/a Distributions (4.20) (4.74) (0.77)

Closing NAV 98.56 91.37 n/a Retained distributions 4.20 4.74 0.77

Direct transaction costs UK p UK p UK p Closing NAV 110.10 97.60 99.67

Costs before dilution 0.00 0.00 n/a Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 n/a adjustments

Total direct transaction costs 0.00 0.00 n/a Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.00 0.00 0.00

Direct portfolio transaction 0.00 0.00 n/a Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating charges 0.52 0.53 n/a costsb

Return after charges +12.63 -4.45 n/a Operating chargesc 0.51 0.55 0.66

Distribution yield 4.35 5.50 n/a Return after charges +12.81 -2.08 -0.33

Other information Distribution yield 3.87 4.99 4.54

Closing NAV (£’000) 45 18 n/a Other information

Closing NAV (%) 0.00 0.00 n/a Closing NAV (£’000) 431,906 108 223

Number of shares 45,390 20,000 n/a Closing NAV (%) 29.89 0.01 0.02

Highest share price (UK p) 100.27 102.56 n/a Number of shares 392,275,840 111,058 223,386

Lowest share price (UK p) 92.28 79.49 n/a Highest share price (UK p) 110.80 107.48 101.07

Lowest share price (UK p) 98.58 83.66 99.67

Annual Long Report and audited Financial Statements • May 2021 57 M&G Global High Yield Bond Fund Financial highlights

Sterling Class ‘R’ Income share Sterling Class ‘R’ Accumulation share performance performance The share class was launched on 3 August 2012. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 94.55 102.17 104.49 Opening NAV 134.56 137.99 134.16

Return before operating 12.44 (1.34) 4.10 Return before operating 17.98 (2.07) 5.41 charges charges

Operating charges (0.90) (0.98) (1.21) Operating charges (1.31) (1.36) (1.58)

Return after operating 11.54 (2.32) 2.89 Return after operating 16.67 (3.43) 3.83 charges charges

Distributions (4.49) (5.30) (5.21) Distributions (5.21) (5.97) (5.30)

Closing NAV 101.60 94.55 102.17 Retained distributions 5.21 5.97 5.30

Direct transaction costs UK p UK p UK p Closing NAV 151.23 134.56 137.99

Costs before dilution 0.00 0.00 0.00 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00 adjustments

Total direct transaction costs 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.00 0.00 0.00

Direct portfolio transaction 0.00 0.00 0.00 Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating chargesc 0.90 0.97 1.16 costsb

Return after charges +12.21 -2.27 +2.77 Operating chargesc 0.90 0.97 1.16

Distribution yield 4.35 5.50 5.20 Return after charges +12.39 -2.49 +2.85

Other information Distribution yield 3.52 4.61 4.04

Closing NAV (£’000) 18,575 15,415 15,721 Other information

Closing NAV (%) 1.29 1.52 1.49 Closing NAV (£’000) 18,445 15,609 15,754

Number of shares 18,281,793 16,304,308 15,386,912 Closing NAV (%) 1.28 1.54 1.49

Highest share price (UK p) 103.46 106.24 105.66 Number of shares 12,196,380 11,599,797 11,416,874

Lowest share price (UK p) 95.49 82.32 98.42 Highest share price (UK p) 152.19 148.35 139.94

Lowest share price (UK p) 135.91 115.42 130.19

58 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial highlights

Sterling Class ‘X’ Income share Sterling Class ‘X’ Accumulation share performance performance The share class was launched on 16 October 1998. The share class was launched on 16 October 1998.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 44.36 48.06 49.27 Opening NAV 129.87 133.50 130.12

Return before operating 5.83 (0.63) 1.94 Return before operating 17.34 (1.98) 5.24 charges charges

Operating charges (0.53) (0.58) (0.69) Operating charges (1.57) (1.65) (1.86)

Return after operating 5.30 (1.21) 1.25 Return after operating 15.77 (3.63) 3.38 charges charges

Distributions (2.10) (2.49) (2.46) Distributions (4.72) (5.43) (4.81)

Closing NAV 47.56 44.36 48.06 Retained distributions 4.72 5.43 4.81

Direct transaction costs UK p UK p UK p Closing NAV 145.64 129.87 133.50

Costs before dilution 0.00 0.00 0.00 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00 adjustments

Total direct transaction costs 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.00 0.00 0.00

Direct portfolio transaction 0.00 0.00 0.00 Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating chargesc 1.12 1.22 1.41 costsb

Return after charges +11.95 -2.52 +2.54 Operating chargesc 1.12 1.22 1.41

Distribution yield 4.35 5.50 5.20 Return after charges +12.14 -2.72 +2.60

Other information Distribution yield 3.37 4.37 3.79

Closing NAV (£’000) 320,017 322,048 368,257 Other information

Closing NAV (%) 22.14 31.73 34.79 Closing NAV (£’000) 146,103 142,528 122,187

Number of shares 672,822,850 725,996,167 766,322,488 Closing NAV (%) 10.11 14.04 11.54

Highest share price (UK p) 48.45 49.88 49.83 Number of shares 100,321,528 109,747,810 91,524,756

Lowest share price (UK p) 44.80 38.64 46.34 Highest share price (UK p) 146.54 143.26 135.40

Lowest share price (UK p) 131.16 111.44 126.08

Annual Long Report and audited Financial Statements • May 2021 59 M&G Global High Yield Bond Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 103,198 (64,551)

Revenue 5 63,038 53,035

Expenses 6 (12,702) (11,269)

Net revenue/(expense) before taxation 50,336 41,766

Taxation 7 1 15

Net revenue/(expense) after taxation 50,337 41,781

Total return before distributions 153,535 (22,770)

Distributions 8 (55,490) (47,683)

Change in net assets attributable to shareholders from 98,045 (70,453) investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 1,015,049 1,058,635

Amounts received on issue of shares 459,386 201,101

Amounts paid on cancellation of shares (163,063) (195,514)

296,323 5,587

Dilution adjustments 2,362 1,309

Change in net assets attributable to shareholders from 98,045 (70,453) investment activities (see above)

Retained distributions on Accumulation shares 33,378 19,961

Unclaimed distributions 20 10

Closing net assets attributable to shareholders 1,445,177 1,015,049

60 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 1,429,646 989,161

Current assets

Debtors 9 18,940 25,525

Cash and bank balances 10 4,736 13,896

Cash equivalents 9,343 28,418

Total assets 1,462,665 1,057,000

Liabilities

Investment liabilities (183) (11,659)

Creditors

Distribution payable (1,605) (2,188)

Other creditors 11 (15,700) (28,104)

Total liabilities (17,488) (41,951)

Net assets attributable to shareholders 1,445,177 1,015,049

Annual Long Report and audited Financial Statements • May 2021 61 M&G Global High Yield Bond Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities (27,369) (32,984)

Derivative contracts 126,659 (20,441)

Currency gains/(losses) 3,908 (11,123)

Transaction charges 0(3)

Net capital gains/(losses) 103,198 (64,551)

2021 2020 for the year to 31 May £’000 £’000

a) Purchases

Debt securitiesa 1,145,131 712,548

b) Sales

Equities 77 44

Debt securitiesa 622,864 663,118

Other transaction types

Corporate actions 69,434 14,757

Total sales 692,375 677,919

62 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

2021 %of 2020 %of £’000 average NAV £’000 average NAV

c) Direct portfolio transaction costs

Commissions paid

Derivatives 3 0.00 2 0.00

Taxes paid

Derivatives 3 0.00 2 0.00

Total direct portfolio transaction costs 6 0.00 4 0.00

d) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.58 1.03 a These transaction types do not attract direct portfolio transaction costs. b Average portfolio dealing spread at the balance sheet date.

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 33 68

Derivative revenue 572 1,976

Dividends from equity investments: non-taxable 11

Dividends from equity investments: taxable 661 492

Interest distributions 14 484

Interest on debt securities 61,745 49,978

Rebate of ongoing charges from underlying funds 12 36

Total revenue 63,038 53,035

Annual Long Report and audited Financial Statements • May 2021 63 M&G Global High Yield Bond Fund Financial statements and notes

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 12,639 8,937

Annual management chargea 0 2,003

Administration chargea 0269

12,639 11,209

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 09

Other expenses

Audit fee (including VAT)a 02

Interest payable 67 34

Legal fees 010

Safe custody chargea (4) 5

63 51

Total expenses 12,702 11,269

64 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax (1) (15)

Deferred tax (note 7c) 00

Total taxation (1) (15)

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 50,336 41,766

Corporation tax at 20% 10,067 8,353

Effects of:

Interest distributions (10,067) (8,353)

Withholding tax (1) (15)

Total tax charge (note 7a) (1) (15)

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset in the current financial year (2020: same).

Annual Long Report and audited Financial Statements • May 2021 65 M&G Global High Yield Bond Fund Financial statements and notes

8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Interest distributions £’000 £’000 £’000 £’000

First interim 2,285 2,364 2,100 1,442

Second interim 1,908 2,907 2,849 2,035

Third interim 1,768 2,711 2,306 1,617

Fourth interim 2,317 3,588 2,288 1,569

Fifth interim 1,817 2,747 2,115 1,410

Sixth interim 1,717 2,547 2,161 1,514

Seventh interim 1,806 2,705 2,277 1,584

Eighth interim 1,720 2,613 2,308 1,474

Ninth interim 1,529 2,323 2,228 1,444

Tenth interim 2,128 3,448 2,790 2,257

Eleventh interim 1,788 2,851 2,006 1,670

Final 1,605 2,574 2,188 1,945

Total net distributions 55,766 47,577

Income deducted on cancellation of shares 335 373

Income received on issue of shares (611) (267)

Distributions 55,490 47,683

Net revenue/(expense) per statement of total return 50,337 41,781

Expenses offset against capital 5,153 5,902

Distributions 55,490 47,683

a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

9Debtors

2021 2020 as at 31 May £’000 £’000

Amounts receivable on issues of shares 1,880 731

Currency deals outstanding 0 10,655

Debt security interest receivable 17,060 13,221

Derivative revenue receivable 0223

Distributions receivable 010

Rebate of ongoing charges from underlying funds 0 1

Sales awaiting settlement 0684

Total debtors 18,940 25,525

66 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Amounts held at futures clearing houses and collateral manager 385 74

Cash held as bank balances 4,351 13,822

Total cash and bank balances 4,736 13,896

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 1,918 625

Annual charge payable 340 325

Currency deals outstanding 010,675

Derivative expense payable 45 0

Expenses payable 014

Purchases awaiting settlement 13,395 16,463

Payable to M&G (Lux) Global High Yield Bond Fund 2 2

Total other creditors 15,700 28,104

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 128,073,793 12,316,792 (7,790,771) 132,599,814

Class ‘A’ Accumulation 218,200,075 15,989,827 (47,297,857) 186,892,045

Class ‘I’ Income 9,213,979 194,917 (818,597) 8,590,299

Class ‘I’ Accumulation 6,619,946 124,520 (1,169,830) 5,574,636

Class ‘PP’ Income 20,000 27,787 (2,397) 45,390

Class ‘PP’ Accumulation 111,058 392,256,191 (91,409) 392,275,840

Class ‘R’ Income 16,304,308 3,116,194 (1,138,709) 18,281,793

Class ‘R’ Accumulation 11,599,797 1,257,171 (660,588) 12,196,380

Class ‘X’ Income 725,996,167 6,000,796 (59,174,113) 672,822,850

Class ‘X’ Accumulation 109,747,810 17,792,496 (27,218,778) 100,321,528

Annual Long Report and audited Financial Statements • May 2021 67 M&G Global High Yield Bond Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 15.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 1.20 1.00

Class ‘I’ 0.70 0.60

Class ‘PP’ 0.55 0.50

Class ‘R’ 0.95 0.85

Class ‘X’ 1.20 1.00

a The amounts shown are the maximum annual charge. M&G will apply a discount of 0.02% for every £1 billion of a fund’s net asset value. This is assessed quarterly and implemented on a forward basis no later than 13 business days after quarter end.

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 40.84% (2020: 21.99%) of the fund’s shares.

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

68 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

Level 3: Valuation technique using unobservable inputs This refers to instruments which have been valued using models with unobservable data inputs. This includes single broker-priced instruments, suspended/unquoted securities, private equity, unlisted closed-ended funds and open- ended funds with restrictions on redemption rights.

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 53,552 0 68,825 0

Level 2 1,375,999 (183) 920,330 (11,659)

Level 3 95 0 6 0

1,429,646 (183) 989,161 (11,659)

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

The VaR limit set during the financial year to 31 May 2021 was 20% (2020: 12%).

The lowest, highest and average VaR, as well as utilisation of VaR with reference to the limit above, are calculated during the financial years ended 31 May 2021 and 31 May 2020.

for the year to 2021 2021 2020 2020 31 May %ofVaR Utilisation %ofVaR Utilisation of VaRa of VaRa 20% 12%

Lowest 2.97 14.85 1.42 11.83

Highest 9.85 49.25 17.47b 145.58

Average 5.47 27.36 4.19 34.88 a The VaR on the fund has been divided by its maximum limit. b Due to market volatility caused by the COVID-19 pandemic there was a passive breach on the internally set upper VaR limit. The recent volatility has been more abrupt than the 2008-09 crisis on which these limits were initially modelled. The VaR levels on all funds remained below the regulatory upper VaR limit and are being monitored with increased oversight.

Annual Long Report and audited Financial Statements • May 2021 69 M&G Global High Yield Bond Fund Financial statements and notes

2021 2020 as at 31 May £’000 £’000

Investment grade securities 109,928 205,570

Below investment grade securities 1,299,321 736,894

Unrated securities 045,570

Other investments 20,214 (10,532)

Total 1,429,463 977,502

The table below shows the exposure to counterparties. Collateral is posted daily, in the form of cash or high-quality government bonds, to minimise this exposure.

Forward Futures currency contracts as at 31 May 2021 £‘000 £’000

BNP Paribas (18) 0

Citigroup 16,655 0

HSBC 3,520 0

JPMorgan 29 0

Merrill Lynch 0174

UBS (146) 0

Total 20,040 174

Swaps Forward Futures currency contracts as at 31 May 2020 £’000 £‘000 £‘000

Bank of America Merrill Lynch (160) (45) 289

Barclays Bank 669 0 0

BNP Paribas 0740

Citigroup 0640

HSBC 0 (4,466) 0

JPMorgan 0(7)0

National Australia Bank 0(31)0

Standard Chartered Bank 0(28)0

State Street Bank 0(6,791)0

UBS 0(205)0

Total 509 (11,435) 289

70 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

21 Leverage risk Funds using VaR approaches are required to disclose the level of leverage employed during the financial reporting period.

for the year to 2021a 2021a 2020a 2020a 31 May £’000 %b £’000 %b

Lowest 982,520 82.48 776,645 83.20

Highest 4,001,868 282.74 2,879,886 309.20

Average 1,516,012 107.97 1,190,080 117.80 a Leverage has been calculated using the Gross Sum of Notional Approach for derivative positions only (including forward currency contracts) and excludes all physical holdings. b Expressed as a percentage over fund valuation.

22 Interest distribution tables This fund pays monthly interest distributions and the following table sets out the distribution period.

Monthly distribution periods

Start End Xd Payment

First interim 01.06.20 30.06.20 01.07.20 31.07.20

Second interim 01.07.20 31.07.20 03.08.20 31.08.20

Third interim 01.08.20 31.08.20 01.09.20 30.09.20

Fourth interim 01.09.20 30.09.20 01.10.20 31.10.20

Fifth interim 01.10.20 31.10.20 02.11.20 30.11.20

Sixth interim 01.11.20 30.11.20 01.12.20 31.12.20

Seventh interim 01.12.20 31.12.20 01.01.21 31.01.21

Eighth interim 01.01.21 31.01.21 01.02.21 28.02.21

Ninth interim 01.02.21 28.02.21 01.03.21 31.03.21

Tenth interim 01.03.21 31.03.21 01.04.21 30.04.21

Eleventh interim 01.04.21 30.04.21 03.05.21 31.05.21

Final 01.05.21 31.05.21 01.06.21 30.06.21

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

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

Annual Long Report and audited Financial Statements • May 2021 71 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘A’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.1147 0.0948 0.2095 0.1834

Second interim 0.0510 0.1251 0.1761 0.2516

Third interim 0.0632 0.1004 0.1636 0.2048

Fourth interim 0.0974 0.1179 0.2153 0.2043

Fifth interim 0.0488 0.1208 0.1696 0.1897

Sixth interim 0.0626 0.0989 0.1615 0.1945

Seventh interim 0.0622 0.1084 0.1706 0.2060

Eighth interim 0.0486 0.1140 0.1626 0.2099

Ninth interim 0.0451 0.1001 0.1452 0.2032

Tenth interim 0.0810 0.1223 0.2033 0.2563

Eleventh interim 0.0833 0.0878 0.1711 0.1846

Final 0.0613 0.0943 0.1556 0.2015

72 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘A’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2449 0.2358 0.4807 0.3679

Second interim 0.3114 0.0718 0.3832 0.5280

Third interim 0.1448 0.2135 0.3583 0.4398

Fourth interim 0.1252 0.3662 0.4914 0.4357

Fifth interim 0.2718 0.0988 0.3706 0.3972

Sixth interim 0.2496 0.0925 0.3421 0.4206

Seventh interim 0.1924 0.1721 0.3645 0.4408

Eighth interim 0.1655 0.1877 0.3532 0.4585

Ninth interim 0.2035 0.1123 0.3158 0.4541

Tenth interim 0.1098 0.3771 0.4869 0.6071

Eleventh interim 0.1660 0.2365 0.4025 0.4147

Final 0.2144 0.1474 0.3618 0.4648

Sterling Class ‘I’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 1.8457 2.6982 4.5439 3.9385

Second interim 1.7636 2.0403 3.8039 5.4035

Third interim 1.5587 1.9749 3.5336 4.4009

Fourth interim 1.4418 3.2115 4.6533 4.3916

Fifth interim 1.5422 2.1242 3.6664 4.0791

Sixth interim 1.3793 2.1147 3.4940 4.1855

Seventh interim 1.7561 1.9108 3.6669 4.4337

Eighth interim 1.2775 2.2419 3.5194 4.5191

Ninth interim 0.9692 2.1753 3.1445 4.3790

Tenth interim 1.7649 2.6372 4.4021 5.5244

Eleventh interim 1.9926 1.7149 3.7075 3.9795

Final 1.6205 1.7513 3.3718 4.3285

Annual Long Report and audited Financial Statements • May 2021 73 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘I’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 3.3436 2.3810 5.7246 4.5279

Second interim 1.9920 2.6867 4.6787 6.3662

Third interim 1.5256 2.8432 4.3688 5.2515

Fourth interim 2.5491 3.3357 5.8848 5.2325

Fifth interim 2.1452 2.4018 4.5470 4.8259

Sixth interim 2.0309 2.2426 4.2735 5.0357

Seventh interim 2.3873 2.1303 4.5176 5.3228

Eighth interim 1.7111 2.6631 4.3742 5.4984

Ninth interim 0.1562 3.7542 3.9104 5.3957

Tenth interim 3.5215 2.2261 5.7476 7.0304

Eleventh interim 2.7484 2.0559 4.8043 4.9369

Final 2.0863 2.2619 4.3482 5.4711

Sterling Class ‘PP’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2173 0.2154 0.4327 n/a

Second interim 0.3631 0.0000 0.3631 n/a

Third interim 0.3374 0.0000 0.3374 0.3812

Fourth interim 0.4447 0.0000 0.4447 0.4180

Fifth interim 0.3504 0.0000 0.3504 0.3896

Sixth interim 0.3337 0.0000 0.3337 0.3993

Seventh interim 0.3508 0.0000 0.3508 0.4225

Eighth interim 0.3361 0.0000 0.3361 0.4315

Ninth interim 0.3007 0.0000 0.3007 0.4186

Tenth interim 0.4212 0.0000 0.4212 0.5279

Eleventh interim 0.3545 0.0000 0.3545 0.3804

Final 0.3231 0.0000 0.3231 0.4141

74 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘PP’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.3952 0.0219 0.4171 0.3314

Second interim 0.1884 0.1558 0.3442 0.4641

Third interim 0.3214 0.0000 0.3214 0.3841

Fourth interim 0.3587 0.0722 0.4309 0.3835

Fifth interim 0.3350 0.0000 0.3350 0.3545

Sixth interim 0.0816 0.2347 0.3163 0.3694

Seventh interim 0.3352 0.0000 0.3352 0.3906

Eighth interim 0.3231 0.0000 0.3231 0.4020

Ninth interim 0.2881 0.0000 0.2881 0.3943

Tenth interim 0.3409 0.0766 0.4175 0.5103

Eleventh interim 0.2814 0.0683 0.3497 0.3610

Final 0.0333 0.2838 0.3171 0.3992

Sterling Class ‘R’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.3105 0.1369 0.4474 0.3902

Second interim 0.1199 0.2558 0.3757 0.5352

Third interim 0.0815 0.2675 0.3490 0.4358

Fourth interim 0.0861 0.3734 0.4595 0.4347

Fifth interim 0.1778 0.1841 0.3619 0.4038

Sixth interim 0.1169 0.2280 0.3449 0.4142

Seventh interim 0.0984 0.2644 0.3628 0.4387

Eighth interim 0.1231 0.2241 0.3472 0.4471

Ninth interim 0.0742 0.2360 0.3102 0.4330

Tenth interim 0.2523 0.1819 0.4342 0.5462

Eleventh interim 0.1653 0.2003 0.3656 0.3934

Final 0.0906 0.2419 0.3325 0.4285

Annual Long Report and audited Financial Statements • May 2021 75 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘R’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2248 0.3050 0.5298 0.4067

Second interim 0.1883 0.2388 0.4271 0.5783

Third interim 0.1580 0.2410 0.3990 0.4843

Fourth interim 0.3372 0.2049 0.5421 0.4815

Fifth interim 0.1166 0.2975 0.4141 0.4416

Sixth interim 0.1759 0.2101 0.3860 0.4647

Seventh interim 0.2011 0.2086 0.4097 0.4885

Eighth interim 0.2198 0.1768 0.3966 0.5051

Ninth interim 0.0989 0.2533 0.3522 0.4989

Tenth interim 0.2407 0.2858 0.5265 0.6581

Eleventh interim 0.2051 0.2319 0.4370 0.4561

Final 0.1044 0.2894 0.3938 0.5071

Sterling Class ‘X’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.0035 0.2064 0.2099 0.1835

Second interim 0.0054 0.1708 0.1762 0.2517

Third interim 0.0051 0.1585 0.1636 0.2047

Fourth interim 0.0141 0.2013 0.2154 0.2043

Fifth interim 0.0093 0.1603 0.1696 0.1897

Sixth interim 0.0086 0.1530 0.1616 0.1948

Seventh interim 0.0016 0.1688 0.1704 0.2060

Eighth interim 0.0049 0.1578 0.1627 0.2096

Ninth interim 0.0068 0.1384 0.1452 0.2033

Tenth interim 0.0180 0.1853 0.2033 0.2564

Eleventh interim 0.0039 0.1672 0.1711 0.1846

Final 0.0097 0.1460 0.1557 0.2012

76 Annual Long Report and audited Financial Statements • May 2021 M&G Global High Yield Bond Fund Financial statements and notes

Sterling Class ‘X’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2656 0.2166 0.4822 0.3682

Second interim 0.2376 0.1459 0.3835 0.5284

Third interim 0.1634 0.1951 0.3585 0.4401

Fourth interim 0.2404 0.2513 0.4917 0.4361

Fifth interim 0.2370 0.1339 0.3709 0.3975

Sixth interim 0.2455 0.0968 0.3423 0.4214

Seventh interim 0.3404 0.0246 0.3650 0.4412

Eighth interim 0.1833 0.1701 0.3534 0.4568

Ninth interim 0.1309 0.1851 0.3160 0.4544

Tenth interim 0.1271 0.3603 0.4874 0.6075

Eleventh interim 0.2167 0.1861 0.4028 0.4150

Final 0.0000 0.3620 0.3620 0.4645

Annual Long Report and audited Financial Statements • May 2021 77 M&G Index-Linked Bond Fund Authorised Corporate Director’s Report

Investment objective The fund manager seeks to take advantage of ‘relative value’ opportunities within the inflation-linked bond The fund aims to provide a higher total return (the market, which involves buying the inflation-linked combination of capital growth and income), net of the bonds that offer the best value. ongoing charge figure, than that of the FTSE Actuaries UK Index-Linked Gilts All Stocks Index over any five- Individual credit selection is carried out with the year period. assistance of an in-house team of credit analysts to complement the fund manager’s views. Investment policy At least 70% of the fund is invested, directly or Benchmark indirectly, in inflation-linked debt securities issued or Benchmark: FTSE Actuaries UK Index-Linked Gilts All guaranteed by the UK government, and denominated in Stocks Index. sterling. The benchmark is a target which the fund seeks to The fund’s indirect exposure to inflation-linked debt outperform. securities is achieved by investing through a The index has been chosen as the fund’s benchmark as combination of instruments. These include the it best reflects the scope of the fund’s investment combination of government bonds or corporate bonds policy. The benchmark is used solely to measure the with credit derivatives, such as credit default swaps. fund’s performance and does not constrain the fund‘s Other investment may include: portfolio construction.

• debt securities issued or guaranteed by The fund is actively managed. governments and their agencies, public The fund manager has complete freedom in choosing authorities, quasi-sovereigns, supranational bodies which investments to buy, hold and sell in the fund. The or corporate debt instruments denominated in any fund’s holdings may deviate significantly from the currency; and benchmark’s constituents. • other transferable securities, cash, and near cash, For unhedged share classes, the benchmark is shown in directly or via collective investment schemes the share class currency. (including funds managed by M&G). Derivatives may be used for investment purposes, Risk profile efficient portfolio management and hedging. The fund invests mainly in index-linked fixed income securities issued by governments and companies. Non- Investment approach sterling denominated securities may be held. The fund The fund is diversified across a range of inflation-linked is, therefore, subject to the price volatility of the global debt securities from a variety of sectors. The fund’s bond market as well as the performance of individual investment approach is based on the principle that issuers. In addition, the fund may be subject to returns from bond markets are driven by a combination fluctuations in currency exchange rates. of macroeconomic factors such as expectations on The fund’s exposure to debt securities may be gained interest rates, inflation and economic growth. As through the use of derivatives. In association with the different factors dominate returns at different stages of use of derivatives, including those instruments not the economic cycle, the manager applies a flexible traded through an exchange, collateral is deposited in investment approach, adjusting the portfolio’s duration as deemed appropriate.

78 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Authorised Corporate Director’s Report

order to mitigate the risk that a counterparty may On 2 November 2020, Miles Tym was appointed fund default on its obligations or become insolvent. manager of the M&G Index-Linked Bond Fund. The fund’s investment objective and policy remain Portfolio diversification is key in managing liquidity and unchanged. default risks as well as reducing market risk. The fund’s risks are measured and managed as an integral part of For the performance of each share class, please refer the investment process. to the ‘Long-term performance by share class’ table in the ‘Financial highlights’ section of this report. The following table shows the risk number associated with the fund and is based on Sterling Class ‘A’ shares. Performance review

Low risk High risk UK government bonds (also known as gilts) delivered negative returns in the 12 months to the end of May Typically lower rewards Typically higher rewards 2021, with index-linked government bonds outperforming conventional gilts. 12345 67 Index-linked bonds refer to bonds where both the value of the loan and the interest payments are adjusted in The above number: line with inflation over the life of the security. In bond • is based on the rate at which the value of the fund markets, actual or expected declines in interest rates has moved up and down in the past and is based typically support sentiment towards government bonds. on historical data so may not be a reliable indicator Investors turned away from government bonds during ofthefutureriskprofileofthefund. periods of greater optimism regarding the economy and • is not guaranteed and may change over time and the progress of the coronavirus pandemic, leading to the lowest risk number does not mean risk free. greater risk appetite at times, such as in August 2020. However, gilts and index-linked gilts were supported at • has not changed during this period. times when investors turned to their perceived ‘safe haven’ characteristics during periods of uncertainty - Investment review for example when progress in the Brexit trade negotiations seemed unlikely. As at 1 June 2021, for the year ended 31 May 2021 Early summer 2020 saw signs that the rate of Performance against objective coronavirus infection may be slowing and some Between 1 June 2020 (the start of the review period) lockdown restrictions in certain parts of the global and 1 June 2021, the M&G Index-Linked Bond Fund’s economy were eased, leading to improved risk appetite. Sterling Class ‘A’ and ‘I’ shares delivered a total return This positive mood turned more cautious later in the (the combination of income and growth of capital) of summer and autumn due to concerns about a second -3.7% and -3.4%, respectively. This was slightly ahead wave of the virus and the effect on prospects for the of the return from the fund’s benchmark, the FTSE global economy. Uncertainty ahead of the US Actuaries UK Index-Linked Gilts All Stocks Index, which presidential election also weighed on risk appetite in was -3.8% over the same period. the autumn, with Joe Biden ultimately emerging Over five years, the fund marginally trailed the victorious. benchmark. The fund’s Sterling Class ‘I’ shares returned In November 2020, index-linked bonds rallied strongly 6.3% pa and the Class ‘A’ shares returned 6.1% pa, after the announcement that the Retail Prices Index while the benchmark returned 6.5% pa over this period. (RPI) would no longer be used as a reference for index-linked gilts from February 2030, instead

Annual Long Report and audited Financial Statements • May 2021 79 M&G Index-Linked Bond Fund Authorised Corporate Director’s Report

switching to the Consumer Prices Index (CPI). This However the economy remains smaller than before the development could potentially have a considerable start of the pandemic. impact on index-linked gilts with a long time to maturity UK consumer price inflation as measured by the and could complicate the process of determining bond Consumer Prices Index (CPI) rose sharply to 1.5% in valuations. This positive market reaction was April 2021 from 0.7% the previous month, largely due to unexpected and may indicate investors had been price rises being compared with falls at the start of the waiting for greater clarity. pandemic. In our view, inflation is likely to increase In December, investor sentiment was supported by the periodically in the short term due to supply disruptions rapid rollout of the UK vaccination programme, although and imbalances between supply and demand in the the emergence of some highly infectious strains of the recovery phase of the economy. virus caused unease and gilts gained over the month. A Investment activities source of uncertainty for many months, the UK and The fund’s performance is affected by its ‘duration’, European Union continued trade negotiations up to the which refers to the portfolio’s sensitivity to changes in wire, finally securing a last-minute trade deal at the end interest rates and is measured in years. At the start of of the year. the period under review, the fund was positioned to a In January, and more notably in February, yields in major neutral duration stance, due to the huge levels of government bonds and UK index-linked gilts rose central bank support in response to the pandemic. sharply (and prices fell) due to expectations of a Since net gilt issuance was reduced to zero as a result significant fiscal stimulus in the US, potentially leading of the Bank of England’s bond purchases during the to higher inflation. Greater optimism regarding the previous few months, we expected net supply to economy and the generally smooth rollout of vaccines increase in anticipation of bond-buying activity starting in developed economies also contributed to the sell-off. to be scaled back. For this reason, and also because we In addition to previous significant rescue packages felt valuations had become stretched, we decided to earlier in the pandemic, in the spring US President lower the fund’s sensitivity to changes in interest rates Biden duly pushed a US$1.9 trillion fiscal package relative to the benchmark. At the same time, we were through the Senate. also anticipating the potential changes to the RPI, Risky assets subsequently saw positive performance mentioned above, which we thought could possibly take due to an improvement in the economic outlook and effect from 2025. with the US Federal Reserve indicating they were in no Following the change in fund manager, we reduced the rush to roll back monetary stimulus. At this time, index- non-inflation linked exposure in the fund. We increased linked gilts gained, although not enough to outweigh the underweight exposure to index-linked gilts with 15- their declines earlier in the year. and 20-year maturities, while increasing the exposure The UK vaccination programme continued to proceed to index-linked gilts maturing in 2028 and 2055. We positively and restrictions were partially eased in May, believe the index-linked gilt maturing in 2055 remained although the emergence of a highly transmissible attractively priced relative to other ultra-long index- variant of the virus in India tempered optimism to an linked gilts of similar maturities. extent. As a result of the rally in index-linked bonds after the Against the backdrop of the third population lockdown, announcement regarding the RPI, described above, we the UK economy shrank in the first three months of sold index-linked gilts and bought fixed-rate gilts in the 2021, but activity subsequently picked up once portfolio. restrictions eased, thanks to strong retail spending.

80 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Authorised Corporate Director’s Report

Early in the new year, we took the opportunity to close companies to adapt to COVID-19 restrictions and the the overweight exposure (relative to the benchmark) to new post-Brexit environment. long-dated conventional fixed-rate gilts following their Given the huge increase in household savings during strong performance relative to index-linked gilts. With the course of the pandemic, there is expected to be a the threat of global inflation increasingly at the significant rise in consumer spending once the forefront of investors’ minds, an underweight position restrictions are lifted. However, a highly infectious strain in index-linked gilts into conventional gilts was of the virus, which was originally identified in India, is becoming less compelling. causing concern in the UK and may impede progress. In March, there was a benchmark extension which, on a Longer term, the full impact of the pandemic on the technical basis, likely pushed long-dated index-linked economy may weigh on the recovery as government bonds to expensive levels. As a result the manager took support ends, while the authorities are also likely to the opportunity to sell long-dated index-linked gilts and raise taxes to pay for the significant sums spent to purchased fixed-rate gilts. bolster the economy. In March we also bought back into index-linked gilts Investors tend to turn to gilts during periods of volatility with 15- and 20-year old maturities, which had as they are seen as representing lower risk than other underperformed alongside the general market sell-off, asset classes. We therefore believe that conventional becoming attractively valued. government bonds and index-linked UK government Against a backdrop of global economic recovery and bonds should prove attractive to investors in the event the expectation of higher inflation, inflation-linked of any market volatility. valuations globally have risen to increasingly expensive Miles Tym levels since the start of 2021, in our view. Towards the Fund manager end of the period, we have therefore taken the An employee of M&G FA Limited which is an associate of M&G Securities opportunity to establish an underweight exposure to Limited. long-dated index-linked government bonds and an With effect from 2 November 2020, Miles Tym took over from Ben Lord as overweight position in long-dated conventional gilts, fund manager. which we consider to be more favourably valued. 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 Towards the end of the period, we further reduced 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 fund’s overall exposure to long-dated index-linked gilts Financial Adviser. into 20-year index-linked gilts, taking the fund’s overall exposure to interest rate risk down as valuations look attractive.

We will continue to focus on an active gilt-specific, relative-value approach and seek to take advantage of pricing anomalies between gilts of differing maturities.

Outlook The UK economy is starting to show signs of improvement in the manufacturing and construction sectors, despite having effectively been in lockdown since November 2020. Economic activity has been assisted by the successful vaccine rollout and steps by

Annual Long Report and audited Financial Statements • May 2021 81 M&G Index-Linked Bond Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income 180,071 99.36 99.22

Debt securities 180,071 99.36 99.22

‘AA’ credit rated bonds 180,071 99.36 97.78

£820,000 Network Rail Infrastructure Finance IL 1.9618% 01/12/2025 1,602 0.88

£3,902,600 UK Treasury 1.625% 22/10/2054 4,257 2.35

£3,691,815 UK Treasury IL 0.125% 22/03/2024 4,989 2.75

£3,833,676 UK Treasury IL 0.125% 22/03/2029 6,014 3.32

£7,033,809 UK Treasury IL 0.125% 10/08/2031 9,442 5.21

£14,689,090 UK Treasury IL 0.125% 22/03/2039 22,684 12.52

£3,920,242 UK Treasury IL 0.125% 22/03/2044 8,114 4.48

£1,306,606 UK Treasury IL 0.125% 22/03/2046 2,636 1.46

£3,245,677 UK Treasury IL 0.125% 22/03/2051 6,326 3.49

£7,629,626 UK Treasury IL 0.125% 22/11/2056 18,581 10.25

£5,288,693 UK Treasury IL 0.375% 22/03/2062 17,202 9.49

£2,800,164 UK Treasury IL 0.5% 22/03/2050 7,985 4.41

£14,283,029 UK Treasury IL 0.75% 22/03/2034 27,253 15.04

£9,439,784 UK Treasury IL 1.125% 22/11/2037 23,869 13.17

£2,017,889 UK Treasury IL 1.25% 22/11/2055 8,435 4.65

£4,901,547 UK Treasury IL 1.875% 22/11/2022 7,721 4.26

£2,232,000 University of Cambridge IL 0.25% 27/06/2068 2,961 1.63

‘A’ credit rated bonds 0 0.00 0.20

Bonds with no credit rating 0 0.00 1.24

Portfolio of investments 180,071 99.36 99.22

Cash equivalents 1,252 0.69 0.67

‘AAA’ rated money market fundsa 1,252 0.69 0.67

1,252,000 Northern Trust Global Fund - Sterling 1,252 0.69

Total portfolio (notes 2c & 2d on page 9) 181,323 100.05 99.89

Net other assets/(liabilities) (92) (0.05) 0.11

Net assets attributable to shareholders 181,231 100.00 100.00

82 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial highlights

Class ‘A’ (Accumulation) shares. As different share Sterlingb classes have different attributes, for example charging Class ‘A’ -3.7 +4.1 +6.1 +6.2c structures and minimum investments, please be aware d that their performance may be different. For more Class ‘I’ -3.4 +4.3 +6.3 +6.3 information on the different share classes in this fund a Absolute basis. b please refer to the Prospectus for M&G Investment Price to price with income reinvested. c 4 October 1999, the end of the initial offer period of the predecessor unit Funds (2), which is available free of charge either from trust. d our website at www.mandg.co.uk/prospectuses or by 3 August 2012, the launch date of the share class. calling M&G Customer Relations.

Fund level performance

Fund net asset value as at 31.05.21 31.05.20 31.05.19 £’000 £’000 £’000

Fund net asset value (NAV) 181,231 266,136 287,753

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

October 1999 = 100, plotted monthly Chart date 1 June 2021

450 400 350

300

250

200

170

140

120

100 9901 03 05 07 09 11 13 15 1719 21

Sterling Class ‘A’ (Accumulation) shares* FTSE Actuaries UK Index-Linked Gilts All Stocks Index

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

Annual Long Report and audited Financial Statements • May 2021 83 M&G Index-Linked Bond Fund Financial highlights

Operating charges The operating charges paid by each share class of the Operating charges include payments made to M&G and fund are shown in the following performance tables. to providers independent of M&G: These charges do not include portfolio transaction costs or any entry and exit charges (also known as initial • Annual charge: Charge paid to M&G covering the and redemption charges). The charging structures of annual cost of M&G managing and administering share classes may differ, and therefore the operating the fund and the costs of third parties providing charges may differ. services to the fund. From 1 August 2019, this charge rolls all costs that make up the operating Operating charges are in line with the ongoing charges charges into one annual charge. shown in the Key Investor Information Document, other For every £1 billion of a fund’s net asset value, a than where there have been extraordinary legal or tax discount of 0.02% will be applied to that fund’s expenses, or an estimate has been used for the annual charge (up to a maximum of 0.12%). ongoing charge because a material change has made the operating charges unreliable as an estimate of • Extraordinary legal and tax expenses: Costs that future charges. specifically relate to legal or tax claims that are both exceptional and unforeseeable. Such expenses are Portfolio transaction costs uncommon, and would not be expected in most years. Portfolio transaction costs are incurred by funds when Although they result in a short-term cost to the fund, buying and selling investments. These costs vary generally they can deliver longer term benefits for depending on the types of investment, their market investors. capitalisation, country of exchange and method of execution. They are made up of direct and indirect • Investment management: Charge paid to M&G for portfolio transaction costs: investment management of the fund. This charge forms part of the annual charge. • Direct portfolio transaction costs: Broker execution commission and taxes. • Administration: Charge paid for administration services in addition to investment management – • Indirect portfolio transaction costs: ‘Dealing any surplus from this charge will be retained by spread’ – the difference between the buying and M&G. From 1 August 2019 this charge is rolled into selling prices of the fund’s investments; some the annual charge. types of investment, such as fixed interest securities, have no direct transaction costs and • Oversight and other independent services: only the dealing spread is paid. Charges paid to providers independent of M&G for services which include depositary, custody and Investments are bought or sold by a fund when audit. From 1 August 2019 these charges will be changes are made to the investment portfolio and in paid by M&G and rolled into the annual charge. response to net flows of money into or out of the fund from investors buying and selling shares in the fund.

84 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial highlights

receive. As the fund invests mainly in fixed interest securities, the direct transaction costs paid on other investments are too small to be reflected in the table below. To give an indication of the indirect portfolio dealing costs the table below 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.

Portfolio transaction costs

as at 31 May 2021 2020 2019 Averagea Indirect portfolio %%% % transaction costs

Average portfolio 0.15 0.13 0.13 0.14 dealing spread a Average of first three columns.

Annual Long Report and audited Financial Statements • May 2021 85 M&G Index-Linked Bond Fund Financial highlights

represent an annual rate except for the ‘Return after fortheyearto31May 2021 2020 2019 operating charges’ which is calculated as a percentage Change in NAV per share UK p UK p UK p of the opening net asset value per share (NAV). ‘Dilution Opening NAV 189.11 178.53 162.16 adjustments’ are only in respect of direct portfolio Return before operating (5.16) 11.59 17.46 transaction costs. charges

Sterling Class ‘A’ Income share Operating charges (1.01) (1.01) (1.09) Return after operating (6.17) 10.58 16.37 performance charges The share class was launched on 4 October 1999. Distributions 0.00 0.00 0.00 for the year to 31 May 2021 2020 2019 Retained distributions 0.00 0.00 0.00 Change in NAV per share UK p UK p UK p Closing NAV 182.94 189.11 178.53 Opening NAV 164.61 155.40 141.16 Direct transaction costs UK p UK p UK p Return before operating (4.47) 10.09 15.19 charges Costs before dilution 0.00 0.00 0.00 adjustments Operatingcharges (0.88) (0.88) (0.95) Dilution adjustmentsa 0.00 0.00 0.00 Return after operating (5.35) 9.21 14.24 charges Total direct transaction costs 0.00 0.00 0.00

Distributions 0.00 0.00 0.00 Performance and charges % % %

Closing NAV 159.26 164.61 155.40 Direct portfolio transaction 0.00 0.00 0.00 costsb Direct transaction costs UK p UK p UK p Operating chargesc 0.55 0.57 0.66 Costs before dilution 0.00 0.00 0.00 adjustments Return after charges -3.26 +5.93 +10.09

Dilution adjustmentsa 0.00 0.00 0.00 Distribution yield 0.00 0.00 0.00

Total direct transaction costs 0.00 0.00 0.00 Other information

Performance and charges % % % Closing NAV (£’000) 32,421 37,463 44,350

Direct portfolio transaction 0.00 0.00 0.00 Closing NAV (%) 17.89 14.08 15.41 costsb Number of shares 17,722,283 19,810,354 24,841,658 Operating chargesc 0.55 0.57 0.66 Highest share price (UK p) 192.42 190.30 178.57 Return after charges -3.25 +5.93 +10.09 Lowest share price (UK p) 170.03 154.36 157.23 Distribution yield 0.00 0.00 0.00

Other information

Closing NAV (£’000) 12,690 14,654 15,929

Closing NAV (%) 7.00 5.51 5.54

Number of shares 7,968,016 8,902,149 10,250,393

Highest share price (UK p) 167.50 165.65 155.44

Lowest share price (UK p) 148.00 134.36 136.86

86 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial highlights

Sterling Class ‘I’ Income share Sterling Class ‘I’ Accumulation share performance performance The share class was launched on 3 August 2012. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

OpeningNAV 1,769.19 1,666.49 1,512.24 Opening NAV 1,771.50 1,668.67 1,514.22

Return before operating (48.17) 108.36 162.87 Return before operating (48.31) 108.60 163.06 charges charges

Operating charges (4.99) (5.66) (8.62) Operating charges (4.92) (5.77) (8.61)

Return after operating (53.16) 102.70 154.25 Return after operating (53.23) 102.83 154.45 charges charges

Distributions 0.00 0.00 0.00 Distributions 0.00 0.00 0.00

Closing NAV 1,716.03 1,769.19 1,666.49 Retained distributions 0.00 0.00 0.00

Direct transaction costs UK p UK p UK p Closing NAV 1,718.27 1,771.50 1,668.67

Costs before dilution 0.00 0.00 0.00 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00 adjustments

Total direct transaction costs 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.00 0.00 0.00

Direct portfolio transaction 0.00 0.00 0.00 Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating chargesc 0.29 0.34 0.56 costsb

Return after charges -3.00 +6.16 +10.20 Operating chargesc 0.29 0.34 0.56

Distribution yield 0.00 0.00 0.00 Return after charges -3.00 +6.16 +10.20

Other information Distribution yield 0.00 0.00 0.00

Closing NAV (£’000) 29,950 95,139 86,709 Other information

Closing NAV (%) 16.53 35.75 30.13 Closing NAV (£’000) 106,170 118,880 140,765

Numberofshares 1,745,308 5,377,557 5,203,124 Closing NAV (%) 58.58 44.66 48.92

Highest share price (UK p) 1,800.47 1,777.11 1,666.86 Number of shares 6,178,922 6,710,713 8,435,781

Lowest share price (UK p) 1,593.68 1,443.40 1,466.64 Highest share price (UK p) 1,802.83 1,779.44 1,669.04

Lowest share price (UK p) 1,595.77 1,445.29 1,468.56

Annual Long Report and audited Financial Statements • May 2021 87 M&G Index-Linked Bond Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 (9,197) 18,595

Revenue 5 2,159 (1,665)

Expenses 6 (693) (1,046)

Net revenue/(expense) before taxation 1,466 (2,711)

Taxation 7 0 0

Net revenue/(expense) after taxation 1,466 (2,711)

Total return before equalisation (7,731) 15,884

Equalisation 8 286 349

Change in net assets attributable to shareholders from (7,445) 16,233 investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 266,136 287,753

Amounts received on issue of shares 10,654 27,743

Amounts paid on cancellation of shares (88,179) (65,659)

(77,525) (37,916)

Dilution adjustments 65 66

Change in net assets attributable to shareholders from (7,445) 16,233 investment activities (see above)

Closing net assets attributable to shareholders 181,231 266,136

88 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 180,071 264,044

Current assets

Debtors 9 85 113

Cash and bank balances 10 61 227

Cash equivalents 1,252 1,793

Total assets 181,469 266,177

Liabilities

Creditors

Other creditors 11 (238) (41)

Total liabilities (238) (41)

Net assets attributable to shareholders 181,231 266,136

Annual Long Report and audited Financial Statements • May 2021 89 M&G Index-Linked Bond Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

In determining the amount available for distribution, a transfer has been made between revenue and capital to disregard the change in the Retail Prices Index during the period in respect of interest from index-linked gilt-edged securities. This is to contribute to the preservation of the share value in real terms.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities (9,176) 18,123

Derivative contracts (21) 472

Net capital gains/(losses) (9,197) 18,595

2021 2020 for the year to 31 May £’000 £’000

a) Purchases

Debt securitiesa 359,378 329,098

b) Sales

Debt securitiesa 435,784 367,440

c) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.15 0.13

a These transaction types do not attract direct portfolio transaction costs. b Average portfolio dealing spread at the balance sheet date.

90 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial statements and notes

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 01

Interest distributions 06

Interest on debt securities 2,158 (1,673)

Rebate of ongoing charges from underlying funds 1 1

Total revenue 2,159 (1,665)

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 691 768

Annual management chargea 0197

Administration chargea 070

691 1,035

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 04

Other expenses

Audit fee (including VAT)a 02

Interest payable 25

Safe custody chargea 00

Total expenses 693 1,046 a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019. As of 1 August 2019 these charges have been replaced by the single annual charge. Audit fees for the financial year ending 2021 were £12,000 (2020: £12,000) (including VAT), which are covered by the annual charge.

Annual Long Report and audited Financial Statements • May 2021 91 M&G Index-Linked Bond Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax 00

Deferred tax (note 7c) 00

Total taxation 00

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 1,466 (2,711)

Corporation tax at 20% 293 (542)

Effects of:

Relief for indexation on UK gilts (1,139) (557)

Current year expenses not utilised 846 1,099

Total tax charge (note 7a) 00

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset of £8,450,000 (2020: £7,604,000) arising as a result of having excess management expenses and interest distributions. We do not expect this asset to be utilised in the foreseeable future. 8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Interest distributions £’000 £’000 £’000 £’000

Interim 00 00

Final 00 00

Total net distributions 00

Income deducted on cancellation of shares (417) (604)

Income received on issue of shares 131 255

Equalisation (286) (349)

Net revenue/(expense) per statement of total return 1,466 (2,711)

Expenses offset against capital 189 384

Effective yield adjustment not distributed (5,697) (2,784)

Income deficit transferred to capital 3,756 4,762

Equalisation (286) (349)

a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

92 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial statements and notes

9Debtors

2021 2020 as at 31 May £’000 £’000

Debt security interest receivable 85 113

Total debtors 85 113

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Cash held as bank balances 61 227

Total cash and bank balances 61 227

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 221 0

Annual charge payable 17 28

Expenses payable 013

Total other creditors 238 41

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 8,902,149 360,535 (1,294,668) 7,968,016

Class ‘A’ Accumulation 19,810,354 1,119,871 (3,207,942) 17,722,283

Class ‘I’ Income 5,377,557 5,672 (3,637,921) 1,745,308

Class ‘I’ Accumulation 6,710,713 463,652 (995,443) 6,178,922

Annual Long Report and audited Financial Statements • May 2021 93 M&G Index-Linked Bond Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 14.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 0.55 0.55

Class ‘I’ 0.30 0.25

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 4.81% (2020: 4.29%) of the fund’s shares.

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

94 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial statements and notes

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 175,508 0 258,260 0

Level 2 4,563 0 5,784 0

Level3 0000

180,071 0 264,044 0

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

The VaR limit set during the financial year to 31 May 2021 was 20% (2020: 20%).

The lowest, highest and average VaR, as well as utilisation of VaR with reference to the limit above, are calculated during the financial years ended 31 May 2021 and 31 May 2020.

for the year to 2021 2021 2020 2020 31 May %ofVaR Utilisation %ofVaR Utilisation of VaRa of VaRa 20% 20%

Lowest 8.81 48.94 6.06 30.30

Highest 13.54 75.22 14.35 71.75

Average 10.80 59.97 4.44 22.21 a The VaR on the fund has been divided by its maximum limit.

Annual Long Report and audited Financial Statements • May 2021 95 M&G Index-Linked Bond Fund Financial statements and notes

2021 2020 as at 31 May £’000 £’000

Investment grade securities 180,071 260,734

Unrated securities 03,310

Other investments 00

Total 180,071 264,044

21 Leverage risk Funds using VaR approaches are required to disclose the level of leverage employed during the financial reporting period.

for the year to 2021a 2021a 2020a 2020a 31 May £’000 %b £’000 %b

Lowest 0 0.00 0 0.00

Highest 0 0.00 5,042 1.90

Average 0 0.00 2,495 0.90

a Leverage has been calculated using the Gross Sum of Notional Approach for derivative positions only (including forward currency contracts) and excludes all physical holdings. b Expressed as a percentage over fund valuation.

22 Interest distribution tables This fund pays semi-annual interest distributions and the following table sets out the distribution periods.

Semi-annual distribution periods

Start End Xd Payment

Interim 01.06.20 30.11.20 01.12.20 31.01.21

Final 01.12.20 31.05.21 01.06.21 31.07.21

96 Annual Long Report and audited Financial Statements • May 2021 M&G Index-Linked Bond Fund Financial statements and notes

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

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

Sterling Class ‘A’ Income shares

Interest Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000

Sterling Class ‘A’ Accumulation shares

Interest Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000

Sterling Class ‘I’ Income shares

Interest Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000

Sterling Class ‘I’ Accumulation shares

Interest Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.0000 0.0000 0.0000 0.0000

Final 0.0000 0.0000 0.0000 0.0000

Annual Long Report and audited Financial Statements • May 2021 97 M&G Index Tracker Fund Authorised Corporate Director’s Report

* FTSE® International. FTSE is a joint trademark of the London Stock Investment objective and policy Exchange Limited and the Financial Times Limited and is used by FTSE up to 27 May 2021 International Limited under licence. The FTSE All-Share Index is calculated by FTSE International Limited. FTSE International Limited does The fund is designed to track the FTSE All-Share Index. not sponsor, endorse or promote these products. All copyright in the The fund manager has full discretionary investment index values and constituent lists rests with FTSE International Limited. M&G Securities Limited has obtained full licence from FTSE International management powers within the confines of this Limited to use such copyright in the creation of this product. investment objective of the fund. Investment approach from 28 May Investment objective from 28 May 2021 2021 The fund is designed to track the FTSE All-Share Index. The fund aims to track the performance of the FTSE The Index represents the performance of small, All-Share Index, gross of the ongoing charge figure medium and large companies listed on the London (OCF). The return received by shareholders will be Stock Exchange’s main market. reduced by the effects of charges. Thefundusesastratifiedsamplingmethodtotrackthe Index and therefore may not hold all the Index Investment policy from 28 May constituents. 2021 The fund will normally hold all of the largest securities The fund aims to be invested in the constituents of the in the Index, as well as a selection of the remaining Index. The fund typically invests directly. smaller securities to ensure that the fund’s capitalisation, sector and industry weights are in line The fund may also invest in other transferable with the Index weightings. securities, cash and near cash for liquidity purposes, directly and via collective investment schemes Using a stratified sampling method may affect the (including funds managed by M&G). fund’s ability to track the Index. There are many factors which do not affect the Index, but do impact on the The fund may hold other transferable securities and fund’s performance, such as transaction costs, other financial instruments where these are held as a expenses and illiquidity of any security. Cash flows, consequence of having invested in an Index including income and distributions, into and out of the constituent. The fund can invest in securities joining or fund may also have an impact on performance as the likely to join the index. fund rebalances, due to the dealing spreads and broker The fund may use derivatives for efficient portfolio commission incurred. In addition, the Index constituents management and hedging only. are not fixed, it rebalances quarterly, and it may take time for the fund to reflect any changes. Investment approach up to The tracking method (combining the stratified sampling technique and the use of derivatives when required for 27 May 2021 short term efficient portfolio management purposes) The M&G Index Tracker Fund is a UK fund that broadly does not introduce any counterparty risk. replicates the FTSE All-Share Index*. The fund holds The tracking error between the performance of the nearly all of the companies in the index and closely fund (gross of OCF) and that of the Index is anticipated matches the weight that each represents in the FTSE to be up to 0.3% per annum under normal All-Share Index. circumstances.

98 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Authorised Corporate Director’s Report

Benchmark up to 27 May 2021 The following table shows the risk number associated with the fund and is based on Sterling Class ‘A’ shares. Benchmark: FTSE All-Share Index. Low risk High risk The index is a constraining benchmark for the fund.

The fund is passively managed and aims to track the Typically lower rewards Typically higher rewards return of the index. The fund‘s holdings are therefore unlikely to significantly deviate from the benchmark‘s 123456 7 constituents. The above number: For unhedged and hedged share classes, the benchmark is shown in the share class currency. • 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 Benchmark from 28 May 2021 of the future risk profile of the fund. Benchmark: FTSE All-Share Index. • is not guaranteed and may change over time and The fund is passively managed. The Index is used as a the lowest risk number does not mean risk free. target benchmark as the fund aims to track the returns • has changed during this period. From 1 June of the Index gross of the ongoing charge figure . 2020 to 23 July 2020 the risk number was 5. Although the fund‘s holdings will be predominantly or entirely comprised of benchmark constituents, the weights held in the fund may deviate from the weights Investment review of the benchmark‘s constituents. As at 1 June 2021, for the year ended 31 May 2021

For unhedged and hedged share classes, the Performance against objective benchmark is shown in the share class currency. The M&G Index Tracker Fund is designed to track the FTSE All-Share Index. Between 1 June 2020 (the start of the review period) and 1 June 2021, the fund’s Risk profile Sterling Class ‘A’ and Class ‘C’ shares produced a total The fund is designed to track the performance of the return (the combination of income and growth of FTSE All-Share Index, which represents a broad spread capital) of 21.4% and 21.9%, respectively in sterling of UK company shares. Its performance, therefore, terms. The fund’s benchmark, the FTSE All-Share Index, reflects the price volatility of the UK stockmarket and produced a total return of 22.4% over the same period. the performance of individual companies. For the performance of each share class, please refer The fund holds nearly all of the companies in the index to the ‘Long-term performance by share class’ table in and closely matches the weight that each represents in the ‘Financial highlights’ section of this report. the FTSE All-Share Index. The fund’s risks are measured Performance review and managed as an integral part of the investment There are several factors that can result in the fund process. underperforming or outperforming the benchmark index over specific periods.

Price swings – This is a dilution adjustment within the share price, which aims to protect existing shareholders from a dilution in performance resulting from deals placed to buy or sell shares. This pricing method has

Annual Long Report and audited Financial Statements • May 2021 99 M&G Index Tracker Fund Authorised Corporate Director’s Report

the effect of moving the single price up or down from source of uncertainty for many months, the UK and EU the mid-price. Much of the fund’s apparent finally secured a last-minute trade deal at the end of the underperformance was due to a price swing at the start year. and end of the period under review. The new year saw early optimism fade somewhat due Fund charges – The fees we charge for managing the to the emergence of more transmissible mutations of fund, as well as the costs incurred when we buy and sell the virus, leading to the imposition of a third population underlying investments, will mean the fund’s return lockdown and renewed business restrictions. At the after charges is below that of the index (which does not same time, the UK announced a £4.6 billion relief reflect the costs of investing). package for closed retail, hospitality and leisure businesses. Timing – This reflects the fact that the fund is priced at midday while the index is priced at close of business In late February, concerns about higher inflation, fuelled day. by hopes of a rapid economic recovery in the near term, drained investors’ risk appetite. March saw more Tracking difference – This refers to the difference in positive sentiment, buoyed by US President Biden’s performance, positive or negative, due to the fund not US$1.9 trillion relief package. In the UK, chancellor Rishi fully replicating the composition of the index. Sunak extended the government’s support measures As the fund tracks the index, its overall performance for the economy. can largely be explained by market developments The UK vaccination programme continued to proceed during the period under review. It is worth noting that, positively and restrictions were partially eased in April in the global economy, the fates of individual markets and May, although the emergence of a particularly are often closely connected to each other. As a result, transmissible variant of the virus tempered optimism to the performance and prospects of the UK stockmarket an extent. tend to be affected by developments around the world. Against the backdrop of business restrictions and Coronavirus remained a dominant theme in the population lockdown, the UK economy shrank in the 12 months under review; during the summer a first three months of 2021, but subsequently picked up resurgence of COVID-19 in different countries, once restrictions eased, thanks to strong retail including the UK, led to renewed restrictions and spending. However, it remains smaller than before the increased investor risk aversion. Minimal progress in the start of the pandemic. Brexit negotiations with the European Union (EU) also weighed on the mood. In other data, UK consumer price inflation, measured by the Consumer Prices Index (CPI) rose sharply over the The UK stockmarket rallied strongly in November 2020, 12 months to April 2021 to 1.5% from 0.7% in the thanks to positive news on a vaccine for COVID-19. previous month, largely due to the fact that the annual Following regulatory approval for a number of vaccines figure was calculated comparing current increases in in the UK, a national vaccination programme was prices with falls at the start of the pandemic. quickly rolled out in December, further boosting Unemployment levels in the UK dipped to 4.8% in the investors’ risk appetite, despite the emergence of some three months to March, compared with 4.9% in the highly infectious strains of the virus. three months to February. Meanwhile, the UK Investors also welcomed the result of the US government has announced an extension to its furlough presidential election, which was ultimately seen as a scheme that pays 80% of employees’ wages until supportive outcome for markets and global trade. A September 2021, although from July that percentage will decrease.

100 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Authorised Corporate Director’s Report

At a sector level, share prices generally declined until while the holding in Travis Perkins was reduced the November rally, and most sectors subsequently reflecting its smaller weight in the index following the rallied thanks to investors’ increased appetite for risk. demerger. Industrial metals and mining stocks in particular fared In other corporate action, supermarket Tesco sold its well over the full 12 months, largely reflecting increased business in Thailand, leading to the return of £5bn to demand from China. Other economically sensitive areas shareholders through a special dividend. of the market, including banks and auto & components, also performed well, while more defensive sectors such A number of sales related to merger and acquisition as tobacco and pharmaceuticals lagged. activity, including security services company G4S, copper miner Kaz Minerals and bookmaker William Hill, Turning to individual stocks, leading performers which were bought by Allied Universal Security included metal and mining firms Rio Tinto, Glencore and Services, investment holding company Vostok Cooper, Anglo American as well as banking group HSBC and US company Caesars Entertainment, respectively. Holdings. In contrast, significant detractors included G4S, Kaz Minerals and William Hill subsequently left the pharmaceutical companies GlaxoSmithKline and index and the portfolio. AstraZeneca as well as British American Tobacco. Outlook Investment activities The UK economy is starting to show signs of Anglo-Dutch consumer goods firm Unilever has improvement in the manufacturing and construction simplified its parent company structure, moving from sectors, despite having effectively been in lockdown two legal entities into a single holding company. In a since November 2020. Economic activity has been significant transaction, we bought additional Unilever helped by the successful vaccine rollout and steps by shares to reflect this restructuring. We funded this companies to adapt to COVID-19 restrictions and the purchase by decreasing holdings across the entire new post-Brexit environment. portfolio. Some of the most significant transactions, which were in proportion to the individual stocks’ Given the huge increase in household savings during weightings in the FTSE All-Share Index, involved the course of the pandemic, there is expected to be a reducing the holdings in pharmaceutical firms significant rise in consumer spending once the AstraZeneca and GlaxoSmithKline, banking and restrictions are lifted. However, a highly infectious strain financial services group HSBC and British American of the virus, which was originally identified in India, is Tobacco. causing concern in the UK and further afield and may impede progress. A number of companies raised funds by issuing shares during the period and we participated in this activity by Longer term, the full impact of the pandemic on the buying shares in sports betting and gaming firm Flutter economy may weigh on the recovery as government Entertainment, London Stock Exchange, Watches of support ends, while the authorities are also likely to Switzerland, financial services company Hargreaves raise taxes to pay for the significant sums spent to Lansdown and banking group NatWest. bolster the economy.

Elsewhere, property development and investment Richard O‘Connor company Hammerson consolidated its shares as part of Fund manager a capital reorganisation. It also raised funds through a An employee of M&G FA Limited which is an associate of M&G Securities rights issue and we participated in this activity. Limited. Please note that the views expressed in this Report should not be taken as a Home improvement retailer Wickes Group was spun off 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 from builders’ merchant Travis Perkins during the whether an investment is suitable for your needs, you should consult a period, with Wickes entering the index and portfolio, Financial Adviser.

Annual Long Report and audited Financial Statements • May 2021 101 M&G Index Tracker Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities 520,461 100.01 98.30

Software & computer services 9,302 1.79 1.90a

85,825 Ascential 313 0.06

203,564 Auto Trader 1,143 0.22

120,499 Avast 567 0.11

26,176 AVEVA 915 0.18

55,370 Bytes Technology 277 0.05

18,852 Computacenter 506 0.10

24,770 Future 703 0.14

25,311 Just Eat Takeaway.com 1,613 0.31

12,796 Kainos 182 0.03

74,499 Micro Focus 387 0.07

117,735 Moneysupermarket.com 318 0.06

90,366 NCC 268 0.05

227,619 Sage 1,494 0.29

33,736 Softcat 616 0.12

Technology hardware & equipment 247 0.05 0.02a

12,797 discoverIE 96 0.02

58,912 TT electronics 151 0.03

Telecommunications equipment 393 0.08 0.09a

157,537 Spirent Communications 393 0.08

Telecommunication service providers 11,385 2.19 2.44

232,029 Airtel Africa 183 0.03

1,936,666 BT 3,386 0.65

143,724 Helios Towers 240 0.05

13,168 Telecom Plus 156 0.03

5,783,427 Vodafone 7,420 1.43

Health care providers 1,175 0.23 0.19a

105,250 Mediclinical International 343 0.07

95,978 Spire Healthcare 234 0.05

56,546 UDG Healthcare 598 0.11

102 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Medical equipment & services 3,809 0.73 0.88a

361,288 ConvaTec 858 0.16

191,571 Smith & Nephew 2,951 0.57

Pharmaceuticals & biotechnology 40,736 7.83 10.61

286,431 AstraZeneca 23,046 4.43

23,032 Dechra Pharmaceuticals 948 0.18

14,381 Genus 726 0.14

1,076,412 GlaxoSmithKline 14,469 2.78

37,064 Hikma Pharmaceuticals 905 0.17

156,155 Indivior 244 0.05

12,953 Oxford Biomedica 148 0.03

156,997 Vectura 250 0.05

Banks 41,779 8.03 6.94a

9,568 Bank of Georgia 125 0.02

3,786,859 Barclays 6,934 1.33

34,451 Close Brothers 565 0.11

4,442,002 HSBC 20,224 3.88

149,433 Investec 464 0.09

15,311,894 Lloyds Banking 7,639 1.47

36,424 Metro Bank 40 0.01

1,096,472 NatWest 2,270 0.44

573,464 Standard Chartered 2,912 0.56

287,049 Virgin Money 606 0.12

Finance & credit services 6,938 1.33 1.44a

61,570 International Personal Finance 81 0.01

78,882 London Stock Exchange 5,973 1.15

87,138 OSB 408 0.08

69,969 Paragon Banking 340 0.06

57,170 Provident Financial 136 0.03

Investment banking & brokerage services 16,604 3.19 3.06a

209,558 3i 2,604 0.50

70,001 AJ Bell 297 0.06

Annual Long Report and audited Financial Statements • May 2021 103 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Investment banking & brokerage services (continued)

87,249 Allied Minds 20 0.00

103,021 Ashmore 408 0.08

67,809 Brewin Dolphin 231 0.04

12,000 City of London Investment 64 0.01

12,818 Georgia Capital 78 0.02

81,613 Hargreaves Lansdown 1,352 0.26

85,241 IG 730 0.14

59,192 IntegraFin 322 0.06

60,547 Intermediate Capital 1,272 0.25

253,731 IP 314 0.06

112,555 John Laing 453 0.09

25,529 JTC 165 0.03

99,659 Jupiter Fund Management 277 0.05

13,007 Liontrust Asset Management 197 0.04

595,846 M&Gb 1,457 0.28

315,415 Man 562 0.11

74,716 Ninety One 178 0.03

25,835 Plus500 390 0.08

384,529 Quilter 591 0.11

12,431 Rathbone Brothers 223 0.04

31,212 Sanne 234 0.05

25,357 Schroders 902 0.17

112,175 St. James‘s Place 1,567 0.30

479,376 Standard Life Aberdeen 1,318 0.25

186,036 TP ICAP 398 0.08

Equity investment instruments 34,776 6.68 6.23

137,908 3i Infrastructure 425 0.08

47,719 Aberdeen Asian Income Fund 107 0.02

113,160 Aberdeen Diversified Income and Growth Trust 110 0.02

34,599 Aberdeen New Dawn Investment Trust 112 0.02

11,497 Aberdeen New India Investment Trust 62 0.01

104 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Equity investment instruments (continued)

14,412 Aberdeen Standard Asia Focus 182 0.04

13,252 Aberdeen Standard Equity Income Trust 48 0.01

22,490 Aberforth Smaller Companies Trust 342 0.07

69,319 Alliance Trust 675 0.13

75,250 Allianz Technology Trust 205 0.04

11,508 Artemis Alpha Trust 51 0.01

27,623 Asia Dragon Trust 145 0.03

26,489 Avi Global Trust 258 0.05

16,577 Baillie Gifford China Growth Trust 80 0.02

122,270 Baillie Gifford European Growth Trust 186 0.04

19,774 Baillie Gifford Japan Trust 206 0.04

52,650 Baillie Gifford Shin Nippon 119 0.02

31,724 Baillie Gifford UK Growth Trust 76 0.01

58,121 Baillie Gifford US Growth Trust 179 0.03

264,890 Bankers Investment Trust 301 0.06

98,299 BB Healthcare Trust 181 0.03

147,625 BBGIGlobalInfrastructure 258 0.05

7,235 BH Global 141 0.03

3,068 BH Macro 103 0.02

17,206 Biotech Growth Trust 232 0.04

57,232 BlackRock Frontier Investment Trust 68 0.01

9,332 BlackRock Latin American Investment Trust 35 0.01

10,421 BlackRock Smaller Companies Trust 205 0.04

19,354 BlackRock Throgmorton Trust 172 0.03

42,703 BlackRock World Mining Trust 276 0.05

79,061 Bluefield Solar Income Fund 98 0.02

172,315 BMO Capital & Income Investment Trust 282 0.05

26,127 BMO Private Equity Trust 106 0.02

4,455 Brown Advisory US Smaller Companies 59 0.01

7,708 Brunner Investment Trust 76 0.01

9,277 Caledonia Investments 281 0.05

Annual Long Report and audited Financial Statements • May 2021 105 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Equity investment instruments (continued)

2,561 Capital Gearing Trust 125 0.02

69,569 Chrysalis Investments 141 0.03

87,714 City of London Investment Trust 343 0.07

70,000 Diverse Income Trust 83 0.02

35,172 Dunedin Income Growth Investment Trust 110 0.02

51,004 Ecofin Global Utilities and Infrastructure Trust 92 0.02

43,537 Edinburgh Investment Trust 276 0.05

58,248 Edinburgh Worldwide Investment Trust 194 0.04

5,282 Electra Private Equity 34 0.01

14,371 EP Global Opportunities Trust 41 0.01

23,857 European Opportunities Trust 179 0.03

21,354 F&C Capital & Income Investment Trust 69 0.01

15,537 Fidelity Asian Values 74 0.01

97,915 Fidelity China Special Situations 405 0.08

102,635 Fidelity European Trust 310 0.06

62,532 Fidelity Special Values 184 0.04

45,710 Finsbury Growth & Income Trust 413 0.08

118,988 Foreign & Colonial Investment Trust 1,011 0.19

162,227 Foresight Solar Fund 159 0.03

5,816 Fundsmith Emerging Equities Trust 76 0.01

203,344 GCP Infrastructure 201 0.04

26,969 Genesis Emerging Markets 248 0.05

416,879 Greencoat UK Wind 550 0.11

17,659 Harbourvest Global Private Equity 366 0.07

12,144 Henderson Alternative Strategies Trustd 36 0.01

93,307 Henderson Diversified Income Trust 80 0.02

6,964 Henderson European Focus Trust 109 0.02

4,288 Henderson EuroTrust 63 0.01

30,027 Henderson Far East Income 96 0.02

28,474 Henderson High Income Trust 50 0.01

19,966 Henderson Smaller Companies Investment Trust 256 0.05

106 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Equity investment instruments (continued)

19,063 Herald Investment Trust 410 0.08

93,863 HgCapital Trust 310 0.06

439,778 HICL Infrastructure 759 0.15

192,340 Hipgnosis Songs Fund 237 0.05

18,266 ICG Enterprise Trust 194 0.04

62,043 Impax Environmental Markets 285 0.05

13,143 International Biotechnology Trust 94 0.02

357,725 International Public Partnerships 618 0.12

14,914 Invesco Asia Trust 56 0.01

47,260 Invesco Bond Income Plus 88 0.02

15,845 Invesco Select Trust 28 0.01

110,740 JLEN Environmental Assets 115 0.02

47,317 JPMorgan American Investment Trust 300 0.06

24,095 JPMorgan Asia Growth & Income 120 0.02

18,705 JPMorgan China Growth & Income 124 0.02

13,939 JPMorgan Claverhouse Investment Trust 103 0.02

302,313 JPMorgan Emerging Markets Investment Trust 403 0.08

29,207 JPMorgan European Growth Investment Trust 101 0.02

40,321 JPMorgan European Smaller Companies Trust 199 0.04

68,371 JPMorgan Global Emerging Markets Income Trust 100 0.02

42,614 JPMorgan Global Growth & Income 182 0.03

22,298 JPMorgan Indian Investment Trust 163 0.03

9,427 JPMorgan Japan Small Cap Growth & Income 45 0.01

36,192 JPMorgan Japanese Investment Trust 225 0.04

5,749 JPMorgan Mid Cap Investment Trust 85 0.02

12,800 JPMorgan Russian Securities 89 0.02

25,942 JPMorgan Smaller Companies Investment Trust 102 0.02

22,035 Keystone Positive Change Investment Trust 64 0.01

27,565 Law Debenture 211 0.04

9,264 Lowland Investment 128 0.02

6,893 Majedie Investments 16 0.00

Annual Long Report and audited Financial Statements • May 2021 107 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Equity investment instruments (continued)

29,585 Martin Currie Global Portfolio Trust 111 0.02

173,934 Mercantile Investment Trust 482 0.09

21,923 Merchants Trust 113 0.02

44,162 Middlefield Canadian Income Trust 46 0.01

48,212 Monks Investment Trust 647 0.12

45,360 Montanaro UK Smaller Companies Investment Trust 70 0.01

31,520 Murray Income Trust 286 0.05

28,625 Murray International Trust 341 0.07

76,307 NB Global Monthly Income Fund 67 0.01

151,875 NextEnergy Solar Fund 152 0.03

41,426 North American Income Trust 111 0.02

2,829 North Atlantic Smaller Companies Investment Trust 123 0.02

79,194 Octopus Renewables Infrastructure Trust 86 0.02

27,869 Pacific Assets Trust 92 0.02

9,861 Pacific Horizon Investment Trust 77 0.01

13,098 Pantheon International 356 0.07

34,576 Pershing Square 909 0.17

578 Personal Assets Trust 272 0.05

23,952 Polar Capital Global Healthcare Trust 61 0.01

31,349 Polar Capital Technology Trust 692 0.13

428,993 Renewables Infrastructure 551 0.11

28,597 RIT Capital Partners 718 0.14

12,710 Riverstone Energy 40 0.01

32,706 Ruffer Investment Company (Preference shares) 96 0.02

35,348 Schroder Asia Pacific Fund 218 0.04

17,722 Schroder Asian Total Return Investment Company 87 0.02

18,236 Schroder Income Growth Fund 57 0.01

19,162 Schroder Japan Growth Fund 39 0.01

56,602 Schroder Oriental Income Fund 159 0.03

7,670 Schroder UK Mid Cap Fund 56 0.01

193,141 Schroder UK Public Private 66 0.01

108 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Equity investment instruments (continued)

30,343 Scottish American Investment 146 0.03

21,868 Scottish Investment Trust 175 0.03

321,268 Scottish Mortgage Investment Trust 3,839 0.74

8,592 Scottish Oriental Small Companies Trust 87 0.02

113,626 SDCL Energy Efficiency Income Trust 131 0.03

20,541 Securities Trust of Scotland 42 0.01

364,316 Sequoia Economic Infrastructure Income Fund 392 0.08

28,696 Smithson Investment Trust 487 0.09

18,427 Standard Life European Private Equity Trust 83 0.02

39,488 Standard Life UK Smaller Companies Trust 268 0.05

104,242 Syncona 221 0.04

13,719 Temple Bar Investment Trust 158 0.03

52,541 Templeton Emerging Markets Investment Trust 529 0.10

12,126 TR European Growth Trust 180 0.03

70,476 TR Property Investment Trust 304 0.06

45,234 Troy Income & Growth Trust 34 0.01

93,393 TwentyFour Income Fund 101 0.02

54,343 Utilico Emerging Markets Trust 115 0.02

17,183 Value and Indexed Property Income Trust 37 0.01

50,284 Vietnam Enterprise Investments 336 0.06

42,656 VinaCapital Vietnam Opportunity Fund 196 0.04

189,931 Witan Investment Trust 452 0.09

13,853 Worldwide Healthcare Trust 512 0.10

Life insurance 17,007 3.27 2.71a

858,959 Aviva 3,532 0.68

37,227 Chesnara 103 0.02

212,129 Just 233 0.04

1,295,175 Legal & General 3,681 0.71

125,424 Phoenix 923 0.18

568,640 Prudential 8,535 1.64

Annual Long Report and audited Financial Statements • May 2021 109 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Non-life insurance 5,231 1.01 1.02

43,761 Admiral 1,286 0.25

131,629 Beazley 396 0.08

305,632 Direct Line Insurance 909 0.17

74,017 Hiscox 580 0.11

56,313 Lancashire 354 0.07

222,820 RSA Insurance 1,525 0.29

69,114 Sabre Insurance 181 0.04

Real estate investment & services 3,092 0.59 0.70a

51,681 CLS 128 0.02

93,425 Foxtons 55 0.01

127,547 Grainger 364 0.07

28,459 Helical 125 0.02

28,097 Henry Boot 79 0.02

23,460 LSL Property Services 110 0.02

24,880 Phoenix Spree Deutschland 91 0.02

164,132 Raven Property 48 0.01

182,596 Rightmove 1,101 0.21

30,756 Savills 365 0.07

285,284 Sirius Real Estate 289 0.06

42,360 St. Modwen Properties 232 0.04

51,200 Tritax EuroBox 54 0.01

54,660 U and I 51 0.01

Realestateinvestmenttrusts 12,929 2.48 2.34a

544,040 Assura 405 0.08

36,298 Big Yellow 474 0.09

119,989 BMO Commercial Property Trust 106 0.02

104,655 BMO Real Estate Investments 76 0.02

211,420 British Land 1,078 0.21

166,552 Capital & Counties Properties 288 0.06

15,313 Capital & Regional 13 0.00

213,089 Civitas Social Housing 252 0.05

110 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Real estate investment trusts (continued)

22,556 Derwent London 780 0.15

95,000 Ediston Property Investment Company 64 0.01

128,508 Empiric Student Property 113 0.02

90,068 GCP Student Living 155 0.03

65,040 Great Portland Estates 469 0.09

894,400 Hammerson 357 0.07

210,191 Intu Propertiesc 00.00

156,231 Land Securities 1,099 0.21

199,116 LondonMetric Property 466 0.09

92,947 LXI 128 0.02

82,394 NewRiver 81 0.02

123,413 Picton Property Income 106 0.02

319,802 Primary Health Properties 492 0.09

57,407 Safestore 541 0.10

120,865 Schroder Real Estate Investment Trust 56 0.01

271,009 Segro 2,828 0.54

68,255 Shaftesbury 424 0.08

92,278 Standard Life Investment Property Income Trust 59 0.01

67,848 Target Healthcare 78 0.02

378,764 Tritax Big Box 745 0.14

142,983 UK Commercial Property Trust 114 0.02

71,803 UNITE 815 0.16

29,525 Workspace 267 0.05

Automobiles & parts 334 0.06 0.01

11,112 Aston Martin Lagonda 234 0.04

32,780 TI Fluid Systems 100 0.02

Consumer services 6,864 1.32 1.29a

385,679 Compass 6,204 1.19

12,969 Dignity 84 0.02

61,665 HomeServe 576 0.11

Annual Long Report and audited Financial Statements • May 2021 111 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Household goods & home construction 9,413 1.81 1.57a

218,377 Barratt Developments 1,652 0.32

27,914 Bellway 998 0.19

24,529 Berkeley 1,147 0.22

111,361 Countryside Properties 570 0.11

75,076 Crest Nicholson 344 0.07

19,105 MJ Gleeson 166 0.03

69,055 Persimmon 2,182 0.42

53,045 Redrow 360 0.07

787,923 Taylor Wimpey 1,351 0.26

48,559 Vistry 643 0.12

Leisure goods 917 0.18 0.14

7,246 Games Workshop 865 0.17

73,700 Photo-Me International 52 0.01

Personal goods 2,730 0.52 0.33a

89,597 Burberry 1,914 0.37

88,722 Dr. Martens 434 0.08

19,443 Superdry 76 0.01

25,663 Ted Baker 46 0.01

33,102 Watches of Switzerland 260 0.05

Media 14,702 2.83 2.99a

9,287 4imprint 267 0.05

11,949 Bloomsbury Publishing 38 0.01

58,354 Hyve 77 0.02

318,094 Informa 1,730 0.33

798,284 ITV 1,025 0.20

167,960 Pearson 1,374 0.26

59,355 Reach 141 0.03

405,420 RELX 7,454 1.43

266,485 WPP 2,596 0.50

Retailers 11,364 2.18 1.47a

64,244 AO World 167 0.03

112 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Retailers (continued)

185,250 B&M European Value Retail 1,067 0.21

81,886 Card Factory 56 0.01

50,550 DFS Furniture 142 0.03

223,550 Dixons Carphone 305 0.06

21,857 Dunelm 320 0.06

58,705 Frasers 340 0.07

47,085 Halfords 180 0.03

130,301 Howden Joinery 1,038 0.20

98,451 JD Sports Fashion 930 0.18

464,668 Kingfisher 1,674 0.32

81,746 Lookers 56 0.01

445,402 Marks & Spencer 737 0.14

27,779 Next 2,266 0.44

337,904 Pendragon 62 0.01

106,681 Pets at Home 479 0.09

21,315 Studio Retail 60 0.01

34,479 Topps Tiles 25 0.00

50,190 Travis Perkins 824 0.16

28,442 WH Smith 492 0.09

56,239 Wickes 144 0.03

Travel & leisure 18,953 3.64 2.77a

59,899 888 240 0.05

35,906 Carnival 634 0.12

238,688 Cineworld 221 0.04

123,929 Domino‘s Pizza 453 0.09

61,852 easyJet 623 0.12

127,614 Entain 2,105 0.40

271,874 FirstGroup 222 0.04

35,184 Flutter Entertainment 4,639 0.89

10,404 Fuller Smith & Turner 85 0.02

18,162 Gamesys 339 0.07

Annual Long Report and audited Financial Statements • May 2021 113 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Travel & leisure (continued)

9,796 Go-Ahead 121 0.02

24,879 Hostelworld 24 0.00

39,680 InterContinental Hotels 1,953 0.38

853,956 International Consolidated Airlines 1,729 0.33

21,673 J D Wetherspoon 285 0.05

143,101 Marston‘s 131 0.03

89,009 Mitchells & Butlers 272 0.05

115,638 National Express 349 0.07

68,330 Playtech 314 0.06

76,731 Rank 154 0.03

150,287 Restaurant 182 0.03

17,889 Saga 68 0.01

179,378 SSP 528 0.10

102,684 Stagecoach 89 0.02

106,421 Trainline 301 0.06

178,027 TUI 769 0.15

44,442 Whitbread 1,414 0.27

14,696 Wizz Air 709 0.14

Beverages 19,017 3.65 3.77

20,044 A.G. Barr 104 0.02

55,219 Britvic 504 0.10

72,380 C&C 175 0.03

18,882 C&C Rights 18/06/2021 10 0.00

43,076 Coca-Cola HBC 1,106 0.21

498,493 Diageo 16,969 3.26

55,456 Stock Spirits 149 0.03

Food producers 3,760 0.72 0.72

4,261 Anglo-Eastern Plantations 28 0.01

75,192 Associated British Foods 1,745 0.34

12,385 Cranswick 490 0.09

58,284 Devro 121 0.02

114 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Food producers (continued)

102,937 Greencore 145 0.03

14,008 Hilton Food 167 0.03

258,422 Premier Foods 273 0.05

103,294 Tate & Lyle 791 0.15

Tobacco 16,774 3.22 4.47

497,473 British American Tobacco 13,494 2.59

205,039 Imperial Brands 3,280 0.63

Personal care, drug & grocery stores 40,384 7.76 6.80a

24,086 Greggs 599 0.11

70,212 McBride 63 0.01

103,160 Ocado 1,948 0.37

52,316 PZ Cussons 133 0.03

137,452 Reckitt Benckiser 8,752 1.68

351,245 Sainsbury (J) 933 0.18

1,646,203 Tesco 3,675 0.71

553,853 Unilever 23,403 4.50

496,408 Wm Morrison Supermarkets 878 0.17

Construction & materials 8,874 1.71 1.49a

148,814 Balfour Beatty 463 0.09

174,156 CRH 6,421 1.23

27,660 Forterra 81 0.02

24,525 Galliford Try 31 0.01

54,455 Genuit 351 0.07

86,006 Ibstock 197 0.04

18,010 Keller 150 0.03

34,008 Kier 39 0.01

29,757 Kier (Subscription shares)d 00.00

46,728 Marshalls 344 0.07

9,070 Morgan Sindall 203 0.04

25,215 Norcros 75 0.01

13,784 Ricardo 63 0.01

Annual Long Report and audited Financial Statements • May 2021 115 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Construction & materials (continued)

69,710 Severfield 55 0.01

188,825 SIG 116 0.02

44,409 Tyman 214 0.04

16,233 Volution 71 0.01

Aerospace & defence 7,918 1.52 1.55

6,501 Avon Rubber 201 0.04

114,381 Babcock International 342 0.07

690,596 BAE Systems 3,637 0.70

67,372 Chemring 205 0.04

167,749 Meggitt 853 0.16

130,873 QinetiQ 465 0.09

1,623,557 Rolls-Royce 1,737 0.33

97,806 Senior 156 0.03

15,643 Ultra Electronics 322 0.06

Electronic & electrical equipment 5,746 1.10 1.02a

7,665 Dialight 25 0.01

82,526 Halma 2,149 0.41

59,287 IMI 984 0.19

67,230 Morgan Advanced Materials 224 0.04

13,023 Oxford Instruments 270 0.05

7,850 Renishaw 434 0.08

197,178 Rotork 666 0.13

25,473 Spectris 818 0.16

3,529 XP Power 176 0.03

General industrials 10,416 2.00 1.84a

73,920 Bunzl 1,689 0.32

404,834 Coats 268 0.05

277,554 DS Smith 1,161 0.22

1,077,461 Melrose Industries 1,861 0.36

105,831 Mondi 2,018 0.39

116 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

General industrials (continued)

85,645 Smiths 1,327 0.26

55,841 Smurfit Kappa 2,092 0.40

Industrial engineering 3,497 0.67 0.62a

15,569 Spirax-Sarco Engineering 1,977 0.38

48,833 Vesuvius 275 0.05

9,812 Vitec 132 0.03

58,022 Weir 1,113 0.21

Industrial support services 22,819 4.39 4.74a

53,359 Aggreko 460 0.09

384,820 Capita 155 0.03

85,469 Costain 49 0.01

21,012 DCC 1,258 0.24

33,902 De La Rue 62 0.01

26,832 Diploma 774 0.15

105,984 Electrocomponents 1,049 0.20

67,717 Equiniti 123 0.02

57,672 Essentra 179 0.04

22,410 Euromoney Institutional Investor 238 0.05

197,400 Experian 5,336 1.03

21,635 FDM 215 0.04

49,089 Ferguson 4,705 0.90

48,326 Grafton 568 0.11

336,791 Hays 583 0.11

91,430 Inchcape 714 0.14

35,202 Intertek 1,910 0.37

171,719 IWG 618 0.12

25,681 Mears 47 0.01

264,162 Mitie 179 0.03

104,207NetworkInternational 415 0.08

68,791 PageGroup 412 0.08

15,415 PayPoint 91 0.02

Annual Long Report and audited Financial Statements • May 2021 117 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Industrial support services (continued)

404,125 Rentokil Initial 1,915 0.37

15,969 Robert Walters 105 0.02

65,601 RPS 64 0.01

278,267 Serco 376 0.07

131,892 Speedy Hire 99 0.02

28,660 SThree 120 0.02

Industrial transportation 7,584 1.46 0.90a

97,428 Ashtead 5,016 0.96

5,449 Clarkson 168 0.03

130,465 Esken 42 0.01

9,975 James Fisher & Sons 96 0.02

22,348 John Menzies 69 0.01

55,333 Redde Northgate 213 0.04

194,207 Royal Mail 1,124 0.22

175,608 Signature Aviation 695 0.13

3,773 Vp 32 0.01

29,634 Wincanton 129 0.03

Industrial materials 0 0.00 0.00a

Industrial metals & mining 42,942 8.25 6.44a

268,501 Anglo American 8,418 1.62

75,031 Antofagasta 1,158 0.22

456,399 BHP 9,689 1.86

41,470 Bodycote 359 0.07

121,499 Evraz 775 0.15

66,287 Ferrexpo 297 0.06

2,358,988 Glencore 7,583 1.46

18,227 Hill & Smith 279 0.05

3,132 Kenmare Resources 14 0.00

236,968 Rio Tinto 14,370 2.76

Precious metals & mining 2,242 0.43 0.47

252,742 Centamin 277 0.05

118 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Precious metals & mining (continued)

45,796 Fresnillo 411 0.08

80,394 Hochschild Mining 158 0.03

561,777 Petropavlovsk 140 0.03

74,111 Polymetal International 1,256 0.24

Chemicals 4,816 0.93 0.72

29,275 Croda International 2,045 0.39

132,081 Elementis 209 0.04

43,200 Johnson Matthey 1,315 0.25

7,668 RHI Magnesita 341 0.07

83,983 Synthomer 444 0.09

19,104 Victrex 462 0.09

Non-renewable energy 37,050 7.12 8.31

4,323,283 BP 13,236 2.54

116,704 Cairn Energy 190 0.04

203,234 Diversified Energy 213 0.04

21,914 Energean 168 0.03

531,611 EnQuest 91 0.02

259,591 Harbour Energy 53 0.01

32,704 Hunting 85 0.02

135,588 John Wood 332 0.06

56,655 Petrofac 75 0.02

57,952 Pharos Energy 14 0.00

895,206 Royal Dutch Shell ‘A’ 12,046 2.32

808,611 Royal Dutch Shell ‘B’ 10,378 1.99

329,426 Tullow Oil 169 0.03

Electricity 4,022 0.77 0.71

102,191 Drax 445 0.08

231,963 SSE 3,577 0.69

Gas, water & multi-utilities 11,672 2.24 2.58

1,314,318 Centrica 718 0.14

767,190 National Grid 7,206 1.38

Annual Long Report and audited Financial Statements • May 2021 119 M&G Index Tracker Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Gas, water & multi-utilities (continued)

91,996 Pennon 972 0.19

54,196 Severn Trent 1,328 0.25

147,217 United Utilities 1,448 0.28

Waste & disposal services 248 0.05 0.01a

58,332 Biffa 170 0.03

143,021 Renewi 78 0.02

Unquoted / unlistedd 0 0.00 0.00

10,204 Bioscience Investment Trust 0 0.00

21,000 Dexion Equity Alternative 0 0.00

12,707 Electric & General Investment Trust 0 0.00

19,068 NMC Health 00.00

Equity derivatives 176 0.03 0.46

Equity futures contracts 176 0.03 0.46

75 FTSE 100 Index Jun 2021 176 0.03

Portfolio of investments 520,637 100.04 98.76

Cash equivalents 2,813 0.54 1.93

‘AAA’ rated money market fundse 2,813 0.54 1.93

2,813,000 Northern Trust Global Fund - Sterling 2,813 0.54

Total portfolio (notes 2c & 2d on page 9) 523,450 100.58 100.69

Net other assets/(liabilities) (3,013) (0.58) (0.69)

Net assets attributable to shareholders 520,437 100.00 100.00

All securities are on an official stock exchange listing except where referenced. a The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. b Related party. c Delisted. d Unlisted/unquoted. e Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk.

120 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Investments

Top ten portfolio transactions for the year to 31 May 2021

Largest purchases £’000

Unilever 14,641

Flutter Entertainment 1,607

Rolls-Royce 1,355

Hammerson 792

London Stock Exchange 773

International Consolidated Airlines 771

Dr. Martens 415

Whitbread 375

TUI 362

AVEVA 281

Other purchases 6,947

Total purchases 28,319

Largest sales £’000

Rolls-Royce 941

AstraZeneca 902

G4S 862

HSBC 757

Diageo 730

William Hill 690

Rolls-Royce 683

GlaxoSmithKline 675

Hammerson 663

Royal Dutch Shell ‘B’ 559

Other sales 19,133

Total sales 26,595

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

Annual Long Report and audited Financial Statements • May 2021 121 M&G Index Tracker Fund Financial highlights

The following chart and tables reflect the key financial 350 information of a representative share class, Sterling 300 Class ‘A’ (Accumulation) shares. As different share 260 classes have different attributes, for example charging 230 200 structures and minimum investments, please be aware 180 that their performance may be different. For more 160 information on the different share classes in this fund 140 please refer to the Prospectus for M&G Investment 120 Funds (2), which is available free of charge either from 100 our website at www.mandg.co.uk/prospectuses or by 90 80 calling M&G Customer Relations. 70 9901 03 05 07 09 11 13 15 1719 21

Sterling Class ‘A’ (Accumulation) shares* Index tracking FTSE All-Share Index The tracking difference between the fund’s investment Source: Morningstar, Inc. and M&G * Income reinvested return and that of the FTSE All-Share Index for the 12 month period ending 31 May 2021 was -0.03% Long-term performance by share class (31 May 2020: +0.18%). The investment returns are To give an indication of the performance of the fund, calculated gross of fees using end of day pricing in the following table shows the compound rate of return, order to be comparable with the index. per annum, over the period. Calculated on a price to price basis with income reinvested. The historic tracking error of the investment return of

the fund relative to the FTSE All-Share Index for the Share One Three Five Since period ending 31 May 2021 was 0.25% (31 May class year years years launch 01.06.20 01.06.18 01.06.16 2020: 0.24%), which falls within the predicted tracking %a %pa %pa %pa error range of 0.0% to 0.30%. Historic tracking error is Sterlingb a measure of the monthly volatility of the investment c returns relative to the index over a 36 month period. Class ‘A’ +21.4 +1.6 +7.1 +4.8 Class ‘C’ +21.9 +2.0 +7.4 +7.0d The differences are due to the fund not fully replicating e the FTSE All-Share Index. Class ‘I’ +21.7 n/a n/a +3.9 a Absolute basis. Fund level performance b Price to price with income reinvested. c 27 February 1998, the launch date of the predecessor unit trust. Fund net asset value as at 31.05.21 31.05.20 31.05.19 d 16 February 2012, the launch date of the share class. £’000 £’000 £’000 e 6 December 2019, the launch date of the share class.

Fund net asset value (NAV) 520,437 446,907 511,085

122 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial highlights

Annual Long Report and audited Financial Statements • May 2021 123 M&G Index Tracker Fund Financial highlights

receive. The table below shows direct portfolio Sterling Class ‘A’ Income share transaction costs paid by the fund before and after that performance part of the dilution adjustment relating to direct The share class was launched on 27 February 1998. portfolio transaction costs. To give an indication of the indirect portfolio dealing costs the table also shows the fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p average portfolio dealing spread. Opening NAV 62.30 72.02 78.32 Further information on this process is in the Prospectus, Return before operating 13.33 (6.80) (2.79) which is available free of charge on request either from charges our website at www.mandg.co.uk/prospectuses or by Operating charges (0.31) (0.32) (0.39) calling M&G Customer Relations. Return after operating 13.02 (7.12) (3.18) Portfolio transaction costs charges Distributions (2.10) (2.60) (3.12) for the year to 31 May 2021 2020 2019 Averagea Closing NAV 73.22 62.30 72.02 Direct portfolio transaction %%% % b costs Direct transaction costs UK p UK p UK p

Broker commission 0.00 0.00 0.00 0.00 Costs before dilution 0.02 0.01 0.01 adjustments Taxes 0.03 0.01 0.02 0.02 Dilution adjustmentsa (0.01) (0.01) (0.01) Costs before dilution 0.03 0.01 0.02 0.02 adjustments Total direct transaction costs 0.01 0.00 0.00

c Dilution adjustments (0.01) (0.01) (0.01) (0.01) Performance and charges % % %

Total direct portfolio 0.02 0.00 0.01 0.01 Direct portfolio transaction 0.02 0.00 0.01 transaction costs costsb

as at 31 May 2021 2020 2019 Averagea Operating chargesc 0.46 0.45 0.53 Indirect portfolio % % % % transaction costs Return after charges +20.90 -9.89 -4.06

Average portfolio dealing 0.09 0.14 0.08 0.10 Historic yield 2.82 3.99 4.24 spread Other information a Average of first three columns. Closing NAV (£’000) 273,388 239,284 278,978 b As a percentage of average net asset value. c In respect of direct portfolio transaction costs. Please see the section Closing NAV (%) 52.53 53.54 54.58 above this table for an explanation of dilution adjustments. Number of shares 373,360,079 384,103,152 387,350,474

Highest share price (UK p) 75.23 78.38 79.63 Specific share class performance Lowest share price (UK p) 58.03 50.57 66.58 The following tables show the performance of each share class. 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.

Historic yields for the current year are calculated as at 11 June 2021.

124 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial highlights

Sterling Class ‘A’ Accumulation share Sterling Class ‘C’ Income share performance performance The share class was launched on 27 February 1998. Sterling Class ‘C’ shares are not generally available to all investors. for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p The share class was launched on 16 February 2012.

Opening NAV 121.24 135.04 140.68 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Return before operating 26.17 (13.19) (4.93) charges Opening NAV 63.34 72.92 79.05

Operating charges (0.60) (0.61) (0.71) Return before operating 13.60 (6.93) (2.80) charges Return after operating 25.57 (13.80) (5.64) charges Operatingcharges (0.01) (0.02) (0.17)

Distributions (3.52) (4.30) (5.06) Return after operating 13.59 (6.95) (2.97) charges Retained distributions 3.52 4.30 5.06 Distributions (2.14) (2.63) (3.16) Closing NAV 146.81 121.24 135.04 Closing NAV 74.79 63.34 72.92 Direct transaction costs UK p UK p UK p Direct transaction costs UK p UK p UK p Costs before dilution 0.03 0.02 0.02 adjustments Costs before dilution 0.02 0.01 0.01 adjustments Dilution adjustmentsa (0.01) (0.02) (0.02) Dilution adjustmentsa (0.01) (0.01) (0.01) Total direct transaction costs 0.02 0.00 0.00 Total direct transaction costs 0.01 0.00 0.00 Performance and charges % % % Performance and charges % % % Direct portfolio transaction 0.02 0.00 0.01 costsb Direct portfolio transaction 0.02 0.00 0.01 costsb Operating chargesc 0.46 0.45 0.53 Operating chargesc 0.01 0.03 0.23 Return after charges +21.09 -10.22 -4.01 Return after charges +21.46 -9.53 -3.76 Historic yield 2.37 3.40 3.66 Historic yield 2.82 3.98 4.23 Other information Other information Closing NAV (£’000) 172,876 147,691 188,380 Closing NAV (£’000) 41,499 36,635 43,727 Closing NAV (%) 33.22 33.05 36.86 Closing NAV (%) 7.97 8.20 8.56 Number of shares 117,754,852 121,815,006 139,499,585 Number of shares 55,489,938 57,836,584 59,968,236 Highest share price (UK p) 148.40 150.01 143.03 Highest share price (UK p) 76.81 79.56 80.42 Lowest share price (UK p) 112.93 96.78 122.00 Lowest share price (UK p) 59.11 51.37 67.32

Annual Long Report and audited Financial Statements • May 2021 125 M&G Index Tracker Fund Financial highlights

Sterling Class ‘I’ Accumulation share performance The share class was launched on 6 December 2019.

for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p

Opening NAV 86.31 100.00 n/a

Return before operating 18.66 (13.61) n/a charges

Operating charges (0.20) (0.08) n/a

Return after operating 18.46 (13.69) n/a charges

Distributions (2.74) (1.26) n/a

Retained distributions 2.74 1.26 n/a

Closing NAV 104.77 86.31 n/a

Direct transaction costs UK p UK p UK p

Costs before dilution 0.03 0.00 n/a adjustments

Dilution adjustmentsa (0.01) 0.00 n/a

Total direct transaction costs 0.02 0.00 n/a

Performance and charges % % %

Direct portfolio transaction 0.02 0.00 n/a costsb

Operating charges 0.21 0.20 n/a

Return after charges +21.39 -13.69 n/a

Historic yield 2.58 3.64 n/a

Other information

Closing NAV (£’000) 32,674 23,297 n/a

Closing NAV (%) 6.28 5.21 n/a

Number of shares 31,185,324 26,992,420 n/a

Highest share price (UK p) 105.89 106.69 n/a

Lowest share price (UK p) 80.48 68.85 n/a

126 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 79,884 (66,617)

Revenue 5 15,015 18,543

Expenses 6 (1,890) (2,064)

Net revenue/(expense) before taxation 13,125 16,479

Taxation 7 (59) (182)

Net revenue/(expense) after taxation 13,066 16,297

Total return before distributions 92,950 (50,320)

Distributions 8 (14,198) (17,533)

Change in net assets attributable to shareholders from 78,752 (67,853) investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 446,907 511,085

Amounts received on issue of shares 21,537 53,261

Amounts paid on cancellation of shares (31,833) (55,697)

(10,296) (2,436)

Dilution adjustments 60 115

Change in net assets attributable to shareholders from 78,752 (67,853) investment activities (see above)

Retained distributions on Accumulation shares 5,013 5,995

Unclaimed distributions 11

Closing net assets attributable to shareholders 520,437 446,907

Annual Long Report and audited Financial Statements • May 2021 127 M&G Index Tracker Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 520,637 441,377

Current assets

Debtors 9 1,993 2,225

Cash and bank balances 10 868 875

Cash equivalents 2,813 8,626

Total assets 526,311 453,103

Liabilities

Creditors

Overdrawn positions at futures clearing houses and 0(910) collateral manager

Distribution payable (5,141) (4,658)

Other creditors 11 (733) (628)

Total liabilities (5,874) (6,196)

Net assets attributable to shareholders 520,437 446,907

128 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities 79,424 (65,678)

Derivative contracts 475 (918)

Currency gains/(losses) (15) (21)

Net capital gains/(losses) 79,884 (66,617)

Annual Long Report and audited Financial Statements • May 2021 129 M&G Index Tracker Fund Financial statements and notes

2021 %of 2020 %of for the year to 31 May £’000 transaction £’000 transaction

a) Purchases

Equities

Equities before transaction costs 24,022 11,400

Commissions 5 0.02 4 0.03

Taxes 114 0.47 48 0.42

Equities after transaction costs 24,141 11,452

Collective investment schemes

Collective investment schemes before transaction costs 608 1,220

Taxes 1 0.16 2 0.19

Collective investment schemes 609 1,222

Other transaction types

Corporate actions 3,569 132

Total purchases after transaction costs 28,319 12,806

b) Sales

Equities

Equities before transaction costs 20,628 11,275

Commissions (4) 0.02 (1) 0.01

Equities after transaction costs 20,624 11,274

Collective investment schemes

Collective investment schemes before transaction costs 2,158 333

Commissions (1) 0.05 0 0.02

Collective investment schemes 2,157 333

Other transaction types

Corporate actions 3,814 2,653

Total sales after transaction costs 26,595 14,260

130 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

2021 %of 2020 %of £’000 average NAV £’000 average NAV

c) Direct portfolio transaction costs

Commissions paid

Equities 9 0.00 5 0.00

Collective investment schemes 1 0.00 0 0.00

Derivatives 0 0.00 1 0.00

Total commissions paid 10 0.00 6 0.00

Taxes paid

Equities 114 0.03 48 0.01

Collective investment schemes 1 0.00 2 0.00

Derivatives 1 0.00 1 0.00

Totaltaxespaid 116 0.03 51 0.01

Total direct portfolio transaction costsa 126 0.03 57 0.01

d) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.09 0.14 a Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section for the effect of dilution adjustments. b Average portfolio dealing spread at the balance sheet date.

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Derivative revenue 01

Dividends from equity investments: non-taxable 14,720 17,352

Dividends from equity investments: taxable 283 355

Interest distributions 446

Rebate of ongoing charges from underlying funds 2 3

Stock dividends 0785

Underwriting commission 61

Total revenue 15,015 18,543

Annual Long Report and audited Financial Statements • May 2021 131 M&G Index Tracker Fund Financial statements and notes

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 1,889 1,683

Annual management chargea 0 242

Administration chargea 0132

1,889 2,057

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 06

Other expenses

Audit fee (including VAT)a 01

Interest payable 20

Safe custody chargea (1) 0

Total expenses 1,890 2,064

a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019. As of 1 August 2019 these charges have been replaced by the single annual charge. Audit fees for the financial year ending 2021 were £9,000 (2020: £9,000) (including VAT), which are covered by the annual charge.

132 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax 59 179

Prior year adjustment 03

Deferred tax (note 7c) 00

Total taxation 59 182

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 13,125 16,479

Corporation tax at 20% 2,625 3,296

Effects of:

Dividends from equity investments: non-taxable (2,935) (3,471)

Property distribution: non-taxable (9) 0

Stock dividends not taxable 0(146)

Current year expenses not utilised 319 321

Withholding tax 59 179

Prior year adjustment 03

Total tax charge (note 7a) 59 182

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset of £5,758,000 (2020: £5,439,000) arising as a result of having excess management expenses. We do not expect this asset to be utilised in the foreseeable future.

Annual Long Report and audited Financial Statements • May 2021 133 M&G Index Tracker Fund Financial statements and notes

8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Ordinary distributions £’000 £’000 £’000 £’000

First interim 3,945 2,111 6,823 3,569

Final 5,141 2,902 4,658 2,426

Total net distributions 14,099 17,476

Income deducted on cancellation of shares 235 283

Income received on issue of shares (136) (226)

Distributions 14,198 17,533

Net revenue/(expense) per statement of total return 13,066 16,297

Expenses offset against capital 1,132 1,236

Distributions 14,198 17,533

a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

9Debtors

2021 2020 as at 31 May £’000 £’000

Amounts receivable on issues of shares 116 565

Debt security interest receivable 02

Distributions receivable 03

Dividends receivable 1,750 1,475

Tax recoverable 12

Withholding tax recoverable 126 178

Total debtors 1,993 2,225

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Amounts held at futures clearing houses and collateral manager 311 0

Cash held as bank balances 557 875

Total cash and bank balances 868 875

134 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 658 504

Annual charge payable 63 53

Expenses payable 011

Purchases awaiting settlement 12 60

Total other creditors 733 628

12 Contingent assets, liabilities and outstanding commitments At the balance sheet date, the fund had a contingent liability of £35,000 (2020: £258,000).

This is in respect of 18,882 C&C nil paid shares resulting from a rights issue whereby, 6 nil paid shares were issued for every 23 ordinary shares held. The nil paid shares may be exercised on 18 June 2021 at £1.86 per share.

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 384,103,152 10,469,810 (21,212,883) 373,360,079

Class ‘A’ Accumulation 121,815,006 5,060,696 (9,120,850) 117,754,852

Class ‘C’ Income 57,836,584 1,865,259 (4,211,905) 55,489,938

Class ‘I’ Accumulation 26,992,420 7,341,291 (3,148,387) 31,185,324

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Share class %

Sterling

Class ‘A’ 0.45

Class ‘C’ 0.00

Class ‘I’ 0.20 a The amounts shown are the maximum annual charge. M&G will apply a discount of 0.02% for every £1 billion of a fund’s net asset value. This is assessed quarterly and implemented on a forward basis no later than 13 business days after quarter end.

Annual Long Report and audited Financial Statements • May 2021 135 M&G Index Tracker Fund Financial statements and notes

At the balance sheet date, the fund held shares in related parties of M&G Securities Limited with a value of £1,457,000 (2020: £866,000).

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 10.42% (2020: 10.41%) of the fund’s shares.

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

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 520,601 0 441,376 0

Level2 0000

Level 3 36 0 1 0

520,637 0 441,377 0

136 Annual Long Report and audited Financial Statements • May 2021 M&G Index Tracker Fund Financial statements and notes

is observable and transactions within the fund take place regularly at that price. The shares in issue as detailed in note 13 meet the definition of a level 2 financial instrument ‘Valuation techniques using observable market data’.

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

19 Market risk sensitivity A five per cent increase in the value of the fund’s investment portfolio would have the effect of increasing the return and net assets by £26,032,000 (2020: £22,069,000). A five per cent decrease would have an equal and opposite effect.

20 Currency risk sensitivity and exposure Currency risk is not considered significant for the fund and is therefore not disclosed.

21 Interest rate risk sensitivity and exposure As the majority of the fund’s financial assets are non-interest bearing, the risk is not considered significant and is therefore not disclosed.

22 Credit risk The table below shows the exposure to counterparties. Collateral is posted daily, in the form of cash or high-quality government bonds, to minimise this exposure.

Futures as at 31 May 2021 £’000

Merrill Lynch 176

Total 176

Futures as at 31 May 2020 £‘000

Bank of America Merrill Lynch 2,065

Total 2,065

Net exposure represents the mark-to-market value of derivative contracts less any cash collateral held. Positive exposure represents the fund’s exposure to that counterparty. Negative amounts are not an exposure to the fund.

23 Dividend distribution tables This fund pays semi-annual ordinary distributions and the following table sets out the distribution periods.

Semi-annual distribution periods

Start End Xd Payment

Interim 01.06.20 30.11.20 01.12.20 31.01.21

Final 01.12.20 31.05.21 01.06.21 31.07.21

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

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

Annual Long Report and audited Financial Statements • May 2021 137 M&G Index Tracker Fund Financial statements and notes

Sterling Class ‘A’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.5710 0.3301 0.9011 1.5446

Final 0.7130 0.4824 1.1954 1.0517

Sterling Class ‘A’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.7692 0.7100 1.4792 2.5909

Final 1.2400 0.8055 2.0455 1.7126

Sterling Class ‘C’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.5620 0.3547 0.9167 1.5633

Final 0.8017 0.4186 1.2203 1.0700

Sterling Class ‘I’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.6367 0.5237 1.1604 n/a

Final 0.6877 0.8954 1.5831 1.2588

138 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Authorised Corporate Director’s Report

Investment objective short-dated corporate bonds, in order to limit the effect of interest rate movements on the fund’s capital value. The fund aims to provide a higher total return (the combination of capital growth and income), net of the Individual credit selection is carried out with the ongoing charge figure, than that of the Markit iBoxx assistance of an in-house team of credit analysts to EUR Corporates 1-3 year Index (GBP Hedged) over any complement the fund manager’s views. five-year period. Benchmark Investment policy Benchmark: Markit iBoxx EUR Corporates 1-3 year Index At least 80% of the fund is invested, directly or (GBP Hedged). indirectly through derivatives, in short-dated investment The benchmark is a target which the fund seeks to grade fixed and floating rate corporate debt securities outperform. The index has been chosen as the fund’s and in asset-backed securities. These securities can be benchmark as it best reflects the scope of the fund’s issued by companies from anywhere in the world, investment policy. The benchmark is used solely to including emerging markets. These securities can be measure the fund’s performance and does not denominated in any currency. constrain the fund‘s portfolio construction.

Other investments may include: The fund is actively managed. • below investment grade and unrated corporate The fund manager has complete freedom in choosing debt securities; and which investments to buy, hold and sell in the fund. The • other transferable securities, cash, and near cash, fund’s holdings may deviate significantly from the directly or via collective investment schemes benchmark’s constituents. (including funds managed by M&G). For unhedged share classes, the benchmark is shown in The fund aims to hedge any non-sterling assets back to the share class currency. sterling. For currency hedged share classes, the benchmark is Derivatives may be used for investment purposes, hedged to the share class currency. efficient portfolio management and hedging. Risk profile Investment approach The fund invests in a range of typically low-risk debt The fund is diversified across a range of investment instruments, or bonds, that are typically repaid over grade debt securities from a variety of sectors and three years. It is, therefore, subject to the price volatility geographies. The fund’s investment approach is based of the global bond market as well as the performance on the principle that returns from corporate bond of individual issuers. In addition, the fund is subject to markets are driven by a combination of macroeconomic, fluctuations in currency exchange rates. asset class, sector, geographic and stock-level factors. Debt securities with a short time until their final As different factors dominate returns at different repayment date tend to be highly liquid, meaning that stages of the economic cycle, the fund manager applies they can be easily bought or sold. The fund’s exposure a flexible investment approach, changing the blend of to debt securities may be gained through the use of duration and credit exposure in the portfolio to weight derivatives. In association with the use of derivatives, them appropriately. The fund manager also maintains a including those instruments not traded through an low duration profile through the fund‘s bias towards exchange, collateral is deposited in order to mitigate the

Annual Long Report and audited Financial Statements • May 2021 139 M&G Short Dated Corporate Bond Fund Authorised Corporate Director’s Report

risk that a counterparty may default on its obligations or For the performance of each share class, please refer become insolvent. to the ‘Long-term performance by share class’ table in the ‘Financial highlights’ section of this report. Portfolio diversification is key in managing liquidity and default risks as well as reducing market risk. The fund’s Performance review risks are measured and managed as an integral part of From the middle of February 2020 to the start of the the investment process. period under review, the value of risky assets fell sharply on confirmation that the coronavirus (COVID-19) The following table shows the risk number associated pandemic would lead to a severe stalling in economic with the fund and is based on Sterling Class ‘A’ shares. activity worldwide, as governments imposed lockdowns Low risk High risk to try to slow down the outbreak. Central banks cut interest rates and purchased debt issued by companies Typically lower rewards Typically higher rewards (securities known as corporate bonds) in order to 123 4567 support the market. Many governments resorted to paying the wages of employees no longer able to work because of the lockdown, and to extending loans to The above number: businesses to bridge cashflow. • is based on the rate at which the value of the fund There was a sharp recovery in risky assets in the has moved up and down in the past and is based months that followed and, on balance, to the end of the on historical data so may not be a reliable indicator period under review. Investors generally took their cue ofthefutureriskprofileofthefund. from the fiscal and monetary stimulus of governments • is not guaranteed and may change over time and and central banks in trying to kickstart economic the lowest risk number does not mean risk free. activity, and the full range of assets rose as a result. By the summer (in the northern hemisphere), lockdowns • has changed during this period. From 1 June were gradually eased across Asia and Europe, although 2020 to 16 July 2020 the risk number was 2. the Americas’ experience of the pandemic seemed to worsen.

Investment review Investor sentiment moved from positive to being more As at 1 June 2021, for the year ended 31 May 2021 cautious as the summer months gave way to an autumn Performance against objective marked by rising concerns regarding a second peak in The fund delivered a positive total return across all its the infection rate of COVID-19, and how this may dim share classes and was ahead of its benchmark, the the outlook for the global economy, amongst other Markit iBoxx EUR Corporates 1-3 year (GBP Hedged) things. This anxiety combined with a noisy build-up to Index, over the 12 months under review. the US presidential election to generally weaken investor appetite by the end of September and into The Markit iBoxx EUR Corporates 1-3 year (GBP what is traditionally a mixed October for financial Hedged) Index was introduced as the fund’s benchmark markets. on 13 March 2018, therefore it is too early to say whether the fund has met its objective of providing a There were two important drivers of investor sentiment higher total return (the combination of capital growth during the winter months and to the end of the period and income), net of the ongoing charge figure, than that under review: news of COVID-19 vaccines being rolled of the Markit iBoxx EUR Corporates 1-3 year (GBP out from December 2020 onwards, and the US Hedged) Index over any five-year period. presidential election reaching closure as Joe Biden defeated Donald Trump with room to spare. In general,

140 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Authorised Corporate Director’s Report

risky assets responded to these key drivers with price environment of very low interest rates. Fund allocation gains as the year came to an end. Overall, it was a to government bonds has been steady at about 8.5% positive period for corporate bonds around this period. throughout the period under review.

However, it was a mixed start to 2021, with some signs Within corporate bonds, the fund’s holding of riskier of volatility starting to emerge as modest changes took high yield bonds has been kept relatively low, at a little place in the prices of many assets. Returns from major more than 3%. This is because we believe companies government bond markets fell as yields (which move issuing these bonds are at greater risk of default (non- inversely to bond prices) rose on US Treasuries, UK payment of interest or principal) in light of the uncertain gilts, and German bunds. This pattern of selling economic conditions that lie ahead. persisted in the months to the end of the period under Holdings of high-quality asset-backed securities have review, as some investors sold their positions in major risen from about 19% to 24%. These assets are typically government bonds on the perceived threat of rising floating-rate instruments – the periodic payments they inflation over the coming years. Equally, returns from make vary with the official interest rate - so they can be most corporate bonds were mixed for most of the a good investment in a period when interest rates rise. remaining months of the review period, and only really started to recover by the spring. Performance was Outlook certainly not as strong as in most of 2020, with US As we move into an uncertain period for the global companies’ bonds performing marginally better than UK economy and, certainly, the direction of interest rates, and European corporate bonds, largely reflecting what we remain defensively positioned in terms of corporate was a better outlook for the US economy compared to bond holdings and exposure to interest rate risk, other major economies in the period. awaiting opportunities to add more corporate bonds if or when we see some weakness in their valuations. A large part of the fund’s positive returns in the period Until then, we will continue to look for single-name was due to the strong performance of shorter-dated opportunities that we think are mispriced and hope to corporate bonds – especially high-quality asset-backed beat the benchmark index through superior bond securities (ABS). ABS are bonds backed by assets selection and asset allocation. including credit card receivables, car loans or mortgages, whose creditworthiness is based on the Matthew Russell underlying assets, rather than on the company that Fund manager issued the bonds. Sectors we favour within ABS include An employee of M&G FA Limited which is an associate of M&G Securities banking, finance, and automobile companies. Limited. Please note that the views expressed in this Report should not be taken as a Investment activities 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 Fund returns are driven by a number of factors, whether an investment is suitable for your needs, you should consult a including duration (interest rate risk) and credit risk, Financial Adviser. with currency exposure hedged to the fund’s base currency – sterling. Over the period, we maintained the portfolio’s exposure to high-quality corporate bonds at around two-thirds of fund allocation – with the average credit rating of issuers at A throughout the period.

During this period, we have been cautious about having too much exposure to government bonds from major developed countries. This is because we believe prices on these bonds have little room to go higher in an

Annual Long Report and audited Financial Statements • May 2021 141 M&G Short Dated Corporate Bond Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income 226,198 97.32 100.40

Debt securities 226,147 97.30 100.34

‘AAA’ credit rated bonds 88,808 38.21 15.77

£1,359,000 Canada Square Funding 2021-1 FRN 1,367 0.59

£2,054,126 Castell 2020-1 FRN 1.3193% 25/03/2053 2,063 0.89

£4,000,000 Economic Master Issuer 2020-1 FRN 0.519% 25/06/2072 4,012 1.73

£2,659,787 Elstree Funding No. 1 FRN 1.449% 20/12/2053 2,686 1.15

£3,000,000 European Investment Bank FRN 1.0496% 18/01/2027 3,136 1.35

£1,272,141 Finsbury Square 2019-3 FRN 1.0588% 16/12/2069 1,280 0.55

€8,000,000 Germany (Federal Republic of) 0% 08/10/2021 6,895 2.97

€3,000,000 Germany (Federal Republic of) IL 0.1% 15/04/2023 2,918 1.25

€2,453,000 Glenbeigh 2 Issuer FRN 0.2113% 24/03/2046 2,106 0.90

£3,160,000 Gosforth Funding 2017-1 FRN 0.534% 19/12/2059 3,168 1.36

£4,000,000 Holmes Master Issuer FRN 0.6219% 15/10/2054 4,015 1.73

£890,346 Hops Hill No. 1 FRN 0.9989% 27/05/2054 898 0.39

US$3,000,000 Johnson & Johnson 0.55% 01/09/2025 2,094 0.90

€1,497,000 Jubilee Place 2021-1 FRN 0.2945% 17/07/2058 1,297 0.56

£2,926,250 Jupiter Mortgage No. 1 FRN 0.8484% 20/07/2060 2,931 1.26

US$3,368,000 Kreditanstalt fuer Wiederaufbau 0.375% 18/07/2025 2,342 1.01

£6,000,000 Kreditanstalt fuer Wiederaufbau 1.25% 29/12/2023 6,148 2.64

£4,000,000 Nationwide Building Society FRN 0.4499% 24/02/2031 4,000 1.72

£1,381,000 PCL Funding IV FRN 1.0989% 15/09/2024 1,388 0.60

£1,581,023 Polaris 2019-1 FRN 1.3169% 27/04/2057 1,586 0.68

£717,790 Precise Mortgage Funding 2020-1B FRN 0.9959% 16/10/2056 722 0.31

£1,653,638 Residential Mortgage Securities 32 FRN 1.2987% 20/06/2070 1,673 0.72

US$4,000,000 RIN II FRN 1.8325% 10/09/2030 2,816 1.21

£8,500,000 Santander FRN 0.5997% 12/02/2027 8,615 3.71

£3,000,000 Silverstone Master Issuer FRN 0.5739% 21/01/2070 3,012 1.29

£1,766,000 Stratton Mortgage Funding 2021-1 FRN 1,767 0.76

£1,680,835 Together Asset Backed Securitisation 2019-1 FRN 1.32% 1,691 0.73 15/07/2061

£3,000,812 Together Asset Backed Securitisation 2020-1 FRN 1.499% 3,040 1.31 15/12/2061

142 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘AAA’ credit rated bonds (continued)

£1,298,671 Together Asset Backed Securitisation No. 1 FRN 1.0835% 1,300 0.56 12/03/2049

£1,430,072 Towd Point Mortgage Funding 2019-Vantage2 FRN 1.4811% 1,436 0.62 20/02/2054

£2,107,000 Tower Bridge Funding FRN 2,113 0.91

£1,089,740 Tower Bridge Funding No. 3 FRN 1.2835% 20/12/2061 1,092 0.47

£1,250,000 Twin Bridges 2021-1 FRN 1,257 0.54

€2,255,000 Voya Euro CLO III FRN 0.92% 15/04/2033 1,944 0.84

‘AA’ credit rated bonds 31,241 13.44 14.88

€4,000,000 Exxon Mobil 0.142% 26/06/2024 3,466 1.49

£1,786,000 First Abu Dhabi Bank 1.375% 19/02/2023 1,804 0.78

£746,000 Jupiter Mortgage No. 1 FRN 1.4484% 20/07/2060 748 0.32

£2,429,000 New York Life Global Funding 1.25% 17/12/2026 2,451 1.05

£1,191,000 New York Life Global Funding 1.625% 15/12/2023 1,223 0.53

£453,000 Telereal Securitisation 1.3657% 10/12/2031 457 0.20

£13,000,000 UK Treasury 0.125% 31/01/2023 13,013 5.60

£8,000,000 UK Treasury 3.75% 07/09/2021 8,079 3.47

‘A’ credit rated bonds 27,611 11.88 28.78

€4,000,000 Bank of America FRN 0.455% 24/08/2025 3,500 1.50

£1,942,000 BMW International Investment 0.75% 08/03/2024 1,944 0.84

US$2,213,000 Boubyan Sukuk 2.593% 18/02/2025 1,618 0.69

€2,500,000 Dassault Systemes 0% 16/09/2022 2,158 0.93

€3,000,000 EssilorLuxottica 0.125% 27/05/2025 2,605 1.12

€2,000,000 GlaxoSmithKline Capital FRN 0.061% 23/09/2021 1,723 0.74

€4,000,000 International Business Machines 0.375% 31/01/2023 3,478 1.50

US$4,000,000 JPMorgan Chase Var. Rate 2.301% 15/10/2025 2,944 1.27

€1,324,000 Medtronic Global 0% 15/10/2025 1,137 0.49

US$3,000,000 NatWest Markets 3.625% 29/09/2022 2,203 0.95

€1,303,000 PepsiCo 0.25% 06/05/2024 1,136 0.49

US$2,634,000 Slam 2021-1 2.434% 15/06/2046 1,858 0.80

£1,328,000 Toyota Motor Credit Corp 0.75% 19/11/2026 1,307 0.56

Annual Long Report and audited Financial Statements • May 2021 143 M&G Short Dated Corporate Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BBB’ credit rated bonds 70,560 30.36 25.83

US$424,478 AASET Trust 2017-1 3.967% 16/05/2042 299 0.13

€2,583,000 Altria 1% 15/02/2023 2,252 0.97

€1,100,000 American International Var. Rate 1.188% 15/03/2037 878 0.38

€2,500,000 Banco Bilbao Vizcaya Argentaria Var. Rate 1% 16/01/2030 2,151 0.92

US$1,345,000 BAT International Finance 1.668% 25/03/2026 943 0.41

US$3,000,000 BNP Paribas 3.5% 01/03/2023 2,222 0.96

US$1,829,000 Boeing 2.196% 04/02/2026 1,291 0.55

€2,129,000 Channel Link Enterprises Finance Var. Rate 1.761% 1,824 0.78 30/06/2050

£1,302,000 Citigroup 2.75% 24/01/2024 1,367 0.59

€3,058,000 CK Hutchison Telecom Finance 0.375% 17/10/2023 2,651 1.14

€1,208,000 CTP 0.625% 27/11/2023 1,050 0.45

€1,622,000 Enel Var. Rate 1.375% Perpetual 1,362 0.59

£2,500,000 FirstGroup 6.875% 18/09/2024 2,925 1.26

£1,150,000 Fiserv 2.25% 01/07/2025 1,207 0.52

€1,915,000 Fraport Frankfurt Airport Services Worldwide 1.625% 1,702 0.73 09/07/2024

€2,434,000 Goldman Sachs FRN 0.466% 30/04/2024 2,116 0.91

£2,737,000 Hiscox 2% 14/12/2022 2,781 1.20

€2,800,000 Iliad 2.375% 17/06/2026 2,467 1.06

£3,000,000 Imperial Brands Finance 9% 17/02/2022 3,175 1.37

€1,300,000 Infineon Technologies 0.75% 24/06/2023 1,137 0.49

£3,000,000 Informa 3.125% 05/07/2026 3,178 1.37

€1,534,000 InterContinental Hotels 1.625% 08/10/2024 1,373 0.59

£2,129,000 Leeds Building Society Var. Rate 1.5% 16/03/2027 2,124 0.91

£2,000,000 Lendlease Europe Finance 6.125% 12/10/2021 2,033 0.87

£2,671,000 Lloyds Banking Var. Rate 1.875% 15/01/2026 2,731 1.17

€2,300,000 Mercialys 4.625% 07/07/2027 2,352 1.01

US$4,000,000 Oracle 2.5% 01/04/2025 2,965 1.28

€5,500,000 Quadient 2.25% 03/02/2025 4,809 2.07

€4,000,000 Signify 2% 11/05/2024 3,622 1.56

144 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BBB’ credit rated bonds (continued)

US$3,000,000 Société Générale 4.25% 14/09/2023 2,279 0.98

£1,407,000 Southern Water Services Finance 1.625% 30/03/2027 1,396 0.60

£1,900,000 Volkswagen Financial Services 1.625% 30/11/2022 1,924 0.83

€2,065,000 Volkswagen Leasing 0.375% 20/07/2026 1,776 0.76

US$3,000,000 Wells Fargo Var. Rate 2.188% 30/04/2026 2,198 0.95

‘BB’ credit rated bonds 7,927 3.41 2.57

£2,000,000 Autostrade per l‘Italia 6.25% 09/06/2022 2,085 0.90

£3,000,000 Ford Motor Credit 4.535% 06/03/2025 3,187 1.37

US$1,500,000 Rakuten Var. Rate 5.125% Perpetual 1,087 0.47

€1,687,000 Rolls-Royce 4.625% 16/02/2026 1,568 0.67

Bondswithnocreditrating 0 0.00 12.51

Debt derivatives 51 0.02 0.06

Credit default swaps 51 0.02 0.06

€2,500,000 Banco Bilbao Vizcaya Argentaria Jun 2025 (3) (0.00)

US$3,200,000 Ford Motor Jun 2025 (327) (0.14)

€(15,000,000) Markit iTraxx Europe Series 34 V1 5 Year Dec 2025 338 0.14

€(3,000,000) Tesco Jun 2026 43 0.02

Currency 1,107 0.48 (0.84)

Forward currency contracts 1,107 0.48 (0.84)

€(80,723,299) Sold for £69,829,693 (expires 02.06.21) 491 0.21

US$(41,266,763) Sold for £29,729,600 (expires 02.06.21) 622 0.27

Annual Long Report and audited Financial Statements • May 2021 145 M&G Short Dated Corporate Bond Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Currency (continued)

Forward currency contracts (continued)

US$3,035,030 Bought for £2,146,774 (expires 02.06.21) (6) (0.00)

Portfolio of investments 227,305 97.80 99.56

Cash equivalents 5,861 2.52 0.57

‘AAA’ rated money market fundsa 5,861 2.52 0.57

5,861,000 Northern Trust Global Fund - Sterling 5,861 2.52

Total portfolio (notes 2c & 2d on page 9) 233,166 100.32 100.13

Net other assets / (liabilities) (750) (0.32) (0.13)

Net assets attributable to shareholders 232,416 100.00 100.00

146 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial highlights

Fund performance Fund performance against the comparator Please note past performance is not a guide to future benchmark performance and the value of investments, and the We are unable to show the fund’s performance against income from them, will fluctuate. This will cause the the comparator benchmark from inception, as the fund fund price to fall as well as rise and you may not get was previously managed against a different comparator back the original amount you invested. benchmark. Therefore, the graph below shows the performance of the fund from the period where the The following charts and tables reflect the key financial fund was managed against the Markit iBoxx EUR information of a representative share class, Sterling Corporates 1-3 year Index (GBP Hedged). Class ‘A’ (Income) shares. As different share classes have different attributes, for example charging From 13 March 2018 = 100, plotted monthly structures and minimum investments, please be aware Chart date 1 June 2021 that their performance may be different. For more 108 information on the different share classes in this fund 107 please refer to the Prospectus for M&G Investment 106 Funds (2), which is available free of charge either from 105 our website at www.mandg.co.uk/prospectuses or by 104 calling M&G Customer Relations. 103

Fund level performance 102

Fund net asset value as at 31.05.21 31.05.20 31.05.19 101 £’000 £’000 £’000 100 Fund net asset value (NAV) 232,416 275,432 323,156 99 Jun 18Dec 18 Jun 19 Dec 19 Jun 20 Dec 20 Jun 21 Performance since launch Sterling Class ‘A’ (Income) shares* Markit iBoxx EUR Corporates 1-3 Index (GBP Hedged) To give an indication of how the fund has performed since launch, the chart below shows total return of Source: Morningstar, Inc. and M&G * Income reinvested Sterling Class ‘A’ (Income) shares. Please note, the comparator benchmark was introduced

January 1993 = 100, plotted monthly on 13 March 2018. Before this date, the fund was not Chart date 1 June 2021 managed with reference to the Markit iBoxx EUR

250 Corporates 1-3 year Index (GBP Hedged).

200

170

140

120

100 93 95 97 99 01 0305 07 0911 13 15 17 19 21

Sterling Class ‘A’ (Income) shares*

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

Annual Long Report and audited Financial Statements • May 2021 147 M&G Short Dated Corporate Bond Fund Financial highlights

Long-term performance by share class • Investment management: Charge paid to M&G for To give an indication of the performance of the fund, investment management of the fund. From the following table shows the compound rate of return, 1 August 2019 this charge forms part of the annual per annum, over the period. Calculated on a price to charge. price basis with income reinvested. • Administration: Charge paid for administration services in addition to investment management – Share One Three Five Since class year years years launch any surplus from this charge will be retained by 01.06.20 01.06.18 01.06.16 M&G. From 1 August 2019 this charge is rolled into %a %pa %pa %pa the annual charge. Sterlingb • Oversight and other independent services: Class ‘A’ +3.5 +2.2 +2.3 +3.1c Charges paid to providers independent of M&G for Class ‘I’ +3.7 +2.3 +2.4 +2.2d services which include depositary, custody and Class ‘PP’ +3.8 n/a n/a +2.7e audit. From 1 August 2019 these charges will be

a Absolute basis. paid by M&G and rolled into the annual charge. b Price to price with income reinvested. • Ongoing charges from underlying funds: Ongoing c 29 January 1993, the end of the initial offer period of the predecessor unit trust. charges on holdings in underlying funds that are d 9 November 2012, the launch date of the share class. not rebated. From 1 August 2019 charges from e 8 April 2019, the launch date of the share class. underlying funds (excluding Investment Trust Companies and Real Estate Investment Trusts) will Operating charges and portfolio be rebated. transaction costs The operating charges paid by each share class of the We explain below the payments made to meet the fund are shown in the following performance tables. ongoing costs of investing and managing the fund, These charges do not include portfolio transaction comprising operating charges and portfolio transaction costs or any entry and exit charges (also known as initial costs. and redemption charges). The charging structures of Operating charges share classes may differ, and therefore the operating Operating charges include payments made to M&G and charges may differ. to providers independent of M&G: Operating charges are in line with the ongoing charges • Annual charge: Charge paid to M&G covering the shown in the Key Investor Information Document, other annual cost of M&G managing and administering than where there have been extraordinary legal or tax the fund and the costs of third parties providing expenses, or an estimate has been used for the services to the fund. From 1 August 2019, this ongoing charge because a material change has made charge rolls all costs that make up the operating the operating charges unreliable as an estimate of charges into one annual charge. future charges. For every £1 billion of a fund’s net asset value, a discount of 0.02% will be applied to that fund’s annual charge (up to a maximum of 0.12%).

• Extraordinary legal and tax expenses: Costs that specifically relate to legal or tax claims that are both exceptional and unforeseeable. Such expenses are uncommon, and would not be expected in most years. Although they result in a short-term cost to the fund, generally they can deliver longer term benefits for investors.

148 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial highlights

Portfolio transaction costs Specific share class performance Portfolio transaction costs are incurred by funds when The following tables show the performance of each buying and selling investments. These costs vary share class. All ‘Performance and charges’ percentages depending on the types of investment, their market represent an annual rate except for the ‘Return after capitalisation, country of exchange and method of operating charges’ which is calculated as a percentage execution. They are made up of direct and indirect of the opening net asset value per share (NAV). ‘Dilution portfolio transaction costs: adjustments’ are only in respect of direct portfolio • Direct portfolio transaction costs: Broker transaction costs. execution commission and taxes. Sterling Class ‘A’ Income share • Indirect portfolio transaction costs: ‘Dealing performance spread’ – the difference between the buying and The share class was launched on 29 January 1993. selling prices of the fund’s investments; some types of investment, such as fixed interest fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p securities, have no direct transaction costs and only the dealing spread is paid. Opening NAV 25.39 25.47 25.63 Return before operating 1.04 0.55 0.53 Investments are bought or sold by a fund when charges changes are made to the investment portfolio and in Operating charges (0.13) (0.13) (0.13) response to net flows of money into or out of the fund from investors buying and selling shares in the fund. Return after operating 0.91 0.42 0.40 charges

To protect existing investors, portfolio transaction costs Distributions (0.34) (0.50) (0.56) incurred as a result of investors buying and selling Closing NAV 25.96 25.39 25.47 shares in the fund are recovered from those investors through a ‘dilution adjustment’ to the price they pay or Direct transaction costs UK p UK p UK p receive. As the fund invests mainly in fixed interest Costs before dilution 0.00 0.00 0.00 securities, the direct transaction costs paid on other adjustments investments are too small to be reflected in the table Dilution adjustmentsa 0.00 0.00 0.00 below. To give an indication of the indirect portfolio Total direct transaction costs 0.00 0.00 0.00 dealing costs the table shows the average portfolio Performance and charges % % % dealing spread. Direct portfolio transaction 0.00 0.00 0.00 Further information on this process is in the Prospectus, costsb which is available free of charge on request either from Operating chargesc 0.50 0.50 0.51 our website at www.mandg.co.uk/prospectuses or by Return after charges +3.58 +1.65 +1.56 calling M&G Customer Relations. Distribution yield 1.13 1.84 2.26

Portfolio transaction costs Other information

Closing NAV (£’000) 51,553 54,948 60,701 as at 31 May 2021 2020 2019 Averagea Indirect portfolio %%% % Closing NAV (%) 22.18 19.95 18.78 transaction costs Number of shares 198,558,032 216,407,298 238,287,578 Average portfolio 0.25 0.51 0.32 0.36 dealing spread Highest share price (UK p) 26.12 25.91 25.78 a Average of first three columns. Lowest share price (UK p) 25.41 24.40 25.13

Annual Long Report and audited Financial Statements • May 2021 149 M&G Short Dated Corporate Bond Fund Financial highlights

Sterling Class ‘I’ Income share Sterling Class ‘I’ Accumulation share performance performance The share class was launched on 9 November 2012. The share class was launched on 15 May 2020.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 1,021.76 1,024.06 1,029.30 Opening NAV 100.35 100.00 n/a

Return before operating 42.07 21.80 21.69 Return before operating 4.04 0.37 n/a charges charges

Operatingcharges (3.76) (4.12) (4.27) Operating charges (0.27) (0.02) n/a

Return after operating 38.31 17.68 17.42 Return after operating 3.77 0.35 n/a charges charges

Distributions (13.79) (19.98) (22.66) Distributions (0.99) (0.05) n/a

Closing NAV 1,046.28 1,021.76 1,024.06 Retained distributions 0.99 0.05 n/a

Direct transaction costs UK p UK p UK p Closing NAV 104.12 100.35 n/a

Costs before dilution 0.00 0.00 0.00 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.00 n/a Dilution adjustmentsa 0.00 0.00 0.00 adjustments

Total direct transaction costs 0.00 0.00 0.00 Dilution adjustmentsa 0.00 0.00 n/a

Performance and charges % % % Total direct transaction costs 0.00 0.00 n/a

Direct portfolio transaction 0.00 0.00 0.00 Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 n/a Operating chargesc 0.36d 0.40 0.42 costsb

Return after charges +3.75 +1.73 +1.69 Operating charges 0.26d 0.40 n/a

Distribution yield 1.13 1.84 2.26 Return after charges +3.76 +0.35 n/a

Other information Distribution yield 0.88 0.00 n/a

Closing NAV (£’000) 178,309 220,240 262,435 Other information

Closing NAV (%) 76.72 79.96 81.21 Closing NAV (£’000) 2,222 20 n/a

Number of shares 17,042,166 21,554,835 25,626,979 Closing NAV (%) 0.96 0.01 n/a

Highest share price (UK p) 1,051.59 1,042.55 1,035.47 Number of shares 2,134,206 20,000 n/a

Lowest share price (UK p) 1,022.59 981.80 1,009.67 Highest share price (UK p) 104.26 100.79 n/a

Lowest share price (UK p) 100.43 100.00 n/a

150 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial highlights

Sterling Class ‘PP’ Income share Sterling Class ‘PP’ Accumulation share performance performance The share class was launched on 5 August 2019. The share class was launched on 8 April 2019.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 98.71 100.00 n/a Opening NAV 101.96 100.13 100.00

Return before operating 4.06 0.87 n/a Return before operating 4.17 2.13 0.18 charges charges

Operating charges (0.26) (0.25) n/a Operating charges (0.24) (0.30) (0.05)

Return after operating 3.80 0.62 n/a Return after operating 3.93 1.83 0.13 charges charges

Distributions (1.33) (1.91) n/a Distributions (1.11) (1.67) (0.57)

Closing NAV 101.18 98.71 n/a Retained distributions 1.11 1.67 0.57

Direct transaction costs UK p UK p UK p Closing NAV 105.89 101.96 100.13

Costs before dilution 0.00 0.00 n/a Direct transaction costs UK p UK p UK p adjustments Costs before dilution 0.00 0.04 0.00 Dilution adjustmentsa 0.00 0.00 n/a adjustments

Total direct transaction costs 0.00 0.00 n/a Dilution adjustmentsa 0.00 0.00 0.00

Performance and charges % % % Total direct transaction costs 0.00 0.04 0.00

Direct portfolio transaction 0.00 0.00 n/a Performance and charges % % % costsb Direct portfolio transaction 0.00 0.00 0.00 Operating charges 0.25 0.30 n/a costsb

Return after charges +3.85 +0.62 n/a Operating chargesc 0.25 0.30 0.30

Distribution yield 1.13 1.84 n/a Return after charges +3.85 +1.83 +0.13

Other information Distribution yield 0.98 1.54 1.95

Closing NAV (£’000) 194 187 n/a Other information

Closing NAV (%) 0.08 0.07 n/a Closing NAV (£’000) 138 37 20

Number of shares 192,148 188,978 n/a Closing NAV (%) 0.06 0.01 0.01

Highest share price (UK p) 101.66 100.69 n/a Number of shares 130,359 36,359 20,000

Lowest share price (UK p) 98.79 94.84 n/a Highest share price (UK p) 106.03 103.16 100.36

Lowest share price (UK p) 102.04 97.48 99.67

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. d As the operating charges figure has been calculated on average NAV basis during the period, the difference between the ‘I’ Income and Accumulation share class charges is due to large inflows on the ‘I’ Accumulation share class.

Annual Long Report and audited Financial Statements • May 2021 151 M&G Short Dated Corporate Bond Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 7,101 (112)

Revenue 5 3,359 5,922

Expenses 6 (991) (1,282)

Net revenue/(expense) before taxation 2,368 4,640

Taxation 7 0 0

Net revenue/(expense) after taxation 2,368 4,640

Total return before distributions 9,469 4,528

Distributions 8 (3,349) (5,907)

Change in net assets attributable to shareholders from 6,120 (1,379) investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 275,432 323,156

Amounts received on issue of shares 37,965 45,612

Amounts paid on cancellation of shares (87,318) (92,182)

(49,353) (46,570)

Dilution adjustments 210 223

Change in net assets attributable to shareholders from 6,120 (1,379) investment activities (see above)

Retained distributions on Accumulation shares 6 0

Unclaimed distributions 12

Closing net assets attributable to shareholders 232,416 275,432

152 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 227,641 276,623

Current assets

Debtors 9 1,219 1,419

Cash and bank balances 10 1,085 508

Cash equivalents 5,861 1,572

Total assets 235,806 280,122

Liabilities

Investment liabilities (336) (2,406)

Creditors

Overdrawn positions at futures clearing houses and 0(68) collateral manager

Distribution payable (709) (1,341)

Other creditors 11 (2,345) (875)

Total liabilities (3,390) (4,690)

Net assets attributable to shareholders 232,416 275,432

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Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities (2,770) 3,131

Derivative contracts 8,688 (504)

Currency gains/(losses) 1,183 (2,738)

Transaction charges 0(1)

Net capital gains/(losses) 7,101 (112)

2021 2020 for the year to 31 May £’000 £’000

a) Purchases

Debt securitiesa 139,854 254,235

b) Sales

Debt securitiesa 178,171 301,862

Other transaction types

Corporate actions 8,415 4,122

Total sales after transaction costs 186,586 305,984

c) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.25 0.51

a These transaction types do not attract direct portfolio transaction costs. b Average portfolio dealing spread at the balance sheet date.

154 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 43

Derivative revenue 163 225

Interest distributions 334

Interest on debt securities 3,187 5,657

Rebate of ongoing charges from underlying funds 2 3

Total revenue 3,359 5,922

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 982 1,044

Annual management chargea 0143

Administration chargea 080

982 1,267

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 04

Other expenses

Audit fee (including VAT)a 02

Interest payable 10 8

Safe custody chargea (1) 1

911

Total expenses 991 1,282 a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019. As of 1 August 2019 these charges have been replaced by the single annual charge. Audit fees for the financial year ending 2021 were £11,000 (2020: £11,000) (including VAT), which are covered by the annual charge.

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7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax 00

Deferred tax (note 7c) 00

Total taxation 00

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 2,368 4,640

Corporation tax at 20% 474 928

Effects of:

Interest distributions (474) (928)

Total tax charge (note 7a) 00

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset in the current financial year (2020: same). 8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Interest distributions £’000 £’000 £’000 £’000

First interim 916 0c 1,646 0c

Second interim 826 0c 1,379 0c

Third interim 755 0c 1,392 0c

Final 709 6 1,341 0c

Total net distributions 3,212 5,758

Income deducted on cancellation of shares 197 251

Income received on issue of shares (60) (102)

Distributions 3,349 5,907

Net revenue/(expense) per statement of total return 2,368 4,640

Expenses offset against capital 981 1,267

Distributions 3,349 5,907

a Distributions payable on Income shares. b Retained distributions on Accumulation shares. c Distribution is less than £1,000.

156 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

9Debtors

2021 2020 as at 31 May £’000 £’000

Debt security interest receivable 1,190 1,356

Derivative revenue receivable 29 62

Distributions receivable 01

Total debtors 1,219 1,419

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Amounts held at futures clearing houses and collateral manager 837 68

Cash held as bank balances 248 440

Total cash and bank balances 1,085 508

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 466 828

Annual charge payable 21 35

Expenses payable 012

Purchases awaiting settlement 1,858 0

Total other creditors 2,345 875

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 216,407,298 13,997,986 (31,847,252) 198,558,032

Class ‘I’ Income 21,554,835 3,072,337 (7,585,006) 17,042,166

Class ‘I’ Accumulation 20,000 2,114,206 0 2,134,206

Class ‘PP’ Income 188,978 37,999 (34,829) 192,148

Class ‘PP’ Accumulation 36,359 94,000 0 130,359

Annual Long Report and audited Financial Statements • May 2021 157 M&G Short Dated Corporate Bond Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 14.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 0.50 0.50

Class ‘I’ 0.40 0.25

Class ‘PP’ 0.30 0.15

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 21.60% (2020: 20.27%) of the fund’s shares.

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

158 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 30,905 0 34,798 0

Level 2 196,736 (336) 241,825 (2,406)

Level3 0000

227,641 (336) 276,623 (2,406)

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

The VaR limit set during the financial year to 31 May 2021 was 11% (2020: 11%).

The lowest, highest and average VaR, as well as utilisation of VaR with reference to the limit above, are calculated during the financial years ended 31 May 2021 and 31 May 2020.

for the year to 2021 2021 2020 2020 31 May %ofVaR Utilisation %ofVaR Utilisation of VaRa of VaRa 11% 11%

Lowest 0.64 3.56 0.33 3.00

Highest 2.56 14.22 4.23 38.45

Average 1.21 6.71 4.44 40.39 a The VaR on the fund has been divided by its maximum limit.

Annual Long Report and audited Financial Statements • May 2021 159 M&G Short Dated Corporate Bond Fund Financial statements and notes

2021 2020 as at 31 May £’000 £’000

Investment grade securities 218,220 234,831

Below investment grade securities 7,927 7,087

Unrated securities 0 34,438

Other investments 1,158 (2,139)

Total 227,305 274,217

The table below shows the exposure to counterparties. Collateral is posted daily, in the form of cash or high-quality government bonds, to minimise this exposure.

Swaps Forward currency contracts as at 31 May 2021 £’000 £‘000

Barclays Bank 381 0

Citigroup 0 622

Goldman Sachs (330) 0

JPMorgan 0 466

Merrill Lynch 0(6)

Standard Chartered Bank 07

State Street Bank 018

Total 51 1,107

160 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

Swaps Forward currency contracts as at 31 May 2020 £’000 £‘000

Bank of America Merrill Lynch 0(18)

Barclays Bank 0(123)

BNP Paribas 137 0

Citigroup 06

Goldman Sachs (64) 0

HSBC 0(676)

JPMorgan 95 (36)

National Australia Bank 0(3)

Standard Chartered Bank 0(30)

State Street Bank 0(1,427)

Total 168 (2,307)

21 Leverage risk Funds using VaR approaches are required to disclose the level of leverage employed during the financial reporting period.

for the year to 2021a 2021a 2020a 2020a 31 May £’000 %b £’000 %b

Lowest 107,267 45.27 159,315 50.60

Highest 482,809 175.26 578,571 185.20

Average 162,135 63.75 232,351 76.60 a Leverage has been calculated using the Gross Sum of Notional Approach for derivative positions only (including forward currency contracts) and excludes all physical holdings. b Expressed as a percentage over fund valuation.

Annual Long Report and audited Financial Statements • May 2021 161 M&G Short Dated Corporate Bond Fund Financial statements and notes

22 Interest distribution tables This fund pays quarterly interest distributions and the following table sets out the distribution periods.

Quarterly distribution periods

Start End Xd Payment

First interim 01.06.20 31.08.20 01.09.20 31.10.20

Second interim 01.09.20 30.11.20 01.12.20 31.01.21

Third interim 01.12.20 28.02.21 01.03.21 30.04.21

Final 01.03.21 31.05.21 01.06.21 31.07.21

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

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

Sterling Class ‘A’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.0509 0.0407 0.0916 0.1347

Second interim 0.0356 0.0527 0.0883 0.1221

Third interim 0.0412 0.0416 0.0828 0.1164

Final 0.0354 0.0445 0.0799 0.1237

Sterling Class ‘I’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 1.6647 2.0246 3.6893 5.4140

Second interim 1.4358 2.1218 3.5576 4.9021

Third interim 2.2338 1.0878 3.3216 4.6901

Final 1.8349 1.3889 3.2238 4.9768

162 Annual Long Report and audited Financial Statements • May 2021 M&G Short Dated Corporate Bond Fund Financial statements and notes

Sterling Class ‘I’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2283 0.0327 0.2610 n/a

Second interim 0.2433 0.0000 0.2433 n/a

Third interim 0.0079 0.2246 0.2325 n/a

Final 0.1371 0.1152 0.2523 0.0525

Sterling Class ‘PP’ Income shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.3563 0.0000 0.3563 0.5064

Second interim 0.3437 0.0000 0.3437 0.4734

Third interim 0.3214 0.0000 0.3214 0.4524

Final 0.0734 0.2381 0.3115 0.4811

Sterling Class ‘PP’ Accumulation shares

Interest distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.2917 0.0000 0.2917 0.4601

Second interim 0.2758 0.0000 0.2758 0.4061

Third interim 0.2617 0.0000 0.2617 0.3872

Final 0.1154 0.1682 0.2836 0.4169

Annual Long Report and audited Financial Statements • May 2021 163 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

Investment objective up to Investment policy from 31 July 30 July 2020 2020 The fund aims to increase income distributions over At least 70% of the fund is invested directly in equities time and targets a yield greater than that of the FTSE and equity-related instruments of companies across All-Share Index. Although income will be the primary any sector and market capitalisation, that are consideration, the investment manager will also aim for incorporated, domiciled, listed or do most of their capital growth. business in the UK.

The fund may invest in other transferable securities, Investment objective from 31 July including equities and equity-related instruments of non-UK companies, investment grade debt securities, 2020 and cash and near cash, directly or via funds (including The fund aims to provide: funds managed by M&G). Debt securities are issued by • a higher annual yield than the FTSE All-Share companies, or issued or guaranteed by government or Index; public issuers, located anywhere in the world, and will be denominated in GBP. • an income stream that increases annually; and Derivatives may be used for efficient portfolio • a higher total return (capital growth plus income), management and hedging. net of the ongoing charge figure, than a composite index* over any five year period.

* 70% FTSE All-Share Index and 30% FTSE Actuaries UK Conventional Gilts Investment approach up to All Stocks Index. 30 July 2020 The M&G UK Income Distribution Fund is managed to Investment policy up to 30 July provide investors with a high income through a portfolio 2020 of UK equities and high quality corporate bonds (in order to aid income generation). The fund targets a At least 70% of the fund will be invested in UK equities. yield that is higher than that of the FTSE All-Share Exposure to UK equities may be gained by investing in Index. Although this gives the fund a bias towards the other collective investment schemes. higher yielding sectors of the market, it aims to have a The fund focuses on good-quality but undervalued broadly diversified portfolio within these yield stocks that offer a higher income than the FTSE constraints. All-Share Index by identifying those companies that The equity component of the fund has a bias towards exhibit the following qualities: strong business good value, out of favour stocks. Good quality operations, good cash flows and attractive dividend investments are selected from the available universe of growth prospects. higher yielding equities by identifying those companies The fund may also invest in sterling-denominated fixed that exhibit the following qualities: strong business income securities. franchise, good cashflow characteristics and attractive Cash and near cash may be held for ancillary purposes dividend growth prospects. and derivatives may be used for efficient portfolio Stocks will generally be sold if these criteria no longer management and hedging purposes. apply, but the specific sell discipline is triggered by over-valuation, falling yield or better opportunities elsewhere.

164 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

The fixed income exposure will be comprised of issues index has been chosen as the fund’s benchmark as it chosen for high quality and broad diversification. best reflects the scope of the fund’s investment policy. Corporate bonds are typically favoured versus the The fund is actively managed. risk-free rate (as proxied by gilts in the long term) in pursuit of income. The fund manager has complete freedom in choosing which assets to buy, hold and sell in the fund within the constraints set by the objective and investment policy. Investment approach from 31 July The fund’s holdings may deviate significantly from the 2020 benchmark’s constituents. The fund employs a disciplined approach to investment, For unhedged share classes, the benchmark is shown in concentrating on analysis and selection of individual the share class currency. companies.

The fund typically invests in a diversified portfolio of high-yielding UK stocks. This means that there is Benchmark from 31 July 2020 generally a bias towards out-of-favour, undervalued Yield – FTSE All-Share Index. stocks. From the universe of high-yielding stocks, the Total return - a composite index comprising: fund manager identifies good-quality companies that • are competitive, with a strong business franchise, 70% FTSE All-Share Index healthy cashflows and that have attractive dividend • 30% FTSE Actuaries UK Conventional Gilts All growth prospects. Stocks Index

The fund manager also allocates part of the portfolio to The benchmarks are targets which the fund seeks to debt securities. Investments in debt securities primarily outperform, and have been chosen as they best reflect aim to reduce the volatility of the fund, whilst providing the scope of the fund’s investment policy. The an alternative stable source of income. benchmarks are used solely to measure the fund’s performance and do not constrain the fund‘s portfolio Benchmark up to 30 July 2020 construction. The fund is actively managed. The fund manager has The target benchmark and comparator benchmark do complete freedom in choosing which investments to not constrain the fund’s portfolio construction. buy, hold and sell in the fund. The fund’s holdings may • Target: deviate significantly from the constituents of the Yield: FTSE All-Share Index. benchmarks.

The benchmark is a target which the fund seeks to The total return benchmark is shown in the share class outperform. The target yield has been chosen as it is an currency. achievable target given the fund’s investment policy. For unhedged share classes, the benchmark is shown in • Comparator: the share class currency.

Total return: 70% FTSE All-Share Index, 30% FTSE Actuaries UK Conventional Gilts All Stocks Index Risk profile The benchmark is a comparator against which the The fund invests mainly in the shares of UK-listed fund’s performance can be measured. The composite companies. It is also invested in high-quality, sterling- denominated fixed income securities, or bonds. The fund is, therefore, subject to the price volatility of the

Annual Long Report and audited Financial Statements • May 2021 165 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

global bond and stockmarkets as well as the Two quarterly distributions of 6.60p per Sterling Class performance of individual companies. The fund is also ‘A’ (Income) share were declared in respect of the first subject to fluctuations in currency exchange rates. The half of the review period, followed by a third quarterly fund has a bias towards the higher yielding sectors of distribution of 6.30p, and a final quarterly distribution of the market, although it seeks to have a broadly 10.81p in respect of the second half of the review diversified portfolio at the same time. Income period. The fund’s total distribution over the year of distributions from the fund’s holdings, however, are not 30.31p represents a decrease of 7.8% on the guaranteed and may vary. corresponding period last year. This compares with an 18.2% decline in the average dividend growth of the Diversification across industries and company sizes is FTSE All-Share Index over the same period. The latest therefore key in managing liquidity risk and reducing annual inflation rate, as measured by the Retail Prices market risk. The fund’s risks are measured and Index (RPI), was 3.3% in May, while on the Consumer managed as an integral part of the investment process. Prices Index (CPI) measure it was 2.1%. The following table shows the risk number associated Between 1 June 2020 (the start of the review period) with the fund and is based on Sterling Class ‘A’ shares. and 1 June 2021, the fund registered a positive total Low risk High risk return of around 19% (the combination of income and growth of capital) across all share classes, ending the Typically lower rewards Typically higher rewards 12-month period ahead of the 13.0% return by its 12345 67 benchmark, a composite index that comprises 70% of the FTSE All-Share Index and 30% of the FTSE Actuaries UK Conventional Gilts All Stocks Index. The above number: Over five years, the fund delivered a positive total return • is based on the rate at which the value of the fund across all share classes, but lagged the benchmark, has moved up and down in the past and is based which returned 6.4% pa. Therefore, the fund did not on historical data so may not be a reliable indicator achieve its objective of outperforming the benchmark ofthefutureriskprofileofthefund. over this period. • is not guaranteed and may change over time and For details of the fund’s historic yields and the the lowest risk number does not mean risk free. performance of each share class, please refer to the • has changed during this period. From 1 June ‘Specific share class performance’ tables and the 2020 to 9 July 2020 the risk number was 4. ‘Long-term performance by share class’ table in the ’Financial highlights’ section of this report. Investment review Performance review The year to June 2021 has witnessed some distinct As at 1 June 2021, for the year ended 31 May 2021 phases for global markets with a number of key events Performance against objective catalysing the subsequent direction in sentiment. The fund did not achieve the objective of growing its Ultimately, the net return for the FTSE All-Share Index income over the 12-month review period. However, as over the 12 months was 22.4%. Beneath this number at 1 June 2021, the 4.17% yield on the fund’s Sterling were some significant events starting with the Class ‘A’ (Income) shares was 51.5% above the broad shockwaves wrought by the COVID-19 pandemic and market FTSE All-Share Index yield of 2.75%, meeting the global response to this event. The vaccine success the fund’s target to exceed the index yield. and subsequent rollout, the US election and the

166 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

‘completion’ of Brexit after years of to-ing and fro-ing the virus. In more recent months investors have started also had a big effect on the UK equity market. to look through to the end of restrictions and a strong recovery by the economy in the second half of the year, Last summer witnessed a continuation in the rampant assisted by huge stimulus packages at home and recovery in stockmarkets after the March nadir, with abroad, especially the US where President Biden is many indices exceeding pre-pandemic levels. A proposing to spend a vast US$9bn on COVID relief reduction in virus cases, easing restrictions and packages, job creation and investment in infrastructure. monetary and fiscal support packages fuelled this resurgence. Technology, growth, quality, defensiveness In the UK sterling bond (fixed income) market, (companies that do well even when the economy is performance varied as the FTSE Actuaries UK weak) and ESG (environmental, social and governance) Conventional Gilts All Stocks Index returned -7.4% and themes led the rally. Debt-laden companies, cyclicals the Merrill Lynch £ Non-Gilts Index returned 2.3%. The (businesses that are economically sensitive), those with UK government bond (or gilt) market lost ground during structural concerns, ESG laggards and those hurt by the period under review as expectations of higher coronavirus restrictions suffered greatly. The inflation and rising interest rates cooled the appetite for bifurcation between ‘quality’ stocks and ‘value’ stocks core government bonds overall. It was a better had been happening for over a decade, but the virus environment for corporate bonds however, as central onset greatly accelerated the trend. bank purchases of these bonds – initially to inject cash into the market during the COVID 19-led economic Whilst markets struggled for direction in the autumn, downturn – provided a boost for prices and therefore events during early November provided the catalyst investment returns during the period. Momentum needed to propel equity indices higher. On 4 November waned somewhat during 2021, as valuations on we began to see the shape of the US election result, corporate bonds seemed to peak, slowing further with the prospect of a split Congress of a Democratic demand for these risky assets as we neared the end of House of Representatives and Republican Senate the 12-month period. The prospect of rising interest pointing towards a continuation of the market-friendly rates also affected the performance of other fixed status quo. On 9 and 16 November, Pfizer/BioNTech income assets during this time. and Moderna, respectively, announced efficacy of between 90-95% of their vaccines. These became the Accordingly, the fund outperformed its benchmark in bridge to life beyond coronavirus restrictions, and the 12 months under review as a result of holding a stocks reacted accordingly. November’s 12% rise in the larger weighting in UK company shares than the FTSE 100 Index goes down as its best monthly composite index, as these outperformed the sterling performance since January 1989. In contrast to the first bond market. 10 months of 2020, value became the dominant factor The equity (company shares) segment of the portfolio after the vaccine announcement. lagged the FTSE All-Share Index at the halfway stage, The year end was a time of heightened watchfulness reflecting the widespread interruption to dividend for the UK as the eyes of the world focused on the payments from the corporate sector. However, equities outcome of the four-year Brexit saga. Most made a strong recovery in the second half, as commentators were putting the odds of deal/no-deal at companies began to restore their dividends and the a coin toss and the subsequent deal, however ‘thin’, value rally benefited the fund’s portfolio of high yielding became a source of relief in the early parts of 2021. The equities, to finish the 12 months under review ahead of fight against the horrendous second wave of COVID- the index. (Higher yielding securities are considered 19 took precedence in the news though, as the UK has riskier, and therefore are priced lower than those of conducted what the government said was a world- companies considered safer; yields move inversely to beating vaccination campaign to turn the tide against prices.) Overall, there was a strong contribution from

Annual Long Report and audited Financial Statements • May 2021 167 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

stock selection, particularly within housebuilders, Properties and Watkin Jones – and commercial real media, plus travel and leisure companies – all areas of estate companies – Home REIT and Urban Logistics the market sensitive to a cyclical upswing. REIT - where attractive yields and strong dividend growth prospects were the common denominator. The fund’s fixed income segment delivered a strong Notably, Home REIT is aiming to create a portfolio of outperformance of the FTSE Actuaries UK Conventional residential properties, let or pre-let to charities or Gilts All Stocks Index. This reflected the fund’s housing associations that receive housing benefit conservative and defensive positioning and exposure to funding from local or central government, to deliver sterling investment grade corporate bonds. accommodation to the homeless. Other additions to the Investment activities portfolio included Tesco, pensions consultancy XPS The focus of activity during the first half of the period Pensions Group, Devro, a leading manufacturer of under review was concentrated on mitigating the collagen casing products (sausage skins), the asset impact of dividend cuts and increasing the fund’s manager Schroders and an inflation-linked income real exposure to companies with higher dividend yields as estate investment trust, Supermarket Income REIT. far as possible, without damaging the portfolio’s total Tesco is a solid business, much improved from where it return credentials. Subsequently, activity in the second was five years ago, in our opinion. The discounters are half reflected the more positive backdrop in the market less of a threat these days, as they have no online and turned to taking advantage of income and valuation exposure and offer fewer product lines – factors that opportunities. There are still risks from the pandemic have proved crucial in the current environment. XPS given the impact of rolling lockdowns, but we are Pensions Group operates in an industry that continues starting to see some degree of normality return to the to grow through demographics and regulation. Devro’s market and corporate behaviour. shares are on half the valuation of the company’s Asthecrisisevolved,wesoldoutofapositionin closest peer, giving them an attractive yield of around Cineworld as film releases were postponed and the 5% and reflecting a substantial programme of capital cinema chain closed its venues and cancelled its expenditure, the benefit of which is starting to come dividend. BT was also sold as, although the shares through. The asset management sector benefits from appear good value, the telecoms company will not be strong cashflow characteristics and is a beneficiary of paying a dividend until 2022. Informa is a solid events rising markets. In particular, Schroders is a compelling business and has performed well for the fund in the long-term investment with a good management past, but this year’s restrictions have hit the company strategy, attractive yield and an enviable record of hard and it had to suspend the dividend, prompting a dividend payments. Supermarket Income REIT is sale of the shares. Bellway was another disposal as the seekingtocapitaliseontheshifttoonlineshopping housebuilder’s future income prospects were too low. from a portfolio of grocery store freeholds through Elsewhere, we sold specialist logistics and industrials inflation-linked long-dated leases to Tesco, Sainsbury’s real estate group LondonMetric Property REIT (real and Morrisons. estate investment trust), as well as retailer DFS Within the fixed income portion of the fund, activity was Furniture, as their yields had become too low, having extremely light. We participated in several new issues benefited from the increase in online shopping in the brought to the sterling investment grade corporate past year. Two holdings, auto insurer Hastings and bond market, where we saw valuation opportunities. bookmaker William Hill, exited the fund at healthy These offered an attractive yield spread over gilts and premiums as a result of takeovers. included issues by VW Financing, Toyota, Experian, Amongst new positions established, there was a Heathrow and JP Morgan. With respect to Heathrow, distinct emphasis on housebuilders – Countryside whilst we are clearly in the middle of an incredibly

168 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

difficult operating environment for this asset, we activity has picked up, indicating that the corporate believe that following a successful cash-raising in the sector has recognised the opportunity in the UK; many bond markets, the company remains adequately IPOs and fund raisings have been oversubscribed, positioned to weather the coronavirus storm. indicating the depth of market support at current levels. Meanwhile, JP Morgan ranks high in terms of balance As matters stand, the backdrop bodes relatively well for sheet strength and credit quality within the banking the UK market, particularly as Brexit has now been sector. In comparison with JP Morgan’s outstanding accomplished and a trade deal agreed. debt instruments, the newly issued bonds offered an The portfolio retains a substantial weighting in good- attractive credit spread and thus gave us an opportunity quality corporate bonds and a small exposure to to take exposure to high-quality credit at appealing government bonds. At current valuation levels, though, levels. the bond portfolio’s static contribution to the income Outlook stream is below what might be expected over the The UK economy is starting to show signs of longer term. However, in our view the bond element improvement in the manufacturing, construction and continues to provide a degree of stability when equity services sectors, despite having effectively been in markets suffer from risk aversion. lockdown since November 2020. Economic activity has Distribution prospects been assisted by the successful vaccine rollout and With regard to income, the backdrop for dividends steps by companies to adapt to COVID-19 restrictions continued to be tough, especially for the first half, and and the new post-Brexit environment. Following the thus the fund’s annual distribution over its financial year 9.9% slump in 2020, the latest Treasury survey of ending 31 May 2021 was cut by 7.8% compared with the independent forecasts is showing an average forecast previous 12-month period. While we are disappointed at of a 6.5% economic expansion for 2021 and 5.6% in having had to cut following the 11.4% rebasing in 2022, which compares with an historic average around distribution to the 12 months ending 31 May 2020, we 2.5%. are pleased with this performance within the context of Barring unforeseen setbacks, the UK could see most the UK market income declining by 18.2% for the pandemic-related restrictions lifted by the summer. 12 months to 31 May 2021. This means that over the last Given the huge increase in household savings during 24 months, the fund has delivered an income decline of the past year, there is expected to be a significant rise 18.3% versus a decline of 30% for the FTSE All-Share in consumer spending as the restrictions are lifted, Index. Given this significantly better performance on resulting in a rapid recovery in the economy in the income management, we feel comfortable about second half of the year. Encouragingly, these trends maintaining the fund’s premium yield. might allow the economy to return to its pre-pandemic We have witnessed a slightly better environment for size by the middle of next year. Naturally, there is always dividends of late as many companies have resumed the potential for unexpected disappointments and the their dividend payments, a trend that we believe should route back to growth may not follow a linear path. continue as economic activity picks up again. At this Despite a strong recovery from the lows of March 2020, stage further, or renewed, dividend suspensions appear we think the UK equity market remains relatively unlikely, but clearly some downside risk will remain until attractively valued versus its global peers and bonds. the pandemic is firmly under control globally. Against Meanwhile, domestic corporate earnings forecasts this background, we are focused on rebuilding the appear to have regained their positive momentum after fund’s income growth record from here, through the last year’s declines and there has been a resumption in combination of underlying dividend growth from company dividend payments, providing further support companies held and the active management of for share prices. Encouragingly, merger and acquisition

Annual Long Report and audited Financial Statements • May 2021 169 M&G UK Income Distribution Fund Authorised Corporate Director’s Report

holdings. We remain convinced of the longer term opportunity presented by higher yielding equities and the UK market.

Elina Symon Fund manager

Elina Symon is employed by M&G FA Limited, which is an associate of M&G Securities Limited. With effect from 1 April 2021, Elina Symon took over from Michael Stiasny 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.

170 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities 414,864 78.03 74.58

Software & computer services 6,902 1.30 1.09a

810,000 Micro Focus 4,212 0.79

997,143 Moneysupermarket.com 2,690 0.51

Technology hardware & equipment 113 0.02 0.54a

15,000 discoverIE 113 0.02

Telecommunication service providers 15,158 2.85 3.92

11,814,311 Vodafone 15,158 2.85

Pharmaceuticals & biotechnology 36,099 6.79 9.53

194,000 AstraZeneca 15,609 2.94

1,524,282 GlaxoSmithKline 20,490 3.85

Banks 20,811 3.91 3.20

430,000 Close Brothers 7,056 1.32

1,750,000 HSBC 7,968 1.50

11,600,000 Lloyds Banking 5,787 1.09

Investment banking & brokerage services 23,707 4.46 3.19a

556,749 Ashmore 2,205 0.42

655,821 Brewin Dolphin 2,230 0.42

3,897,979 Duke Royalty 1,403 0.26

396,429 EF Realisationb 47 0.01

286,364 IG 2,453 0.46

250,000 Jupiter Fund Management 694 0.13

64,429 Schroders 1,678 0.32

480,000 St. James‘s Place 6,705 1.26

1,900,000 Standard Life Aberdeen 5,225 0.98

802,076 XPS Pensions 1,067 0.20

Equity investment instruments 5,121 0.96 0.63

1,000,000 Ecofin Global Utilities and Infrastructure Trust 1,805 0.34

154,000 Honeycomb Investment Trust 1,478 0.28

1,750,000 Middlefield Canadian Income Trust 1,838 0.34

Life insurance 31,332 5.89 4.81a

2,600,000 Aviva 10,691 2.01

1,600,000 Chesnara 4,416 0.83

Annual Long Report and audited Financial Statements • May 2021 171 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Life insurance (continued)

3,250,000 Legal & General 9,237 1.74

950,000 Phoenix 6,988 1.31

Non-life insurance 12,134 2.28 2.12

70,000 Admiral 2,057 0.39

500,000 Conduit 2,585 0.48

2,520,000 Direct Line Insurance 7,492 1.41

Real estate investment & services 1,933 0.36 0.79

4,201,840 Grit Real Estate Income 1,933 0.36

Realestateinvestmenttrusts 18,712 3.52 2.31

150,000 British Land 765 0.14

2,200,000 Channel Islands Property Fund 2,200 0.41

599,140 Home REIT 662 0.13

304,687 Land Securities 2,143 0.40

750,000 McKay Securities 1,642 0.31

2,700,000 NewRiver 2,649 0.50

1,200,000 Regional 1,054 0.20

2,300,000 Standard Life Investment Property Income Trust REIT 1,477 0.28

589,000 Supermarket Income REIT 674 0.13

580,000 Urban Logistics REIT 905 0.17

3,149,371 Warehouse REIT 4,541 0.85

Household goods & home construction 11,166 2.10 1.48

45,000 Countryside Properties 230 0.04

83,500 Persimmon 2,639 0.50

397,433 Vistry 5,266 0.99

1,350,000 Watkin Jones 3,031 0.57

Leisure goods 836 0.16 1.35

7,000 Games Workshop 836 0.16

Personal goods 0 0.00 0.00a

Media 23,246 4.37 2.55a

4,945,000 ITV 6,350 1.19

3,400,000 Reach 8,075 1.52

172 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Media (continued)

365,387 STV 1,224 0.23

780,000 WPP 7,597 1.43

Retailers 3,411 0.64 0.65

684,897 ScS 1,760 0.33

95,503 WH Smith 1,651 0.31

Travel & leisure 17,913 3.37 3.58

600,000 Entain 9,897 1.86

190,000 Go-Ahead 2,352 0.44

1,900,000 Marston‘s 1,736 0.33

1,300,000 National Express 3,928 0.74

Food producers 3,938 0.74 0.38

960,000 Devro 2,002 0.38

252,738 Tate & Lyle 1,936 0.36

Tobacco 28,191 5.30 5.57

600,000 British American Tobacco 16,275 3.06

745,000 Imperial Brands 11,916 2.24

Personal care, drug & grocery stores 10,417 1.96 0.89a

2,300,000 Tesco 5,135 0.97

125,000 Unilever 5,282 0.99

Construction & materials 575 0.11 0.08

500,000 Kier 575 0.11

437,500 Kier (Subscription shares)b 00.00

Electronic & electrical equipment 2,134 0.40 0.32a

640,000 Morgan Advanced Materials 2,134 0.40

General industrials 4,380 0.82 0.52

1,046,887DSSmith 4,380 0.82

Industrial engineering 0 0.00 0.15

Industrial support services 4,175 0.79 0.83

1,385,000 Connect 593 0.11

138,000 Electrocomponents 1,366 0.26

375,000 PayPoint 2,216 0.42

Annual Long Report and audited Financial Statements • May 2021 173 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Industrial transportation 1,923 0.36 0.00

2,628,944 Taylor Maritime Investments 1,923 0.36

Industrial metals & mining 31,565 5.94 4.97

330,000 BHP 7,006 1.32

405,000 Rio Tinto 24,559 4.62

Chemicals 5,082 0.96 0.82

230,000 Synthomer 1,217 0.23

160,000 Victrex 3,865 0.73

Non-renewable energy 33,838 6.37 7.47

7,285,000 BP 22,303 4.20

5,997,178 Diversified Energy 6,273 1.18

410,000 Royal Dutch Shell ‘B’ 5,262 0.99

Electricity 13,603 2.56 1.12

999,420 Drax 4,351 0.82

600,000 SSE 9,252 1.74

Gas, water & multi-utilities 19,555 3.68 5.16

1,150,000 National Grid 10,801 2.03

270,000 Pennon 2,854 0.54

600,000 United Utilities 5,900 1.11

Non-convertible preference shares 26,894 5.06 4.56

1,500,000 Aviva 8.375% Cum. Irrd. Pref. 2,370 0.44

3,800,000 General Accident 7.875% Cum. Irrd. Pref. 5,358 1.01

2,000,000 General Accident 8.875% Cum. Irrd. Pref. 3,240 0.61

7,725,000 Lloyds Banking 9.25% Non-cum. Irrd. Pref. 12,422 2.34

6,250 Nationwide Building Society 10.25% CCD Non-cum. Irrd. Pref. 1,154 0.22

1,600,000 Standard Chartered 8.25% Non-cum. Irrd. Pref. 2,350 0.44

Fixed income 118,906 22.36 25.70

Debt securities 118,906 22.36 25.70

‘AAA’ credit rated bonds 16,455 3.09 1.94

£1,186,000 Barclays Bank FRN 0.487% 09/01/2023 1,192 0.22

£976,591 Bavarian Sky UK 3 FRN 0.6861% 20/04/2028 978 0.18

£1,500,000 Canadian Imperial Bank of Commerce FRN 1.0958% 10/01/2022 1,503 0.28

174 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘AAA’ credit rated bonds (continued)

£965,000 Clydesdale Bank FRN 0.7738% 22/03/2024 978 0.18

£647,000 Commonwealth Bank of Australia FRN 0.6177% 16/01/2025 654 0.12

£222,000 Coventry Building Society FRN 0.5872% 15/01/2025 225 0.04

£1,642,302 Dukinfield FRN 1.7866% 20/12/2052 1,644 0.31

£85,781 Feldspar 2016-1 FRN 1.1868% 15/09/2045 86 0.02

£1,000,000 Johnson & Johnson 5.5% 06/11/2024 1,167 0.22

£295,000 Leeds Building Society FRN 0.6072% 15/01/2025 299 0.06

£1,000,000 Nationwide Building Society FRN 0.4977% 02/08/2022 1,004 0.19

£1,997,000 Nordea Eiendomskreditt FRN 0.8634% 18/06/2023 1,999 0.38

£572,000 PCL Funding III FRN 0.7923% 15/06/2023 572 0.11

£237,153 Polaris 2019-1 FRN 1.3169% 27/04/2057 238 0.04

£142,392 Precise Mortgage Funding 2020-1B FRN 0.9959% 16/10/2056 143 0.03

£905,000 Royal Bank of Canada FRN 0.6472% 03/10/2024 916 0.17

£1,742,000 Santander UK FRN 0.507% 16/11/2022 1,745 0.33

£750,000 Toronto-Dominion Bank FRN 0.5423% 24/06/2022 753 0.14

£357,311 Towd Point Mortgage Funding 2019-Vantage2 FRN 1.4811% 359 0.07 20/02/2054

‘AA’ credit rated bonds 17,375 3.27 3.91

£382,000 Euroclear Bank 1.25% 30/09/2024 389 0.07

£1,306,000 Land Securities Capital Markets 1.974% 08/02/2024 1,338 0.25

£933,000 MassMutual Global Funding II 1.375% 15/12/2026 949 0.18

£2,442,000 Metropolitan Life Global Funding I 1.125% 15/12/2021 2,452 0.46

£510,000 Metropolitan Life Global Funding I 2.625% 05/12/2022 527 0.10

£607,000 New York Life Global Funding 1.25% 17/12/2026 612 0.12

£3,000,000 Procter & Gamble 1.375% 03/05/2025 3,097 0.58

£151,000 Telereal Securitisation 1.3657% 10/12/2031 152 0.03

£2,490,000 UK Treasury 4% 07/03/2022 2,566 0.48

£3,360,000 UK Treasury IL 1.875% 22/11/2022 5,293 1.00

‘A’ credit rated bonds 36,965 6.95 7.87

£1,100,000 ABN AMRO Bank 1.375% 07/06/2022 1,111 0.21

£1,750,000 Amgen 5.5% 07/12/2026 2,154 0.40

Annual Long Report and audited Financial Statements • May 2021 175 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘A’ credit rated bonds (continued)

£1,500,000 Banco Santander 1.375% 31/07/2024 1,520 0.29

£1,200,000 Banque Fédérative du Crédit Mutuel 1.375% 20/12/2021 1,207 0.23

£812,000 BASF 1.375% 21/06/2022 820 0.15

£1,174,000 BMW International Investment 1.25% 11/07/2022 1,184 0.22

£2,000,000 BNP Paribas 1.125% 16/08/2022 2,018 0.38

£500,000 BNP Paribas 1.875% 14/12/2027 508 0.10

£700,000 BPCE 1.375% 23/12/2026 708 0.13

£3,000,000 BPCE 2.125% 16/12/2022 3,074 0.58

£430,000 CK Hutchison Group Telecom Finance 2% 17/10/2027 438 0.08

£824,000 Coventry Building Society 1.5% 23/01/2023 835 0.16

£2,000,000 Coventry Building Society 1.875% 24/10/2023 2,053 0.39

£800,000 Deutsche Pfandbriefbank 1.75% 21/11/2022 809 0.15

£459,000 Experian Finance 0.739% 29/10/2025 453 0.09

£485,000 Experian Finance 2.125% 27/09/2024 503 0.09

£1,100,000 Henkel 1.25% 30/09/2026 1,115 0.21

£2,000,000 HSBC Var. Rate 2.256% 13/11/2026 2,076 0.39

£421,000 HSBC Var. Rate 3% 22/07/2028 453 0.09

£500,000 HSBC Var. Rate 3% 29/05/2030 537 0.10

£1,300,000 ING 3% 18/02/2026 1,404 0.26

£825,000 JPMorgan Chase & Co 0.991% 28/04/2026 826 0.16

£500,000 Landesbank Baden-Wuerttemberg 1.5% 03/02/2025 509 0.10

£1,525,000 London Merchant Securities 6.5% 16/03/2026 1,852 0.35

£1,000,000 Munich Re Finance Var. Rate 6.625% 26/05/2042 1,057 0.20

£918,000 Notting Hill Genesis 3.25% 12/10/2048 1,083 0.20

£1,071,000 Shaftesbury Chinatown 2.348% 30/09/2027 1,066 0.20

£1,503,000 Total Capital International 1.75% 07/07/2025 1,557 0.29

£443,000 Toyota Motor Credit Corp 0.75% 19/11/2026 436 0.08

£1,500,000 Yorkshire Building Society 3.5% 21/04/2026 1,673 0.31

£1,750,000 Yorkshire Water Finance 6.5876% 21/02/2023 1,926 0.36

176 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BBB’ credit rated bonds 45,949 8.64 7.91

£794,000 Akelius Residential Property 2.375% 15/08/2025 830 0.16

£1,150,000 Anheuser-Busch InBev 9.75% 30/07/2024 1,468 0.28

£793,000 Annington Funding 2.646% 12/07/2025 835 0.16

£664,000 Aroundtown 3% 16/10/2029 700 0.13

£2,000,000 Aviva Var. Rate 6.625% 03/06/2041 2,000 0.38

£1,500,000 Bank of America 5.5% 22/11/2021 1,533 0.29

£1,000,000 Barclays 3.125% 17/01/2024 1,055 0.20

£1,026,000 Barclays Var. Rate 2.375% 06/10/2023 1,049 0.20

£874,000 Canadian Imperial Bank of Commerce 1.625% 25/09/2025 902 0.17

£846,000 Channel Link Enterprises Finance Var. Rate 3.043% 30/06/2050 849 0.16

£976,000 Citigroup 2.75% 24/01/2024 1,025 0.19

£1,171,000 Credit Suisse Var. Rate 2.125% 12/09/2025 1,202 0.23

£2,320,000 Daimler International Finance 1.5% 13/01/2022 2,334 0.44

£208,000 Deutsche Telekom 3.125% 06/02/2034 233 0.04

£1,152,000 Deutsche Telekom International Finance 2.5% 10/10/2025 1,233 0.23

£178,000 Digital Stout 2.75% 19/07/2024 188 0.03

£513,000 DP World 4.25% 25/09/2030 581 0.11

£250,000 EDF 6.125% 02/06/2034 358 0.07

£300,000 FirstGroup 6.875% 18/09/2024 351 0.07

£800,000 Goldman Sachs 3.125% 25/07/2029 884 0.17

£1,000,000 Goldman Sachs 5.5% 12/10/2021 1,017 0.19

£2,000,000 Hammerson 3.5% 27/10/2025 2,074 0.39

£110,000 Heathrow Funding 2.75% 13/10/2029 114 0.02

£1,473,000 Heathrow Funding 5.225% 15/02/2023 1,579 0.30

£878,000 Imperial Brands Finance 8.125% 15/03/2024 1,039 0.19

£1,250,000 Imperial Brands Finance 9% 17/02/2022 1,323 0.25

£357,000 Informa 3.125% 05/07/2026 378 0.07

£426,000 LafargeHolcim Sterling Finance (Netherlands) 3% 12/05/2032 458 0.09

£795,000 Legal & General Var. Rate 10% 23/07/2041 805 0.15

£454,000 Liberty Living Finance 2.625% 28/11/2024 476 0.09

Annual Long Report and audited Financial Statements • May 2021 177 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

‘BBB’ credit rated bonds (continued)

£492,000 Lloyds Banking 2.707% 03/12/2035 495 0.09

£234,000 Logicor Financing 2.75% 15/01/2030 243 0.05

£369,000 Mckesson 3.125% 17/02/2029 400 0.07

£1,000,000 National Express 2.5% 11/11/2023 1,038 0.19

£619,000 Royal Bank of Scotland Var. Rate 3.125% 28/03/2027 666 0.12

£205,000 Next 3% 26/08/2025 220 0.04

£272,000 SP Transmission 2% 13/11/2031 277 0.05

£241,000 Student Finance 2.6663% 30/09/2024 243 0.05

£1,000,000 Telefónica Emisiones 5.375% 02/02/2026 1,181 0.22

£277,000 Tesco 6.125% 24/02/2022 288 0.05

£101,000 Tesco Corporate Treasury Services 2.5% 02/05/2025 107 0.02

£422,000 Thames Water Utilities Finance 1.875% 24/01/2024 434 0.08

£505,000 UNITE 3.5% 15/10/2028 557 0.10

£1,320,000 United Utilities Water Finance 2% 14/02/2025 1,376 0.26

£698,000 Virgin Money Var. Rate 3.375% 24/04/2026 739 0.14

£2,700,000 Volkswagen Financial Services 1.125% 18/09/2023 2,716 0.51

£1,043,000 Wells Fargo 1.375% 30/06/2022 1,051 0.20

£1,950,000 Wells Fargo Bank 5.25% 01/08/2023 2,130 0.40

£2,530,000 Westfield America Management 2.125% 30/03/2025 2,584 0.49

£149,000 Wm Morrison Supermarkets 3.5% 27/07/2026 166 0.03

£157,000 Yorkshire Building Society Var. Rate 3% 18/04/2025 165 0.03

‘BB’ credit rated bonds 2,162 0.41 0.38

£734,000 Ford Motor Credit 4.535% 06/03/2025 780 0.15

£1,390,000 Rolls-Royce 3.375% 18/06/2026 1,382 0.26

178 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Fixed income (continued)

Debt securities (continued)

Bondswithnocreditrating 0 0.00 3.69

Portfolio of investments 533,770 100.39 100.28

Cash equivalents 965 0.18 0.57

‘AAA’ rated money market fundsc 965 0.18 0.57

965,000 Northern Trust Global Fund - Sterling 965 0.18

Total portfolio (notes 2c & 2d on page 9) 534,735 100.57 100.85

Net other assets/(liabilities) (3,028) (0.57) (0.85)

Net assets attributable to shareholders 531,707 100.00 100.00 All securities are on an official stock exchange listing except where referenced. a The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. b Unlisted/unquoted. c Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk.

Annual Long Report and audited Financial Statements • May 2021 179 M&G UK Income Distribution Fund Investments

Top ten portfolio transactions for the year to 31 May 2021

Largest purchases £’000

Diversified Gas & Oil 3,881

Tesco 3,502

SSE 2,772

Volkswagen Financial Services 1.125% 18/09/2023 2,713

British American Tobacco 2,654

Conduit 2,500

IG 2,376

Watkin Jones 2,163

Drax 1,986

Taylor Maritime Investments 1,861

Other purchases 36,349

Total purchases 62,757

Largest sales £’000

Royal Dutch Shell 7,498

Games Workshop 7,365

William Hill 5,683

AstraZeneca 5,592

BT 4,464

GVC 4,445

discoverIE 2,816

Pennon 2,610

Hastings 2,501

Volkswagen Financial Services 2,500

Other sales 40,588

Total sales 86,062

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

180 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial highlights

Fund performance Performance since launch To give an indication of how the fund has performed Please note past performance is not a guide to future since launch, the chart below shows performance of performance and the value of investments, and the Sterling Class ‘A’ (Accumulation) shares and Sterling income from them, will fluctuate. This will cause the Class ‘A’ (Income) shares. With Accumulation shares, fund price to fall as well as rise and you may not get income received from an investment is reinvested, while back the original amount you invested. with Income shares, the income is paid out to The following charts and tables reflect the key financial shareholders. information of a representative share class, Sterling Class ‘A’ (Accumulation) shares. As different share November 1973 = 100, plotted monthly classes have different attributes, for example charging Chart date 1 June 2021 structures and minimum investments, please be aware 20,000 that their performance may be different. For more 12,000 information on the different share classes in this fund 7,000 please refer to the Prospectus for M&G Investment 4,000 Funds (2), which is available free of charge either from 2,000 our website at www.mandg.co.uk/prospectuses or by 1,000 calling M&G Customer Relations. 600 400

Fund level performance 200

Fund net asset value as at 31.05.21 31.05.20 31.05.19 100 £’000 £’000 £’000 50 Fund net asset value (NAV) 531,707 489,340 585,811 7377 81 85 89 93 97 01 05 0913 17 21 Sterling Class ‘A’ (Income) shares Sterling Class ‘A’ (Accumulation) shares*

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

Annual Long Report and audited Financial Statements • May 2021 181 M&G UK Income Distribution Fund Financial highlights

Ten-year performance Historic yield The fund’s comparator benchmark changed from the The chart below shows the historic yield of Sterling FTSE All-Share Index to a composite index (which Class ‘A’ (Income) shares against that of the fund’s comprises 70% FTSE All-Share Index and 30% FTSE target benchmark. Actuaries UK Conventional Gilts All Stocks Index) in June 2000 to reflect the change in the fund’s holdings. Yield comparison from January 1974, plotted monthly Chart date 1 June 2021 Given that we are unable to show the fund’s performance against the composite comparator 18 benchmark from inception, please find below a ten-year 16

chart for comparison. 14

12 Ten years, 1 June 2011 = 100, plotted monthly Chart date 1 June 2021 10

200 8

6 170 4

2 140 7781 85 89 93 97 01 05 09 1317 21

Sterling Class ‘A’ (Income) shares yield 120 FTSE All-Share Index yield

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

100 Historic yield: The historic yield reflects distributions 90 declared over the past twelve months as a percentage 20112012 2013 2014 2015 2016 2017 2018 2019 2020 of the mid-market price, as at the date shown. It does Sterling Class ‘A’ (Accumulation) shares* 70% FTSE All-Share Index, not include any preliminary charge and investors may 30% FTSE Actuaries UK Conventional Gilts All Stocks Index be subject to tax on their distributions. Source: Morningstar, Inc. and M&G * Income reinvested

182 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial highlights

Distribution over ten years Operating charges and portfolio The chart below shows the annual distribution of transaction costs Sterling Class ‘A’ (Income) shares over ten years. Weexplainbelowthepaymentsmadetomeetthe ongoing costs of investing and managing the fund, Annual distribution over 10 years comprising operating charges and portfolio transaction Chart date 1 June 2021 costs. 40.0 Operating charges 35.0 Operating charges include payments made to M&G and 30.0 to providers independent of M&G:

25.0 • Annual charge: Charge paid to M&G covering the 20.0 annual cost of M&G managing and administering

15.0 the fund and the costs of third parties providing services to the fund. From 1 August 2019, this 10.0 charge rolls all costs that make up the operating 5.0 charges into one annual charge. 0.0 For every £1 billion of a fund’s net asset value, a 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year ending May discount of 0.02% will be applied to that fund’s Sterling Class ‘A’ (Income) shares annual charge (up to a maximum of 0.12%). Long-term performance by share class • Extraordinary legal and tax expenses: Costs that To give an indication of the performance of the fund, specifically relate to legal or tax claims that are both the following table shows the compound rate of return, exceptional and unforeseeable. Such expenses are per annum, over the period. Calculated on a price to uncommon, and would not be expected in most years. price basis with income reinvested. Although they result in a short-term cost to the fund, generally they can deliver longer term benefits for Share One Three Five Since investors. class year years years launch 01.06.20 01.06.18 01.06.16 • Investment management: Charge paid to M&G for %a %pa %pa %pa investment management of the fund. From Sterlingb 1 August 2019 this charge forms part of the annual Class ‘A’ +18.9 +2.0 +5.2 +11.3c charge.

Class ‘C’ +19.7 +3.0 +6.3 +6.7d • Administration: Charge paid for administration Class ‘I’ +19.4 +2.6 +5.8 +6.9e services in addition to investment management –

Class ‘R’ +19.1 +2.3 +5.5 +6.6e any surplus from this charge will be retained by M&G. From 1 August 2019 this charge is rolled into Class ‘X’ +18.9 +2.0 +5.2 +7.1f the annual charge. a Absolute basis. b Price to price with income reinvested. • Oversight and other independent services: c 19 November 1973, the end of the initial offer period of the predecessor Charges paid to providers independent of M&G for unit trust. d 1 December 2005, the launch date of the share class. services which include depositary, custody and e 3 August 2012, the launch date of the share class. audit. From 1 August 2019 these charges will be f 1 October 2002, the launch date of the share class. paid by M&G and rolled into the annual charge.

Annual Long Report and audited Financial Statements • May 2021 183 M&G UK Income Distribution Fund Financial highlights

• Ongoing charges from underlying funds: Ongoing receive. The table below shows direct portfolio charges on holdings in underlying funds that are transaction costs paid by the fund before and after that not rebated. From 1 August 2019 charges from part of the dilution adjustment relating to direct underlying funds (excluding Investment Trust portfoliotransactioncosts.Togiveanindicationofthe Companies and Real Estate Investment Trusts) will indirect portfolio dealing costs the table also shows the be rebated. average portfolio dealing spread.

The operating charges paid by each share class of the Further information on this process is in the Prospectus, fund are shown in the following performance tables. which is available free of charge on request either from These charges do not include portfolio transaction our website at www.mandg.co.uk/prospectuses or by costs or any entry and exit charges (also known as initial calling M&G Customer Relations. and redemption charges). The charging structures of share classes may differ, and therefore the operating Portfolio transaction costs charges may differ. for the year to 31 May 2021 2020 2019 Averagea Operating charges are in line with the ongoing charges Direct portfolio transaction %%% % costsb shown in the Key Investor Information Document, other than where there have been extraordinary legal or tax Broker commission 0.01 0.01 0.01 0.01 expenses, or an estimate has been used for the Taxes 0.04 0.05 0.02 0.04

ongoing charge because a material change has made Costs before dilution 0.05 0.06 0.03 0.05 the operating charges unreliable as an estimate of adjustments future charges. Dilution adjustmentsc (0.01) (0.01) (0.01) (0.01)

Total direct portfolio 0.04 0.05 0.02 0.04 Portfolio transaction costs transaction costs Portfolio transaction costs are incurred by funds when as at 31 May 2021 2020 2019 Averagea buying and selling investments. These costs vary Indirect portfolio % % % % depending on the types of investment, their market transaction costs

capitalisation, country of exchange and method of Average portfolio dealing 0.39 0.55 0.26 0.40 execution. They are made up of direct and indirect spread

portfolio transaction costs: a Average of first three columns. b As a percentage of average net asset value. • Direct portfolio transaction costs: Broker c In respect of direct portfolio transaction costs. Please see the section execution commission and taxes. above this 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.

184 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial highlights

Specific share class performance Sterling Class ‘A’ Accumulation share The following tables show the performance of each performance share class. All ‘Performance and charges’ percentages The share class was launched on 19 November 1973. represent an annual rate except for the ‘Return after for the year to 31 May 2021 2020 2019 operating charges’ which is calculated as a percentage Change in NAV per share UK p UK p UK p of the opening net asset value per share (NAV). ‘Dilution Opening NAV 6,541.56 7,169.40 7,300.31 adjustments’ are only in respect of direct portfolio Return before operating 1,270.62 (538.91) (28.55) transaction costs. charges

Historic yields for the current year are calculated as at Operating charges (83.58) (88.93) (102.36) 11 June 2021. Return after operating 1,187.04 (627.84) (130.91) charges

Sterling Class ‘A’ Income share Distributions (236.62) (238.86) (251.75) performance Retained distributions 236.62 238.86 251.75 The share class was launched on 19 November 1973. Closing NAV 7,728.60 6,541.56 7,169.40 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Direct transaction costs UK p UK p UK p

Opening NAV 639.38 734.51 785.86 Costs before dilution 3.51 4.01 2.24 adjustments Return before operating 121.52 (53.24) (3.35) a (1.01) (0.74) (1.05) charges Dilution adjustments

Operating charges (8.04) (9.00) (10.89) Total direct transaction costs 2.50 3.27 1.19

Return after operating 113.48 (62.24) (14.24) Performance and charges % % % charges Direct portfolio transaction 0.04 0.05 0.02 costsb Distributions (30.31) (32.89) (37.11) Operating chargesc 1.20 1.24 1.44 Closing NAV 722.55 639.38 734.51 Return after charges +18.15 -8.76 -1.79 Direct transaction costs UK p UK p UK p Historic yield 3.01 3.52 3.45 Costs before dilution 0.34 0.41 0.24 adjustments Other information

a Dilution adjustments (0.10) (0.07) (0.11) Closing NAV (£’000) 19,884 17,256 20,174

Total direct transaction costs 0.24 0.34 0.13 Closing NAV (%) 3.74 3.53 3.44

Performance and charges % % % Number of shares 257,274 263,787 281,385

Direct portfolio transaction 0.04 0.05 0.02 Highest share price (UK p) 7,870.55 7,958.52 7,403.78 costsb Lowest share price (UK p) 6,199.41 5,539.42 6,582.75 Operating chargesc 1.20 1.24 1.44

Return after charges +17.75 -8.47 -1.81

Historic yield 4.13 4.96 4.96

Other information

Closing NAV (£’000) 130,692 120,944 143,765

Closing NAV (%) 24.58 24.72 24.54

Number of shares 18,087,515 18,915,718 19,572,985

Highest share price (UK p) 746.84 801.25 795.71

Lowest share price (UK p) 599.54 552.52 696.78

Annual Long Report and audited Financial Statements • May 2021 185 M&G UK Income Distribution Fund Financial highlights

Sterling Class ‘C’ Income share Sterling Class ‘I’ Income share performance performance Sterling Class ‘C’ shares are not generally available to all The share class was launched on 3 August 2012. investors. for the year to 31 May 2021 2020 2019 The share class was launched on 1 December 2005. Change in NAV per share UK p UK p UK p

for the year to 31 May 2021 2020 2019 Opening NAV 1,056.16 1,207.33 1,283.58 Change in NAV per share UK p UK p UK p Return before operating 200.99 (88.47) (5.63) Opening NAV 748.37 849.58 897.80 charges

Return before operating 141.95 (63.93) (4.74) Operating charges (8.13) (8.51) (9.80) charges Return after operating 192.86 (96.98) (15.43) Operating charges (0.29) (0.24) (1.67) charges

Return after operating 141.66 (64.17) (6.41) Distributions (50.20) (54.19) (60.82) charges Closing NAV 1,198.82 1,056.16 1,207.33 Distributions (34.64) (37.04) (41.81) Direct transaction costs UK p UK p UK p Closing NAV 855.39 748.37 849.58 Costs before dilution 0.56 0.67 0.39 Direct transaction costs UK p UK p UK p adjustments

Costs before dilution 0.40 0.47 0.27 Dilution adjustmentsa (0.16) (0.12) (0.18) adjustments Total direct transaction costs 0.40 0.55 0.21 Dilution adjustmentsa (0.11) (0.09) (0.13) Performance and charges % % % Total direct transaction costs 0.29 0.38 0.14 Direct portfolio transaction 0.04 0.05 0.02 Performance and charges % % % costsb

Direct portfolio transaction 0.04 0.05 0.02 Operating chargesc 0.73 0.71 0.79 costsb Return after charges +18.26 -8.03 -1.20 Operating chargesc 0.03 0.03 0.19 Historic yield 4.12 4.95 4.94 Return after charges +18.93 -7.55 -0.71 Other information Historic yield 3.99 4.77 4.83 Closing NAV (£’000) 72,371 68,687 79,074 Other information Closing NAV (%) 13.61 14.04 13.50 Closing NAV (£’000) 61,386 56,008 67,285 Number of shares 6,036,903 6,503,445 6,549,484 Closing NAV (%) 11.55 11.44 11.49 Highest share price (UK p) 1,238.87 1,321.25 1,301.21 Number of shares 7,176,387 7,483,938 7,919,730 Lowest share price (UK p) 992.31 911.81 1,142.16 Highest share price (UK p) 883.38 933.23 910.97

Lowest share price (UK p) 704.98 644.94 801.46

186 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial highlights

Sterling Class ‘I’ Accumulation share Sterling Class ‘R’ Income share performance performance The share class was launched on 3 August 2012. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 1,506.89 1,643.50 1,663.07 Opening NAV 103.60 118.72 126.54

Return before operating 292.99 (124.85) (6.69) Return before operating 19.70 (8.67) (0.56) charges charges

Operating charges (11.73) (11.76) (12.88) Operating charges (1.07) (1.13) (1.27)

Return after operating 281.26 (136.61) (19.57) Return after operating 18.63 (9.80) (1.83) charges charges

Distributions (61.64) (62.97) (67.69) Distributions (4.92) (5.32) (5.99)

Retained distributions 61.64 62.97 67.69 Closing NAV 117.31 103.60 118.72

Closing NAV 1,788.15 1,506.89 1,643.50 Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 0.05 0.07 0.04 adjustments Costs before dilution 0.81 0.92 0.51 adjustments Dilution adjustmentsa (0.02) (0.01) (0.02)

Dilution adjustmentsa (0.23) (0.17) (0.24) Total direct transaction costs 0.03 0.06 0.02

Total direct transaction costs 0.58 0.75 0.27 Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.04 0.05 0.02 costsb Direct portfolio transaction 0.04 0.05 0.02 costsb Operating chargesc 0.98 0.96 1.04

Operating chargesc 0.73 0.71 0.79 Return after charges +17.98 -8.25 -1.45

Return after charges +18.66 -8.31 -1.18 Historic yield 4.12 4.95 4.95

Historic yield 3.39 4.03 4.04 Other information

Other information Closing NAV (£’000) 177,811 163,939 197,766

Closing NAV (£’000) 29,178 26,370 35,417 Closing NAV (%) 33.44 33.50 33.76

Closing NAV (%) 5.49 5.39 6.05 Number of shares 151,571,783 158,235,292 166,576,488

Number of shares 1,631,728 1,749,987 2,154,969 Highest share price (UK p) 121.25 129.72 128.22

Highest share price (UK p) 1,820.64 1,830.17 1,696.15 Lowest share price (UK p) 97.24 89.49 112.44

Lowest share price (UK p) 1,430.88 1,274.93 1,505.00

Annual Long Report and audited Financial Statements • May 2021 187 M&G UK Income Distribution Fund Financial highlights

Sterling Class ‘R’ Accumulation share Sterling Class ‘X’ Income share performance performance The share class was launched on 3 August 2012. The share class was launched on 1 October 2002.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 147.94 161.75 164.08 Opening NAV 644.65 740.52 792.26

Return before operating 28.73 (12.25) (0.66) Return before operating 122.58 (53.63) (3.35) charges charges

Operating charges (1.55) (1.56) (1.67) Operating charges (8.11) (9.08) (10.98)

Return after operating 27.18 (13.81) (2.33) Return after operating 114.47 (62.71) (14.33) charges charges

Distributions (5.66) (5.79) (6.27) Distributions (30.57) (33.16) (37.41)

Retained distributions 5.66 5.79 6.27 Closing NAV 728.55 644.65 740.52

Closing NAV 175.12 147.94 161.75 Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 0.34 0.41 0.24 adjustments Costs before dilution 0.08 0.09 0.05 adjustments Dilution adjustmentsa (0.10) (0.08) (0.11)

Dilution adjustmentsa (0.02) (0.02) (0.02) Total direct transaction costs 0.24 0.33 0.13

Total direct transaction costs 0.06 0.07 0.03 Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.04 0.05 0.02 costsb Direct portfolio transaction 0.04 0.05 0.02 costsb Operating chargesc 1.20 1.24 1.44

Operating chargesc 0.98 0.96 1.04 Return after charges +17.76 -8.47 -1.81

Return after charges +18.37 -8.54 -1.42 Historic yield 4.13 4.96 4.96

Historic yield 3.18 3.77 3.81 Other information

Other information Closing NAV (£’000) 17,012 16,515 20,739

Closing NAV (£’000) 20,627 16,721 17,692 Closing NAV (%) 3.20 3.37 3.53

Closing NAV (%) 3.88 3.42 3.02 Number of shares 2,335,000 2,561,909 2,800,614

Number of shares 11,778,722 11,302,689 10,938,290 Highest share price (UK p) 753.04 807.84 802.19

Highest share price (UK p) 178.32 179.84 166.97 Lowest share price (UK p) 604.50 557.07 702.48

Lowest share price (UK p) 140.33 125.22 148.27

188 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial highlights

Sterling Class ‘X’ Accumulation share performance The share class was launched on 1 October 2002.

for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p

Opening NAV 6,467.56 7,087.69 7,216.95

Return before operating 1,257.21 (531.96) (28.12) charges

Operating charges (82.47) (88.17) (101.14)

Return after operating 1,174.74 (620.13) (129.26) charges

Distributions (234.99) (236.74) (249.04)

Retained distributions 234.99 236.74 249.04

Closing NAV 7,642.30 6,467.56 7,087.69

Direct transaction costs UK p UK p UK p

Costs before dilution 3.45 3.96 2.21 adjustments

Dilution adjustmentsa (0.99) (0.73) (1.04)

Total direct transaction costs 2.46 3.23 1.17

Performance and charges % % %

Direct portfolio transaction 0.04 0.05 0.02 costsb

Operating chargesc 1.20 1.24 1.44

Return after charges +18.16 -8.75 -1.79

Historic yield 3.02 3.53 3.45

Other information

Closing NAV (£’000) 2,746 2,900 3,899

Closing NAV (%) 0.51 0.59 0.67

Number of shares 35,939 44,838 55,012

Highest share price (UK p) 7,782.58 7,868.24 7,319.37

Lowestshareprice(UKp) 6,129.63 5,476.69 6,507.65 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.

Annual Long Report and audited Financial Statements • May 2021 189 M&G UK Income Distribution Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 66,753 (66,865)

Revenue 5 22,817 25,786

Expenses 6 (4,295) (5,075)

Net revenue/(expense) before taxation 18,522 20,711

Taxation 7 (86) (10)

Net revenue/(expense) after taxation 18,436 20,701

Total return before distributions 85,189 (46,164)

Distributions 8 (21,894) (24,951)

Change in net assets attributable to shareholders from 63,295 (71,115) investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 489,340 585,811

Amounts received on issue of shares 25,061 22,004

Amounts paid on cancellation of shares (48,533) (50,106)

(23,472) (28,102)

Dilution adjustments 183 135

Change in net assets attributable to shareholders from 63,295 (71,115) investment activities (see above)

Retained distributions on Accumulation shares 2,314 2,567

Unclaimed distributions 47 44

Closing net assets attributable to shareholders 531,707 489,340

190 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 533,770 490,740

Current assets

Debtors 9 3,189 4,422

Cash and bank balances 10 1,035 517

Cash equivalents 965 2,777

Total assets 538,959 498,456

Liabilities

Creditors

Distribution payable (6,853) (8,671)

Other creditors 11 (399) (445)

Total liabilities (7,252) (9,116)

Net assets attributable to shareholders 531,707 489,340

Annual Long Report and audited Financial Statements • May 2021 191 M&G UK Income Distribution Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities 66,774 (66,917)

Currency gains/(losses) (21) 53

Transaction charges 0(1)

Net capital gains/(losses) 66,753 (66,865)

192 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

2021 %of 2020 %of for the year to 31 May £’000 transaction £’000 transaction

a) Purchases

Equities

Equities before transaction costs 54,751 68,072

Commissions 17 0.03 27 0.04

Taxes 200 0.36 255 0.37

Equities after transaction costs 54,968 68,354

Debt securitiesa 5,490 25,366

Collective investment schemes

Collective investment schemes before transaction costs 2,293 0

Commissions 1 0.02 0 -

Taxes 5 0.23 0 0.00

Collective investment schemes after transaction costs 2,299 0

Other transaction types

Corporate actions 0 180

Total purchases after transaction costs 62,757 93,900

b) Sales

Equities

Equities before transaction costs 70,727 85,764

Commissions (27) 0.04 (34) 0.04

Equities after transaction costs 70,700 85,730

Debt securitiesa 9,177 38,894

Collective investment schemes

Collective investment schemes before transaction costs 1,538 0

Commissions (1) 0.05 0 -

Collective investment schemes after transaction costs 1,537 0

Other transaction types

Corporate actions 4,648 0

Total sales after transaction costs 86,062 124,624

Annual Long Report and audited Financial Statements • May 2021 193 M&G UK Income Distribution Fund Financial statements and notes

2021 %of 2020 %of £‘000 average NAV £‘000 average NAV

c) Direct portfolio transaction costs

Commissions paid

Equities 45 0.01 61 0.01

Collective investment schemes 1 0.00 0 0.00

Total commissions paid 46 0.01 61 0.01

Taxes paid

Equities 200 0.04 255 0.05

Collective investment schemes 5 0.00 0 0.00

Total taxes paid 205 0.04 255 0.05

Total direct portfolio transaction costsb 251 0.05 316 0.06

d) Indirect portfolio transaction costs

Portfolio dealing spreadc 0.39 0.55

a These transaction types do not attract direct portfolio transaction costs. b Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section for the effect of dilution adjustments. c Average portfolio dealing spread at the balance sheet date.

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 11 1

Distributions from collective investment schemes: taxable 123 0

Dividends from equity investments: non-taxable 18,743 21,015a

Dividends from equity investments: taxable 200 10a

Interest distributions 116

Interest on debt securities 2,917 3,271

Property distribution: non-taxable 119 83a

Property distribution: taxable 257 958a

Rebate of ongoing charges from underlying funds 1 1

Stock dividends 432 428

Underwriting commission 13 3

Total revenue 22,817 25,786

a Restated.

194 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 4,289 4,074

Annual management chargea 0 833

Administration chargea 0150

4,289 5,057

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 07

Other expenses

Audit fee (including VAT)a 02

Interest payable 78

Safe custody chargea (1) 1

611

Total expenses 4,295 5,075 a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019. As of 1 August 2019 these charges have been replaced by the single annual charge. Audit fees for the financial year ending 2021 were £9,000 (2020: £9,000) (including VAT), which are covered by the annual charge.

Annual Long Report and audited Financial Statements • May 2021 195 M&G UK Income Distribution Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax 86 10

Deferred tax (note 7c) 00

Total taxation 86 10

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 18,522 20,711

Corporation tax at 20% 3,704 4,142

Effects of:

Dividends from equity investments: non-taxable (3,773) (4,220)

Stock dividends not taxable (86) (86)

Relief for indexation on UK gilts (35) (11)

Current year expenses not utilised 190 175

Withholding tax 86 10

Total tax charge (note 7a) 86 10

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset of £2,374,000 (2020: £2,184,000) arising as a result of having excess management expenses. We do not expect this asset to be utilised in the foreseeable future.

196 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Ordinary distributions £’000 £’000 £’000 £’000

First interim 4,341 522 4,531 573

Second interim 4,254 451 4,467 509

Third interim 4,031 431 4,438 491

Final 6,853 910 8,671 994

Total net distributions 21,793 24,674

Income deducted on cancellation of shares 289 472

Income received on issue of shares (188) (195)

Distributions 21,894 24,951

Net revenue/(expense) per statement of total return 18,436 20,701

Expenses offset against capital 3,703 4,388

Sharing of relief between classes (68) (82)

Effective yield adjustment not distributed (177) (56)

Distributions 21,894 24,951 a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

9Debtors

2021 2020 as at 31 May £’000 £’000

Amounts receivable on issues of shares 110 67

Debt security interest receivable 1,312 1,348

Dividends receivable 1,767 2,363

Sales awaiting settlement 0 644

Total debtors 3,189 4,422

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Cash held as bank balances 1,035 517

Total cash and bank balances 1,035 517

Annual Long Report and audited Financial Statements • May 2021 197 M&G UK Income Distribution Fund Financial statements and notes

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 263 307

Annual charge payable 136 128

Expenses payable 010

Total other creditors 399 445

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Sterling

Class ‘A’ Income 18,915,718 442,657 (1,270,860) 18,087,515

Class ‘A’ Accumulation 263,787 9,239 (15,752) 257,274

Class ‘C’ Income 7,483,938 385,125 (692,676) 7,176,387

Class ‘I’ Income 6,503,445 399,888 (866,430) 6,036,903

Class ‘I’ Accumulation 1,749,987 343,863 (462,122) 1,631,728

Class ‘R’ Income 158,235,292 5,158,217 (11,821,726) 151,571,783

Class ‘R’ Accumulation 11,302,689 1,582,270 (1,106,237) 11,778,722

Class ‘X’ Income 2,561,909 38,907 (265,816) 2,335,000

Class ‘X’ Accumulation 44,838 315 (9,214) 35,939

198 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 14.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 1.20 1.10

Class ‘C’ 0.00 0.00

Class ‘I’ 0.70 0.70

Class ‘R’ 0.95 0.95

Class ‘X’ 1.20 1.10 a The amounts shown are the maximum annual charge. M&G will apply a discount of 0.02% for every £1 billion of a fund’s net asset value. This is assessed quarterly and implemented on a forward basis no later than 13 business days after quarter end.

During the year, there were transactions with related parties of M&G Securities Limited with a total value of £nil (2020: £2,403,000).

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 3.64% (2020: 3.65%) of the fund’s shares.

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

Annual Long Report and audited Financial Statements • May 2021 199 M&G UK Income Distribution Fund Financial statements and notes

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 421,522 0 372,927 0

Level 2 112,201 0 117,766 0

Level 3 47 0 47 0

533,770 0 490,740 0

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

19 Market risk sensitivity A five per cent increase in the value of the fund’s investment portfolio would have the effect of increasing the return and net assets by £26,689,000 (2020: £24,537,000). A five per cent decrease would have an equal and opposite effect.

20 Currency risk sensitivity and exposure Currency risk is not considered significant for the fund and is therefore not disclosed.

21 Interest rate risk sensitivity and exposure Changes in interest rates or changes in expectations of future interest rates may result in an increase or decrease in the market value of the investments held. A one per cent increase in interest rates (based on current parameters used by the Manager’s Investment Risk department) would have the effect of decreasing the return and net assets by £(6,650,803) (2020: £(6,576,473)). A one per cent decrease would have the effect of increasing the return and net assets by £7,750,270 (2020: £7,555,302). The table below sets out the fund’s exposure to interest rate risk.

2021 2020 for the year to 31 May £’000 £’000

Investments with fixed interest rates 90,698 95,444

Investments with variable interest rates 28,208 30,329

Non-interest bearing investments 414,864 364,967

Total 533,770 490,740

200 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

22 Credit risk The fund is exposed to credit risk both through the credit quality of the investments it holds and through the derivative positions with counterparties. The table below shows the credit quality of the investments held in the portfolio.

2021 2020 as at 31 May £’000 £’000

Investment grade securities 116,744 105,846

Below investment grade securities 2,162 1,873

Unrated securities 018,053

Other investments 414,864 364,968

Total 533,770 490,740

23 Dividend distribution tables This fund pays quarterly ordinary distributions and the following table sets out the distribution periods.

Quarterly distribution periods

Start End Xd Payment

First interim 01.06.20 31.08.20 01.09.20 31.10.20

Second interim 01.09.20 30.11.20 01.12.20 31.01.21

Third interim 01.12.20 28.02.21 01.03.21 30.04.21

Final 01.03.21 31.05.21 01.06.21 31.07.21

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

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

Sterling Class ‘A’ Income shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 2.8470 3.7530 6.6000 6.6000

Second interim 1.9186 4.6814 6.6000 6.6000

Third interim 2.2588 4.0412 6.3000 6.6000

Final 3.8434 6.9712 10.8146 13.0921

Annual Long Report and audited Financial Statements • May 2021 201 M&G UK Income Distribution Fund Financial statements and notes

Sterling Class ‘A’ Accumulation shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 38.6575 13.8425 52.5000 49.2500

Second interim 15.7592 29.2408 45.0000 48.1000

Third interim 20.7252 24.7748 45.5000 46.2500

Final 41.2881 52.3360 93.6241 95.2554

Sterling Class ‘C’ Income shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.0000 7.5500 7.5500 7.5000

Second interim 0.4161 7.0339 7.4500 7.4000

Third interim 2.5479 4.6321 7.1800 7.4000

Final 0.7133 11.7468 12.4601 14.7384

Sterling Class ‘I’ Income shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 5.4872 5.4128 10.9000 10.8500

Second interim 4.2822 6.6178 10.9000 10.8500

Third interim 3.8706 6.5794 10.4500 10.9499

Final 5.8964 12.0529 17.9493 21.5448

Sterling Class ‘I’ Accumulation shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 7.0239 6.4761 13.5000 12.8500

Second interim 4.8328 7.6672 12.5000 12.6000

Third interim 5.8567 6.5433 12.4000 12.3499

Final 6.1579 17.0815 23.2394 25.1679

202 Annual Long Report and audited Financial Statements • May 2021 M&G UK Income Distribution Fund Financial statements and notes

Sterling Class ‘R’ Income shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.4614 0.6086 1.0700 1.0675

Second interim 0.3043 0.7657 1.0700 1.0675

Third interim 0.3450 0.6750 1.0200 1.0700

Final 0.4904 1.2674 1.7578 2.1183

Sterling Class ‘R’ Accumulation shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 0.3581 0.8919 1.2500 1.2000

Second interim 0.2661 0.8489 1.1150 1.1600

Third interim 0.5185 0.5990 1.1175 1.1250

Final 0.6413 1.5325 2.1738 2.3039

Sterling Class ‘X’ Income shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 2.8246 3.8254 6.6500 6.6500

Second interim 2.0484 4.6116 6.6600 6.6500

Third interim 2.7338 3.6162 6.3500 6.6499

Final 2.8161 8.0894 10.9055 13.2121

Sterling Class ‘X’ Accumulation shares

Ordinary distributions Group 2 Group 1 & 2 for the year Income Equalisation Distribution to 31 May 2021 2021 2021 2020 UK p UK p UK p UK p

First interim 26.6186 25.3814 52.0000 48.7000

Second interim 15.1814 29.6186 44.8000 48.0000

Third interim 5.2369 40.0131 45.2500 45.7500

Final 54.8498 38.0883 92.9381 94.2949

Annual Long Report and audited Financial Statements • May 2021 203 M&G UK Select Fund Authorised Corporate Director’s Report

Investment objective Benchmark The fund aims to provide a higher total return (the Benchmark: FTSE All-Share Index. combination of capital growth and income), net of the The benchmark is a target which the fund seeks to ongoing charge figure, than that of the FTSE All-Share outperform. The index has been chosen as the fund’s Index over any five-year period. benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to Investment policy measure the fund’s performance and does not constrain the fund‘s portfolio construction. At least 80% of the fund is invested directly in equity securities and equity-related securities of companies The fund is actively managed. across any sectors and market capitalisations, that are The fund manager has complete freedom in choosing incorporated, domiciled, listed or do most of their which investments to buy, hold and sell in the fund. The business in the United Kingdom. fund’s holdings may deviate significantly from the The fund usually holds a concentrated portfolio of benchmark’s constituents. fewer than 50 companies. For unhedged share classes, the benchmark is shown in The fund may also invest in other transferable securities the share class currency. directly and via collective investment schemes (including funds managed by M&G). Risk profile The fund may also hold cash and near cash for liquidity The fund invests in the shares of UK-listed companies purposes. and is, therefore, subject to the price volatility of the UK Derivatives may be used for efficient portfolio stockmarket and the performance of individual management and hedging. companies. The fund typically holds around 50 stocks and this relatively concentrated profile requires the fund manager to have strong conviction in each and Investment approach every holding. However, the fund is mainly invested in The fund employs a disciplined approach to investment the shares of large and medium-sized companies, which concentrates on the analysis and selection of which are normally traded with relative ease. individual companies. Diversification is key in managing liquidity risk and The investment approach seeks to identify UK reducing market risk. The fund’s risks are measured and companies that have sustainable competitive managed as an integral part of the investment process. advantages leading to high return on invested capital. Each company’s strategy around capital allocation is central to the investment process.

The fund manager focuses on companies which recognise the importance of dividends, which in turn instils capital discipline and ensures that the highest returning growth projects are prioritised.

Rising cashflow, and over time, rising dividends, for the fund’s holdings are expected to drive the long-term total return of the fund.

204 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Authorised Corporate Director’s Report

The following table shows the risk number associated For the performance of each share class, please refer with the fund and is based on Sterling Class ‘A’ shares. to the ‘Long-term performance by share class’ table in

Low risk High risk the ‘Financial Highlights’ section of this report. Market backdrop Typically lower rewards Typically higher rewards The year to June 2021 has been nothing short of 123456 7 extraordinary. The backdrop created by the pandemic has been a breeding ground for volatility and behavioural extremes when it comes to financial The above number: markets. The 22.4% return by the FTSE All-Share Index • is based on the rate at which the value of the fund over the fund’s reporting year suggests largely upward has moved up and down in the past and is based momentum and, although true, that observation masks on historical data so may not be a reliable indicator tectonic shifts in market dynamics over the period. ofthefutureriskprofileofthefund. For the first 10 months of calendar year 2020, the • is not guaranteed and may change over time and market saw a distinct flight to quality. That held firm the lowest risk number does not mean risk free. during the collapse in equities during February and March, the recovery through April and May, and then a • has changed during this period. From 1 June 2020 period of digestion up to November. Structural growth, to 14 September 2020 the risk number was 5. quality characteristics, defensiveness (companies that do well even when the economy is weak) and ESG Investment review (environmental, social and governance) credentials were strongly rewarded. Cyclicals (businesses that are As at 1 June 2021, for the year ended 31 May 2021 economically sensitive), ESG laggards, and companies Performance against objective with high levels of debt and structural concerns Between 1 June 2020 (the start of the review period) suffered greatly. The bifurcation between ‘quality’ and 1 June 2021, the fund delivered a positive total stocks and ‘value’ stocks (those with cheaper return (the combination of income and growth of valuations) had been underway for most of the last capital) across all sterling share classes and decade, but the pandemic provided a turbo-boost. outperformed the benchmark FTSE All-Share Index, That all changed as we progressed through November which returned 22.4%. The fund’s euro share classes andinto2021,withaseriesofpositivenewsevents were closed on 15 December 2020, having catalysing a dramatic rotation in factor performance, outperformed the benchmark FTSE All-Share Index, with ‘value’ very much in the ascendency. First came which returned 6.5% in euros over the six-and-a-half- the vaccine announcements forming a bridge to a post- month period. Covid normalisation. These were followed by On 1 March 2019 the fund’s objective changed to Democratic success in the Georgia Senate run-off aiming to provide a higher total return (the combination handing President Biden a less restrictive route to push of capital growth and income), net of the ongoing through wartime levels of fiscal stimulus. The charge figure, than that of the FTSE All-Share Index combination of these events has fuelled a meteoric rise over any five-year period. The fund met its new in expectations for both growth and inflation. In objective. The fund’s five-year returns were ahead of response, re-opening plays, inflation hedges, cyclicals the FTSE All-Share Index, which returned 7.3% pa in and low-quality ‘value’ have led the market. sterling to 1 June 2021 and 1.9% pa in euros to Despite the polarised nature of the market between the 15 December 2020. first and second half of the fund’s reporting period, the

Annual Long Report and audited Financial Statements • May 2021 205 M&G UK Select Fund Authorised Corporate Director’s Report

M&G UK Select Fund outperformed the FTSE All-Share quality and sustainably aligned mining division, which Index, with the Sterling Class ‘A’ shares returning 23.4% helps customers drive energy, water and waste savings. versus 22.4%. As a fund that specialises in investing in Key detractors were London Stock Exchange and high quality sustainable businesses, it’s safe to say the Experian. In the case of London Stock Exchange, the former environment provided us with more favourable company unveiled higher-than-expected expenses to conditions than the latter. I’m exceptionally proud we’ve integrate data provider Refinitiv, which impacted the managed to outperform in a year that will be long shares heavily. Despite potentially higher costs, we still remembered for such extreme rotational forces. I think see long-term upside from the Refinitiv merger but the outcome speaks volumes about how agile portfolio continue to analyse the integration carefully. construction and good stockpicking can help drive performance in different market paradigms. We’ve Experian is the largest credit bureau in the US and also worked hard to position the fund for the has leading positions in the UK and Brazil, as well as macroeconomic recovery seen so far during 2021, and several other EMEA and Asia Pacific markets at various we’ll continue to work hard to adapt to whatever lies stages of maturity. Our above-market position hurt ahead. during a period of volatile share price performance. Although key risks around slowdown in credit growth in Performance review the company’s key markets, increased competition and Over the 12 months the fund’s top contributor was the possibility for data breaches remain, we feel that Burford Capital, a company which took the bottom spot the company’s increasing breadth of offering, highly in our previous annual report. The management innovative product set and presence among multiple continue to improve corporate governance and geographies underpin the valuation and we continue to disclosure in the wake of short seller Muddy Waters’ be firm holders of the shares. criticisms. They have seen some strong investment returns so far this year on their 2016/17 business and Investment activities we remain very hopeful this trajectory continues. Duringthe12-monthperiodweinvestedineightnew companies, while fully exiting seven. Of those seven, Ashtead, a leading provider of rental equipment with three represented sale opportunities to help transition operations in the US, Canada and the UK, was the the portfolio towards high-quality sustainable growth fund’s second top contributor. The company traded companies, as discussed below. The previous 12-month very strongly over the period and management have period saw us take on 11 new companies; last year’s clearly laid out a future strategy that will focus on higher number was perhaps symptomatic of record technology continuing to be a key competitive driver, levels of volatility seen at the height of the pandemic. ESG credentials bolstering future growth, a clear As patient and disciplined stock pickers, we used that ambition to de-lever and to seek bolt-on merger and volatility to find compelling valuation opportunities in acquisition opportunities. We think Ashtead is an companies we believe will fuel the long-term extremely attractive quality earnings compounder with performance of the fund. key thematic growth drivers underpinning its future expansion. New holdings Weir: We bought Weir with the firm view that it was a ASOS and Weir, both bought in 2020, also appear in the company of two halves. Its oil and gas division was a top 10. ASOS has been a ‘Covid winner’ and low-quality business facing structural challenge. In management have done a great job improving the contrast, the minerals division is a far better business, margin and cash generation of the business. Weir with some attractive structural growth tailwinds in divested its oil and gas division at a very favourable helping their mining customers improve water, waste price, allowing the company to focus on its higher and energy usage. Our hope was that in selling its oil

206 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Authorised Corporate Director’s Report

and gas division, the true value of minerals would be of the hydrogen value chain in best-of-breed exposed. That very much proved to be the case when electrolyser and fuel cell technology. Early in 2021, the the company announced the sale, with the shares company raised capital in order to fund future materially increasing in price to reflect its ability to expansion and a shift into electrolysers. This coincided become a quality earnings compounder. with a steep sell-off in renewable energy stocks, providing an excellent opportunity to invest in the Diageo: We have always admired Diageo’s market company at an attractive valuation. position within the global spirits market and the structural growth underpinnings of alcohol Stryker Corp: Over recent years we have become consumption behaviour. The reduced mobility and mass increasingly excited about the role of robotics and socialising under coronavirus restrictions has had a big technology within healthcare and medical devices. We impact on global alcohol consumption, particularly the recently conducted in-depth research into this theme to on-trade segment of bars and restaurants. Obviously, evaluate the opportunity and competitive environment. until more liberal social activity is permitted, that will Our conclusion was that our current ‘play’ in the space, continue to be the case. However, the long-term Smith & Nephew, rather than being structurally structural dynamics are unchanged. We think the virus- empowered by robotics, was likely to be disrupted. induced sell-off opened up an attractive valuation Conversely, Stryker, with its market-leading technology, opportunity and we took advantage. attitude to innovation, installed base and scale across orthopaedic functions gives it a huge platform to grow Hollywood Bowl: This tenpin bowling operator is a over the long term as penetration of robotic procedures decent quality earnings compounder and the share increases. price has been decimated as part of the vilified ‘Covid- bucket’ of stocks that have been hit hard by the Charles Schwab Corp: We have had exposure to pandemic. We really like its competitive position and commercial and retail investment platforms for a few opportunity to expand over the long term. We were years now. We like the structural growth dynamics of confident in its ability to trade through to a post- online penetration, wealth accumulation, demographic restriction world and we thought the share price trends, the need for advice and more responsibility massively underappreciated the long-term opportunity being placed on consumers to save for their future. We and intrinsic value for this company. recently re-evaluated our holdings in this sector and decided that AJ Bell no longer offered the fund ITM Power: In tracking the hydrogen industry for a long valuation upside. As a consequence we decided to time,wehavecometoseeitasacorecontributortothe switch into Schwab, which offers very similar quality shift towards a lower carbon society. ITM is the industry and growth characteristics but at a much more leader in PEM electrolysers used to produce hydrogen. attractive valuation. Schwab also provides us with a Hydrogen as a fuel is rapidly becoming a critical portfolio construction benefit in having direct revenue component of our future energy network for power, exposure to rising bond yields, due to the net interest storage and transportation. If ITM is able to protect its margin earned on customer cash deposits, as opposed technological leadership, then this could prove to be a to platform fees that are the dominant source of income very exciting company. for its UK-listed peers. Ceres Power: Ceres is the global leader in solid oxide GTT: GTT is a technology company that specialises in fuel cells, a technology that turns hydrogen and other designing cryogenic membranes for liquefied natural fuels into low or zero-carbon electricity. We have gas (LNG) carriers. They are an effective monopoly, followed the space closely and are big believers in having won every global contract in recent times. This hydrogen’s role in the future low-carbon energy mix. technology is very sensitive, given the risks of failure. Between ITM and Ceres we have exposure to both ends Rather than vilify natural gas, we think it is a core form

Annual Long Report and audited Financial Statements • May 2021 207 M&G UK Select Fund Authorised Corporate Director’s Report

of decarbonisation from oil and coal as we shift to more macro-commentators are feeding the rotational frenzy, sustainable energy forms. It is a critical low-carbon fuel calling this a ‘new paradigm’ and ‘the great rotation’. source for countries such as China and India. GTT helps That feels awfully premature after more than a decade enable that transition. Beyond natural gas, it also plays of ‘value’ being on the back foot. I’m convinced this isn’t into smart shipping, LNG as a marine fuel, hydrogen a regime change. For that to develop there needs to be electrolysis and liquified hydrogen transportation. We a structural above-trend improvement in economic consider this to be a unique and innovative sustainable growth and inflation. Biden’s stimulus packages are a growth company that contributes greatly to steroid shot for sure, but they do nothing to reverse the decarbonisation. multi-decade trend towards lower growth and lower inflation. The deflationary forces of debt, demographics Complete sales and digitisation put a cap on the latter. Debt, During the fund’s reporting year, nine positions were demographics and China’s slowing contribution to exited. Notable amongst these were cyber security global growth will limit the former. Indeed, the IMF still software firm GB Group, which had been a highly forecasts both returning to trend by 2023. 2021 is going successful investment, but we felt the valuation toseeamyriadofbullishmacrodatapoints.Iwould underappreciated the risks around data regulation and urge investors not to be carried away by the misleading the firm’s merger and acquisition strategy. Another sale nature of those readouts. What we should be was of medical equipment manufacturer Convatec, concentrating on is the enduring reality that sits on the which had performed well given its defensive nature, other side. In a stable but relatively low-growth but we were quite sceptical of its ability to sustainably environment, I feel very comfortable in our philosophy grow ahead of its end markets. Elsewhere, British of investing in high quality sustainable growth American Tobacco, Total and BP were sold as part of businesses. the ongoing transition of the portfolio toward high- quality sustainable growth companies. Historically the 2. We’re in the ESG and sustainability foothills: You oil majors have constituted a material proportion of the often hear the terms ‘peak-ESG’ and ‘ESG bubble’ when fund, and over the past year we have gradually evaluating the compelling performance of stocks that engineered a complete exit from this sector. Both display good and/or improving ESG credentials. I think wealth manager AJ Bell and another medical we’re barely scratching the surface. 12 months ago equipment manufacturer, Smith & Nephew, were sold most market participants had barely heard the word as we switched into what we considered to be superior ‘sustainability’, let alone understood the implications of alternatives. Smith & Nephew was sold due to our society’s shift towards greater sustainability. I really concern about the potential for it to be disrupted as don’t think we fully acknowledge the magnitude of robotics and technology within healthcare increases in policy and regulation required to achieve change. adoption rates. Reducing greenhouse gas emissions to ‘net zero’ globally is the most obvious and sensitive of the issues Outlook at hand. If you’ve watched the price of carbon over The Hall Of Fame baseball manager, Casey Stengel, recent months, you’ll probably have some appreciation once said, ‘Never make predictions, especially about of the potential cost of not transitioning. The good the future’. After the last 18-or-so months that quotation news with the M&G UK Select Fund is that we only look feels enormously relevant. There are, however, three for sustainable businesses that will benefit from this things that make me very optimistic about the future for societal evolution. We have been mapping the the M&G UK Select Fund: portfolio’s carbon intensity and it currently has a 1. Sustainable quality as a style: As mentioned in my weighted carbon intensity nearly 90% below the FTSE introduction, the leadership of ‘value’ as a style since All-Share Index. (The Weighted Average Carbon November 2020 is well documented. Journalists and

208 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Authorised Corporate Director’s Report

Intensity measures a fund‘s exposure to carbon Please note that the views expressed in this Report should not be taken as a intensive companies.) Over 50% of our holdings have 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 science-based net zero targets and we’re pushing hard whether an investment is suitable for your needs, you should consult a with our engagement to encourage the rest to follow Financial Adviser. suit. As the rhetoric continues to build, we think the fund is fantastically placed to benefit. COP 26 in Glasgow later this year will provide another rocket- booster to ESG promises. Anyone calling 2020 as ‘peak ESG’ is likely to be in for a painful and prolonged shock.

3. Our excitement for investing in the UK: Ever since the Brexit referendum in 2016, the FTSE All-Share Index has traded at a severe discount versus other global indices. At points, this discount has been larger than at any time since the UK was bailed out by the IMF in 1976. As the uncertainty around Brexit starts to clear, in conjunction with our globally leading vaccine rollout program, we expect that valuation anomaly to normalise. However, what gets me most energised is the structural improvement in the UK investible universe. The depth and quality of the IPO (initial public offering, or stock flotation) pipeline is quite exceptional, in my view. Most of these are digitally native structural growth businesses that understand their place in a more sustainable world. On the flip side, some of the more disadvantaged and ESG-sensitive businesses are being acquired and/or accorded a lower market rating. The net effect of those two forces is that the FTSE All Share Index is becoming an index of higher quality and more digitally enabled businesses. That feels like a great place for quality-oriented stock pickers like ourselves.

As ever, within the M&G UK Select Fund we remain committed to building a portfolio of fantastic sustainable quality compounders. We’ll do our very best to use portfolio construction to adapt to whatever market environment we find ourselves in, with our execution in 2020 and 2021 hopefully evidencing that. Hopefully, the next 12 months will provide a more stable economic foundation where stock picking, rather than factor rotations, drives market behaviour.

Rory Alexander Fund manager

An employee of M&G FA Limited which is an associate of M&G Securities Limited.

Annual Long Report and audited Financial Statements • May 2021 209 M&G UK Select Fund Investments

Portfolio statement

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities 546,030 98.03 94.09

Software & computer services 21,864 3.93 4.58a

3,243,358 Ascential 11,838 2.13

3,715,829 Moneysupermarket.com 10,026 1.80

Technology hardware & equipment 11,584 2.08 1.06

21,490,720 IQE 11,584 2.08

Health care providers 13,541 2.43 1.83a

1,281,043 UDG Healthcare 13,541 2.43

Medical equipment & services 11,311 2.03 3.88a

62,986 Stryker 11,311 2.03

Pharmaceuticals & biotechnology 49,185 8.83 10.15

478,225 AstraZeneca 38,478 6.91

512,289 Hutchison China MediTech ADR 10,707 1.92

Banks 37,528 6.74 4.75

712,261 Close Brothers 11,688 2.10

2,836,718 HSBC 12,916 2.32

2,545,111 Standard Chartered 12,924 2.32

Finance & credit services 18,005 3.23 2.82

237,781 London Stock Exchange 18,005 3.23

Investment banking & brokerage services 58,990 10.59 9.32a

1,343,279 Burford Capital 11,411 2.05

221,056 Charles Schwab 11,484 2.06

1,727,141 IntegraFin 9,396 1.69

7,187,458 Man 12,808 2.30

994,345 St. James‘s Place 13,891 2.49

Life insurance 10,858 1.95 1.14a

1,207,600 AIA 10,858 1.95

Household goods & home construction 22,669 4.07 2.74a

2,282,269 Countryside Properties 11,674 2.10

4,897,532 Watkin Jones 10,995 1.97

Leisure goods 11,470 2.06 2.51

96,063 Games Workshop 11,470 2.06

210 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Retailers 10,535 1.89 3.63

216,193 ASOS 10,535 1.89

Travel & leisure 24,126 4.33 1.02

5,284,436 Hollywood Bowl 13,634 2.45

2,574,723 On the Beach 10,492 1.88

Beverages 16,322 2.93 2.54

316,242 Diageo 10,765 1.93

217,497 Fevertree Drinks 5,557 1.00

Food producers 12,071 2.17 2.57

305,285 Cranswick 12,071 2.17

Tobacco 00.003.89

Personal care, drug & grocery stores 47,084 8.45 9.47a

314,242 Reckitt Benckiser 20,008 3.59

640,780 Unilever 27,076 4.86

Construction & materials 12,701 2.28 1.73

1,969,179 Genuit 12,701 2.28

Electronic & electrical equipment 11,955 2.15 1.93a

3,541,177 Rotork 11,955 2.15

General industrials 24,306 4.36 3.61

18,343,861 Coats 12,144 2.18

784,911Smiths 12,162 2.18

Industrial engineering 14,443 2.59 1.32a

30,679 Kone 1,745 0.31

661,703 Weir 12,698 2.28

Industrial support services 38,513 6.92 6.82a

649,138 Experian 17,546 3.15

799,729 FDM 7,941 1.43

240,060 Intertek 13,026 2.34

Industrial transportation 30,863 5.54 3.40a

320,025 Ashtead 16,475 2.96

467,915 Clarkson 14,388 2.58

Annual Long Report and audited Financial Statements • May 2021 211 M&G UK Select Fund Investments

Portfolio statement (continued)

Holding as at 31.05.21 as at 31.05.21 as at 31.05.20 £’000 % %

Equities (continued)

Chemicals 11,818 2.12 1.51

489,166 Victrex 11,818 2.12

Non-renewable energy 10,618 1.91 5.87

179,962 Gaztransport Technigaz 10,618 1.91

Renewable energy 13,670 2.45 0.00

916,568 Ceres Power 9,963 1.79

945,669 ITM Power 3,707 0.66

Unquoted / unlisted 0 0.00 0.00

770,825 Izodiab 00.00

Portfolio of investments 546,030 98.03 94.09

Cash equivalents 13,673 2.46 6.52

‘AAA’ rated money market fundsc 13,673 2.46 6.52

13,673,168 Northern Trust Global Fund - Sterling 13,673 2.46

Totalportfolio(notes2c&2donpage9) 559,703 100.49 100.61

Net other assets/(liabilities) (2,727) (0.49) (0.61)

Net assets attributable to shareholders 556,976 100.00 100.00

All securities are on an official stock exchange listing except where referenced. a The comparative sector weightings have been re-analysed to reflect changes to the sector classifications. b Suspended. c Uncommitted surplus cash is placed into ‘AAA’ rated money market funds with the aim of reducing counterparty risk.

212 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Investments

Top ten portfolio transactions for the year to 31 May 2021

Largest purchases £’000

Gaztransport Technigaz 12,142

Stryker 10,888

Charles Schwab 10,482

Weir 10,447

Hollywood Bowl 10,241

Ceres Power 9,795

On the Beach 9,210

Diageo 8,211

ITM Power 5,678

IQE 5,556

Other purchases 49,982

Total purchases 142,632

Largest sales £’000

British American Tobacco 17,768

Royal Dutch Shell 15,198

Smith & Nephew 14,205

TOTAL 13,911

BP 13,417

WH Smith 11,165

Fevertree Drinks 10,445

On the Beach 9,017

ASOS 8,686

AJ Bell 8,591

Other sales 85,700

Total sales 208,103

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

Annual Long Report and audited Financial Statements • May 2021 213 M&G UK Select Fund Financial highlights

Fund performance Ten-year performance Please note that comparator benchmark data is not Please note past performance is not a guide to future available from fund launch. Therefore a ten-year performance and the value of investments, and the comparable performance chart is shown below. income from them, will fluctuate. This will cause the fund price to fall as well as rise and you may not get Ten years, 1 June 2011 = 100, plotted monthly back the original amount you invested. Chart date 1 June 2021

The following charts and tables reflect the key financial 200 information of a representative share class, Sterling Class ‘A’ (Accumulation) shares. As different share 170 classes have different attributes, for example charging structures and minimum investments, please be aware 140 that their performance may be different. For more information on the different share classes in this fund 120 please refer to the Prospectus for M&G Investment Funds (2), which is available free of charge either from 100 our website at www.mandg.co.uk/prospectuses or by

calling M&G Customer Relations. 80 20112012 2013 2014 2015 2016 2017 2018 2019 2020

Fund level performance Sterling Class ‘A’ (Accumulation) shares* FTSE All-Share Index Fund net asset value as at 31.05.21 31.05.20 31.05.19 £’000 £’000 £’000 Source: Morningstar, Inc. and M&G * Income reinvested

Fund net asset value (NAV) 556,976 535,323 581,167

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

December 1968 = 100, plotted monthly Chart date 1 June 2021

15,000 10,000 7,000 5,000 3,000 2,000 1,500 1,000 600 400

200

100

50 6770 73 76 79 82 85 88 91 9497 0003 06 0912 15 18 21

Sterling Class ‘A’ (Accumulation) shares*

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

214 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial highlights

Long-term performance by share class • Annual charge: Charge paid to M&G covering the To give an indication of the performance of the fund, annual cost of M&G managing and administering the following table shows the compound rate of return, the fund and the costs of third parties providing per annum, over the period to 15 December 2020 for services to the fund. From 1 August 2019, this the euro share classes and 1 June 2021 for the sterling charge rolls all costs that make up the operating classes. Calculated on a price to price basis with charges into one annual charge. income reinvested. For every £1 billion of a fund’s net asset value, a discount of 0.02% will be applied to that fund’s Share One Three Five Since annual charge (up to a maximum of 0.12%). class year years years launch 01.06.20 01.06.18 01.06.16 • Extraordinary legal and tax expenses: Costs that %a %pa %pa %pa specifically relate to legal or tax claims that are both Eurob exceptional and unforeseeable. Such expenses are Class ‘A’ +9.7 +0.1 +2.6 +2.8c uncommon, and would not be expected in most years.

Class ‘C’ +10.2 +0.9 +3.4 +3.6c Although they result in a short-term cost to the fund, generally they can deliver longer term benefits for Sterlingb investors. Class ‘A’ +23.4 +4.9 +8.0 +9.5d • Investment management: Charge paid to M&G for Class ‘C’ +24.8 +6.3 +9.5 +7.9e investment management of the fund. From f Class ‘I’ +24.0 +5.5 +8.8 +8.4 1 August 2019 this charge forms part of the annual Class ‘PP’ n/a n/a n/a +6.8g charge.

f Class ‘R’ +23.7 +5.3 +8.5 +8.1 • Administration: Charge paid for administration Class ‘X’ +23.4 +4.9 +8.0 +8.6h services in addition to investment management – a Absolute basis. any surplus from this charge will be retained by b Price to price with income reinvested. M&G. From 1 August 2019 this charge is rolled into c 31 August 2007, the launch date of the share class. the annual charge. d 17 December 1968, the end of the initial offer period of the predecessor unit trust. • e 13March2013,thelaunchdateoftheshareclass. Oversight and other independent services: f 3 August 2012, the launch date of the share class. Charges paid to providers independent of M&G for g 19 February 2021, the launch date of the share class. Not annualised. services which include depositary, custody and h 1 October 2002, the launch date of the share class. audit. From 1 August 2019 these charges will be paid by M&G and rolled into the annual charge. Operating charges and portfolio • transaction costs Ongoing charges from underlying funds: Ongoing charges on holdings in underlying funds that are We explain below the payments made to meet the not rebated. From 1 August 2019 charges from ongoing costs of investing and managing the fund, underlying funds (excluding Investment Trust comprising operating charges and portfolio transaction Companies and Real Estate Investment Trusts) will costs. be rebated. Operating charges The operating charges paid by each share class of the Operating charges include payments made to M&G and fund are shown in the following performance tables. to providers independent of M&G: These charges do not include portfolio transaction costs or any entry and exit charges (also known as initial and redemption charges). The charging structures of share classes may differ, and therefore the operating charges may differ.

Annual Long Report and audited Financial Statements • May 2021 215 M&G UK Select Fund Financial highlights

Operating charges are in line with the ongoing charges Portfolio transaction costs shown in the Key Investor Information Document, other than where there have been extraordinary legal or tax for the year to 31 May 2021 2020 2019 Averagea Direct portfolio transaction %%% % expenses, or an estimate has been used for the costsb ongoing charge because a material change has made Broker commission 0.02 0.04 0.04 0.03 the operating charges unreliable as an estimate of future charges. Taxes 0.08 0.15 0.22 0.15 Costs before dilution 0.10 0.19 0.26 0.18 Portfolio transaction costs adjustments Portfolio transaction costs are incurred by funds when Dilution adjustmentsc (0.02) (0.01) (0.04) (0.02) buying and selling investments. These costs vary Total direct portfolio 0.08 0.18 0.22 0.16 depending on the types of investment, their market transaction costs

capitalisation, country of exchange and method of as at 31 May 2021 2020 2019 Averagea execution. They are made up of direct and indirect Indirect portfolio % % % % portfolio transaction costs: transaction costs • Average portfolio dealing 0.13 0.13 0.12 0.13 Direct portfolio transaction costs: Broker spread execution commission and taxes. a Average of first three columns. • Indirect portfolio transaction costs: ‘Dealing b As a percentage of average net asset value. c In respect of direct portfolio transaction costs. Please see the section spread’ – the difference between the buying and above this table for an explanation of dilution adjustments. selling prices of the fund’s investments; some types of investment, such as fixed interest securities, have no direct transaction costs and Specific share class performance only the dealing spread is paid. The following tables show the performance of each Investments are bought or sold by a fund when share class. All ‘Performance and charges’ percentages changes are made to the investment portfolio and in represent an annual rate except for the ‘Return after response to net flows of money into or out of the fund operating charges’ which is calculated as a percentage from investors buying and selling shares in the fund. of the opening net asset value per share (NAV). ‘Dilution adjustments’ are only in respect of direct portfolio To protect existing investors, portfolio transaction costs 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.

216 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial highlights

Historic yields for the current year are calculated as at Euro Class ‘C’ Accumulation share 11 June 2021. performance Euro Class ‘A’ Accumulation share The share class was launched on 31 August 2007. The share class closed on 15 December 2020. performance The share class was launched on 31 August 2007. The for the year to 31 May 2021 2020 2019 Change in NAV per share Euro ¢ Euro ¢ Euro ¢ share class closed on 15 December 2020. Opening NAV 1,446.65 1,514.76 1,571.50 for the year to 31 May 2021 2020 2019 Change in NAV per share Euro ¢ Euro ¢ Euro ¢ Return before operating 167.11 (55.80) (42.31) charges Opening NAV 1,313.93 1,388.29 1,451.15 Operating charges (5.89) (12.31) (14.43) Return before operating 151.45 (51.44) (39.88) charges Return after operating 161.22 (68.11) (56.74) charges Operating charges (12.57) (22.92) (22.98) Distributions (6.56) (25.36) (34.88) Return after operating 138.88 (74.36) (62.86) charges Retained distributions 6.56 25.36 34.88

Distributions (0.70) (10.55) (21.82) Return to shareholder as a result of (1,607.87) n/a n/a share class closure Retained distributions 0.70 10.55 21.82 Closing NAV 0.00 1,446.65 1,514.76 Return to shareholder as a result of (1,452.81) n/a n/a share class closure Direct transaction costs Euro ¢ Euro ¢ Euro ¢

Closing NAV 0.00 1,313.93 1,388.29 Costs before dilution 1.51 2.89 4.08 adjustments Direct transaction costs Euro ¢ Euro ¢ Euro ¢ Dilution adjustmentsa (0.26) (0.21) (0.58) Costs before dilution 1.37 2.59 3.57 adjustments Total direct transaction costs 1.25 2.68 3.50

Dilution adjustmentsa (0.13) (0.19) (0.50) Performance and charges % % %

Total direct transaction costs 1.24 2.40 3.07 Direct portfolio transaction 0.08 0.18 0.22 costsb Performance and charges % % % Operating chargesc 0.70 0.73 0.91 Direct portfolio transaction 0.08 0.18 0.22 costsb Return after charges +11.14 -4.50 -3.61

Operating chargesc 1.65 1.65 1.66 Historic yield 0.00 1.67 2.28

Return after charges +10.57 -5.36 -4.33 Other information

Historic yield 0.00 0.76 1.56 Closing NAV (£’000) 0 95 4,390

Other information Closing NAV (%) 0.00 0.02 0.76

Closing NAV (£’000) 0 1,714 1,840 Number of shares 0 7,275 327,077

Closing NAV (%) 0.00 0.32 0.32 Highest share price (Euro ¢) 1,648.60 1,758.14 1,609.84

Number of shares 0 144,408 149,548 Lowest share price (Euro ¢) 1,428.12 1,071.38 1,301.42

Highest share price (Euro ¢) 1,490.42 1,601.02 1,476.34

Lowest share price (Euro ¢) 1,294.04 974.87 1,196.56

Annual Long Report and audited Financial Statements • May 2021 217 M&G UK Select Fund Financial highlights

Sterling Class ‘A’ Income share Sterling Class ‘A’ Accumulation share performance performance The share class was launched on 19 October 1982. The share class was launched on 17 December 1968.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 2,715.18 2,873.47 3,069.31 Opening NAV 4,505.93 4,652.54 4,809.42

Return before operating 650.85 (53.35) (52.70) Return before operating 1,083.46 (87.60) (80.52) charges charges

Operating charges (34.75) (36.30) (48.56) Operating charges (57.85) (59.01) (76.36)

Return after operating 616.10 (89.65) (101.26) Return after operating 1,025.61 (146.61) (156.88) charges charges

Distributions (63.99) (68.64) (94.58) Distributions (48.72) (52.74) (73.22)

Closing NAV 3,267.29 2,715.18 2,873.47 Retained distributions 48.72 52.74 73.22

Direct transaction costs UK p UK p UK p Closing NAV 5,531.54 4,505.93 4,652.54

Costs before dilution 2.92 5.30 7.55 Direct transaction costs UK p UK p UK p adjustments Costs before dilution 4.87 8.61 11.87 Dilution adjustmentsa (0.50) (0.38) (1.06) adjustments

Total direct transaction costs 2.42 4.92 6.49 Dilution adjustmentsa (0.83) (0.62) (1.67)

Performance and charges % % % Total direct transaction costs 4.04 7.99 10.20

Direct portfolio transaction 0.08 0.18 0.22 Performance and charges % % % costsb Direct portfolio transaction 0.08 0.18 0.22 Operating chargesc 1.17 1.28 1.66 costsb

Return after charges +22.69 -3.12 -3.30 Operating chargesc 1.17 1.28 1.66

Historic yield 1.96 2.44 3.27 Return after charges +22.76 -3.15 -3.26

Other information Historic yield 0.88 1.13 1.56

Closing NAV (£’000) 229,504 202,586 224,258 Other information

Closing NAV (%) 41.21 37.85 38.59 Closing NAV (£’000) 189,229 163,588 180,828

Number of shares 7,024,314 7,461,242 7,804,421 Closing NAV (%) 33.97 30.56 31.11

Highest share price (UK p) 3,309.29 3,125.10 3,117.16 Number of shares 3,420,914 3,630,503 3,886,649

Lowest share price (UK p) 2,666.98 2,112.75 2,583.46 Highest share price (UK p) 5,528.23 5,094.93 4,884.05

Lowest share price (UK p) 4,425.73 3,444.47 4,081.30

218 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial highlights

Sterling Class ‘C’ Income share Sterling Class ‘I’ Income share performance performance Sterling Class ‘C’ shares are not generally available to all The share class was launched on 3 August 2012. investors. for the year to 31 May 2021 2020 2019 The share class was launched on 13 March 2013. Change in NAV per share UK p UK p UK p

for the year to 31 May 2021 2020 2019 Opening NAV 1,356.85 1,428.16 1,513.97 Change in NAV per share UK p UK p UK p Return before operating 326.11 (26.69) (25.75) Opening NAV 2,865.00 2,994.19 3,150.12 charges

Return before operating 691.22 (56.37) (53.07) Operating charges (10.41) (10.41) (13.21) charges Return after operating 315.70 (37.10) (38.96) Operating charges 0.00 (0.83) (4.97) charges

Return after operating 691.22 (57.20) (58.04) Distributions (32.07) (34.21) (46.85) charges Closing NAV 1,640.48 1,356.85 1,428.16 Distributions (67.99) (71.99) (97.89) Direct transaction costs UK p UK p UK p Closing NAV 3,488.23 2,865.00 2,994.19 Costs before dilution 1.46 2.64 3.73 Direct transaction costs UK p UK p UK p adjustments

Costs before dilution 3.10 5.56 7.80 Dilution adjustmentsa (0.25) (0.19) (0.53) adjustments Total direct transaction costs 1.21 2.45 3.20 Dilution adjustmentsa (0.53) (0.40) (1.10) Performance and charges % % % Total direct transaction costs 2.57 5.16 6.70 Direct portfolio transaction 0.08 0.18 0.22 Performance and charges % % % costsb

Direct portfolio transaction 0.08 0.18 0.22 Operating chargesc 0.70 0.73 0.91 costsb Return after charges +23.27 -2.60 -2.57 Operating chargesc 0.00 0.03 0.16 Historic yield 1.96 2.43 3.26 Return after charges +24.13 -1.91 -1.84 Other information Historic yield 1.95 2.43 3.25 Closing NAV (£’000) 30,737 27,266 30,714 Other information Closing NAV (%) 5.52 5.09 5.28 Closing NAV (£’000) 14,862 12,966 14,582 Number of shares 1,873,672 2,009,537 2,150,600 Closing NAV (%) 2.67 2.42 2.51 Highest share price (UK p) 1,661.54 1,558.80 1,539.76 Number of shares 426,055 452,568 487,022 Lowest share price (UK p) 1,333.07 1,054.74 1,279.86 Highest share price (UK p) 3,532.94 3,282.85 3,208.32

Lowest share price (UK p) 2,815.72 2,223.98 2,674.58

Annual Long Report and audited Financial Statements • May 2021 219 M&G UK Select Fund Financial highlights

Sterling Class ‘I’ Accumulation share Sterling Class ‘PP’ Income share performance performance The share class was launched on 3 August 2012. The share class was launched on 19 February 2021.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 1,645.04 1,689.42 1,733.34 Opening NAV 100.00 n/a n/a

Return before operating 396.28 (32.06) (28.66) Return before operating 6.28 n/a n/a charges charges

Operating charges (12.34) (12.32) (15.26) Operating charges (0.15) n/a n/a

Return after operating 383.94 (44.38) (43.92) Return after operating 6.13 n/a n/a charges charges

Distributions (26.36) (28.31) (38.96) Distributions (0.97) n/a n/a

Retained distributions 26.36 28.31 38.96 Closing NAV 105.16 n/a n/a

Closing NAV 2,028.98 1,645.04 1,689.42 Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 0.00 n/a n/a adjustments Costs before dilution 1.74 3.13 4.31 adjustments Dilution adjustmentsa 0.00 n/a n/a

Dilution adjustmentsa (0.29) (0.23) (0.61) Total direct transaction costs 0.00 n/a n/a

Total direct transaction costs 1.45 2.90 3.70 Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.08 n/a n/a costsb Direct portfolio transaction 0.08 0.18 0.22 costsb Operating chargesc 0.55 n/a n/a

Operating chargesc 0.70 0.73 0.91 Return after charges +6.13 n/a n/a

Return after charges +23.34 -2.63 -2.53 Historic yield 1.96 n/a n/a

Historic yield 1.30 1.66 2.29 Other information

Other information Closing NAV (£’000) 21 n/a n/a

Closing NAV (£’000) 49,938 92,724 88,570 Closing NAV (%) 0.00 n/a n/a

Closing NAV (%) 8.97 17.32 15.24 Number of shares 20,010 n/a n/a

Number of shares 2,461,212 5,636,584 5,242,643 Highest share price (UK p) 106.07 n/a n/a

Highest share price (UK p) 2,027.76 1,856.68 1,762.73 Lowest share price (UK p) 98.20 n/a n/a

Lowest share price (UK p) 1,616.14 1,256.30 1,477.29

220 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial highlights

Sterling Class ‘PP’ Accumulation share Sterling Class ‘R’ Income share performance performance The share class was launched on 19 February 2021. The share class was launched on 3 August 2012.

for the year to 31 May 2021 2020 2019 fortheyearto31May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 100.00 n/a n/a Opening NAV 134.40 141.82 150.72

Return before operating 6.28 n/a n/a Return before operating 32.26 (2.65) (2.57) charges charges

Operating charges (0.15) n/a n/a Operating charges (1.40) (1.38) (1.67)

Return after operating 6.13 n/a n/a Return after operating 30.86 (4.03) (4.24) charges charges

Distributions (0.82) n/a n/a Distributions (3.17) (3.39) (4.66)

Retained distributions 0.82 n/a n/a Closing NAV 162.09 134.40 141.82

Closing NAV 106.13 n/a n/a Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 0.15 0.26 0.37 adjustments Costs before dilution 0.00 n/a n/a adjustments Dilution adjustmentsa (0.02) (0.02) (0.05)

Dilution adjustmentsa 0.00 n/a n/a Total direct transaction costs 0.13 0.24 0.32

Total direct transaction costs 0.00 n/a n/a Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.08 0.18 0.22 costsb Direct portfolio transaction 0.08 n/a n/a costsb Operating chargesc 0.95 0.98 1.16

Operating chargesc 0.55 n/a n/a Return after charges +22.96 -2.84 -2.81

Return after charges +6.13 n/a n/a Historic yield 1.96 2.44 3.26

Historic yield 1.45 n/a n/a Other information

Other information Closing NAV (£’000) 6,543 5,153 5,206

Closing NAV (£’000) 21 n/a n/a Closing NAV (%) 1.17 0.96 0.90

Closing NAV (%) 0.00 n/a n/a Number of shares 4,036,403 3,834,022 3,670,824

Number of shares 20,000 n/a n/a Highest share price (UK p) 164.17 154.55 153.22

Highest share price (UK p) 106.07 n/a n/a Lowest share price (UK p) 132.03 104.53 127.23

Lowest share price (UK p) 98.20 n/a n/a

Annual Long Report and audited Financial Statements • May 2021 221 M&G UK Select Fund Financial highlights

Sterling Class ‘R’ Accumulation share Sterling Class ‘X’ Income share performance performance The share class was launched on 3 August 2012. The share class was launched on 1 October 2002.

for the year to 31 May 2021 2020 2019 for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p Change in NAV per share UK p UK p UK p

Opening NAV 161.26 166.03 170.77 Opening NAV 2,733.29 2,892.63 3,089.78

Return before operating 38.84 (3.15) (2.84) Return before operating 655.17 (53.63) (53.05) charges charges

Operating charges (1.69) (1.62) (1.90) Operating charges (34.98) (36.62) (48.88)

Return after operating 37.15 (4.77) (4.74) Return after operating 620.19 (90.25) (101.93) charges charges

Distributions (2.14) (2.37) (3.42) Distributions (64.41) (69.09) (95.22)

Retained distributions 2.14 2.37 3.42 Closing NAV 3,289.07 2,733.29 2,892.63

Closing NAV 198.41 161.26 166.03 Direct transaction costs UK p UK p UK p

Direct transaction costs UK p UK p UK p Costs before dilution 2.94 5.34 7.59 adjustments Costs before dilution 0.17 0.31 0.42 adjustments Dilution adjustmentsa (0.27) (0.39) (1.07)

Dilution adjustmentsa (0.03) (0.02) (0.06) Total direct transaction costs 2.67 4.95 6.52

Total direct transaction costs 0.14 0.29 0.36 Performance and charges % % %

Performance and charges % % % Direct portfolio transaction 0.08 0.18 0.22 costsb Direct portfolio transaction 0.08 0.18 0.22 costsb Operating chargesc 1.17 1.28 1.66

Operating chargesc 0.95 0.98 1.16 Return after charges +22.69 -3.12 -3.30

Return after charges +23.04 -2.87 -2.78 Historic yield 1.96 2.44 3.27

Historic yield 1.08 1.42 2.05 Other information

Other information Closing NAV (£’000) 5,528 4,868 5,836

Closing NAV (£’000) 26,713 21,004 21,153 Closing NAV (%) 0.99 0.91 1.00

Closing NAV (%) 4.80 3.92 3.64 Number of shares 168,058 178,082 201,759

Number of shares 13,463,937 13,024,454 12,740,356 Highest share price (UK p) 3,331.36 3,145.94 3,137.94

Highest share price (UK p) 198.29 182.18 173.58 Lowest share price (UK p) 2,684.76 2,126.84 2,600.69

Lowest share price (UK p) 158.41 123.22 145.33

222 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial highlights

Sterling Class ‘X’ Accumulation share performance The share class was launched on 1 October 2002.

for the year to 31 May 2021 2020 2019 Change in NAV per share UK p UK p UK p

Opening NAV 4,457.58 4,602.61 4,757.81

Return before operating 1,071.83 (86.65) (79.66) charges

Operating charges (57.23) (58.38) (75.54)

Return after operating 1,014.60 (145.03) (155.20) charges

Distributions (48.20) (52.18) (72.43)

Retained distributions 48.20 52.18 72.43

Closing NAV 5,472.18 4,457.58 4,602.61

Direct transaction costs UK p UK p UK p

Costs before dilution 4.82 8.52 11.74 adjustments

Dilution adjustmentsa (0.82) (0.62) (1.66)

Total direct transaction costs 4.00 7.90 10.08

Performance and charges % % %

Direct portfolio transaction 0.08 0.18 0.22 costsb

Operating chargesc 1.17 1.28 1.66

Return after charges +22.76 -3.15 -3.26

Historic yield 0.88 1.13 1.56

Other information

Closing NAV (£’000) 3,880 3,359 3,790

Closing NAV (%) 0.70 0.63 0.65

Number of shares 70,909 75,354 82,354

Highest share price (UK p) 5,468.90 5,040.25 4,831.64

Lowest share price (UK p) 4,378.24 3,407.51 4,037.51 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.

Annual Long Report and audited Financial Statements • May 2021 223 M&G UK Select Fund Financial statements and notes

Financial statements Statement of total return

2021 2020

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

Income

Net capital gains/(losses) 3 107,778 (24,099)

Revenue 5 11,901 14,077

Expenses 6 (5,686) (6,296)

Net revenue/(expense) before taxation 6,215 7,781

Taxation 7 (38) (28)

Net revenue/(expense) after taxation 6,177 7,753

Total return before distributions 113,955 (16,346)

Distributions 8 (8,739) (10,468)

Change in net assets attributable to shareholders from 105,216 (26,814) investment activities

Statement of change in net assets attributable to shareholders

2021 2020

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

Opening net assets attributable to shareholders 535,323 581,167

Amounts received on issue of shares 15,638 24,909

Amounts paid on cancellation of shares (102,200) (47,965)

(86,562) (23,056)

Dilution adjustments 144 117

Change in net assets attributable to shareholders from 105,216 (26,814) investment activities (see above)

Retained distributions on Accumulation shares 2,829 3,869

Unclaimed distributions 26 40

Closing net assets attributable to shareholders 556,976 535,323

224 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

Financial statements Balance sheet

as at 31 May Note 2021 2020 £’000 £’000

Assets

Fixed assets

Investments 546,030 503,663

Current assets

Debtors 9 1,282 1,023

Cash and bank balances 10 559 860

Cash equivalents 13,673 34,911

Total assets 561,544 540,457

Liabilities

Creditors

Distribution payable (3,865) (4,527)

Other creditors 11 (703) (607)

Total liabilities (4,568) (5,134)

Net assets attributable to shareholders 556,976 535,323

Annual Long Report and audited Financial Statements • May 2021 225 M&G UK Select Fund Financial statements and notes

Notes to the financial statements 1 Accounting policies The financial statements have been prepared in accordance with the ‘Summary of significant accounting policies’ set out on pages 9 to 12.

In determining the amount available for distribution, ordinary stock dividends have been transferred to capital, reducing the amount available.

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

3 Net capital gains/(losses)

2021 2020 for the year to 31 May £’000 £’000

Non-derivative securities 107,838 (25,002)

Currency gains/(losses) (60) 904

Transaction charges 0(1)

Net capital gains/(losses) 107,778 (24,099)

2021 %of 2020 %of for the year to 31 May £’000 transaction £’000 transaction

a) Purchases

Equities

Equities before transaction costs 142,177 246,157

Commissions 51 0.04 103 0.04

Taxes 404 0.28 845 0.34

Total purchases after transaction costs 142,632 247,105

b) Sales

Equities

Equities before transaction costs 208,187 277,832

Commissions (81) 0.04 (103) 0.04

Taxes (3) 0.00 (1) 0.00

Total sales after transaction costs 208,103 277,728

226 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

2021 %of 2020 %of £‘000 average NAV £‘000 average NAV

c) Direct portfolio transaction costs

Commissions paid

Equities 132 0.02 206 0.04

Total commissions paid 132 0.02 206 0.04

Taxes paid

Equities 407 0.08 846 0.15

Total taxes paid 407 0.08 846 0.15

Total direct portfolio transaction costsa 539 0.10 1,052 0.19

d) Indirect portfolio transaction costs

Portfolio dealing spreadb 0.13 0.13 a Costs before dilution adjustments. Please refer to the ‘Financial highlights’ section for the effect of dilution adjustments. b Average portfolio dealing spread at the balance sheet date.

5 Revenue

2021 2020 for the year to 31 May £’000 £’000

Bank interest 01

Dividends from equity investments: non-taxable 11,578 13,478

Dividends from equity investments: taxable 63

Interest distributions 19 181

Rebate of ongoing charges from underlying funds 11 14

Stock dividends 287 400

Total revenue 11,901 14,077

Annual Long Report and audited Financial Statements • May 2021 227 M&G UK Select Fund Financial statements and notes

6 Expenses

2021 2020 for the year to 31 May £’000 £’000

Payable to the ACD or associate

Annual charge 5,686 4,880

Annual management chargea 0 1,259

Administration chargea 0147

5,686 6,286

Payable to the Depositary or associate

Depositary‘s charge (including VAT)a 07

Other expenses

Audit fee (including VAT)a 02

Interest payable 01

Total expenses 5,686 6,296

a The segregated charges shown above for annual management, administration, depositary, audit and safe custody are those paid by the fund up to and including 31 July 2019 Audit fees for the financial year ending 2021 were £9,000 (2020: £9,000) (including VAT), which are covered by the annual charge.

228 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

7Taxation

2021 2020 for the year to 31 May £’000 £’000

a) Analysis of charge in the year

Corporation tax 00

Withholding tax 38 28

Deferred tax (note 7c) 00

Total taxation 38 28

b) Factors affecting taxation charge for the year

Net revenue/(expense) before taxation 6,215 7,781

Corporation tax at 20% 1,243 1,556

Effects of:

Dividends from equity investments: non-taxable (2,316) (2,695)

Stock dividends not taxable (57) (80)

Current year expenses not utilised 1,130 1,219

Withholding tax 38 28

Total tax charge (note 7a) 38 28

c) Provision for deferred taxation

Provision at the start of the year 00

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

Provision at the end of the year 00

The fund has not recognised a deferred tax asset of £29,242,000 (2020:£28,112,000 ) arising as a result of having excessmanagement expenses.We do not expect this asset to be utilised in the foreseeable future.

Annual Long Report and audited Financial Statements • May 2021 229 M&G UK Select Fund Financial statements and notes

8 Distributions

2021 2020 for the year to 31 May Inca Accb Inca Accb Dividend distributions £’000 £’000 £’000 £’000

First interim 1,817 822 1,913 1,017

Final 3,865 2,007 4,527 2,852

Total net distributions 8,511 10,309

Income deducted on cancellation of shares 284 279

Income received on issue of shares (56) (120)

Distributions 8,739 10,468

Net revenue/(expense) per statement of total return 6,177 7,753

Expenses offset against capital 2,849 3,115

Stock dividends not distributed (287) (400)

Distributions 8,739 10,468

a Distributions payable on Income shares. b Retained distributions on Accumulation shares.

9Debtors

2021 2020 as at 31 May £’000 £’000

Amounts receivable on issues of shares 68 32

Currency deals outstanding 02

Distributions receivable 010

Dividends receivable 1,177 978

Rebate of ongoing charges from underlying funds 0 1

Withholding tax recoverable 37 0

Total debtors 1,282 1,023

10 Cash and bank balances

2021 2020 as at 31 May £’000 £’000

Cash held as bank balances 559 860

Total cash and bank balances 559 860

230 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

11 Other creditors

2021 2020 as at 31 May £’000 £’000

Amounts payable on cancellation of shares 536 429

Annual charge payable 167 165

Currency deals outstanding 02

Expenses payable 011

Total other creditors 703 607

12 Contingent assets, liabilities and outstanding commitments There were no contingent assets, liabilities or outstanding commitments at the balance sheet date (2020: same).

Opening Movements Closing Share class 01.06.20 Issued Cancelled 31.05.21

Euro

Class ‘A’ Accumulation 144,408 3,300 (147,708) 0

Class ‘C’ Accumulation 7,275 1,112 (8,387) 0

Sterling

Class ‘A’ Income 7,461,242 89,715 (526,643) 7,024,314

Class ‘A’ Accumulation 3,630,503 5,092 (214,681) 3,420,914

Class ‘C’ Income 452,568 24,687 (51,200) 426,055

Class ‘I’ Income 2,009,537 89,711 (225,576) 1,873,672

Class ‘I’ Accumulation 5,636,584 430,811 (3,606,183) 2,461,212

Class ‘PP’ Income 0 20,010 0 20,010

Class ‘PP’ Accumulation 0 20,000 0 20,000

Class ‘R’ Income 3,834,022 374,408 (172,027) 4,036,403

Class ‘R’ Accumulation 13,024,454 1,220,471 (780,988) 13,463,937

Class ‘X’ Income 178,082 3,998 (14,022) 168,058

Class ‘X’ Accumulation 75,354 78 (4,523) 70,909

Annual Long Report and audited Financial Statements • May 2021 231 M&G UK Select Fund Financial statements and notes

14 Charging structure The table below sets out the charging structure for each class of share in existence at the balance sheet date. The charging structure is the same for both Income and Accumulation shares of each class.

Annual chargea Annual chargea to 14.02.21 from 15.02.21 Share class % %

Sterling

Class ‘A’ 1.20 1.10

Class ‘C’ 0.00 0.00

Class ‘I’ 0.70 0.70

Class ‘PP’ n/a 0.70

Class ‘R’ 0.95 0.95

Class ‘X’ 1.20 1.10

During the year, there were transactions with related parties of M&G Securities Limited with a total value of £nil (2020: £26,991,000).

At the balance sheet date, shareholders from within M&G plc, of which M&G Securities Limited is a wholly owned subsidiary, have holdings totalling 2.64% (2020: 11.08%) of the fund’s shares.

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

232 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

as at 31 May Assets Liabilities Assets Liabilities 2021 2021 2020 2020 Basis of valuation £’000 £‘000 £’000 £‘000

Level 1 546,030 0 503,663 0

Level2 0000

Level3 0000

546,030 0 503,663 0

18 Risk management policies The general risk management policies for the fund are set out in note 3 to the financial statements on pages 12 to 14.

19 Market risk sensitivity A five per cent increase in the value of the fund’s investment portfolio would have the effect of increasing the return and net assets by £27,302,000 (2020: £25,183,000). A five per cent decrease would have an equal and opposite effect.

20 Currency risk sensitivity and exposure Currency risk is not considered significant for the fund and is therefore not disclosed.

21 Interest rate risk sensitivity and exposure As the majority of the fund’s financial assets are non-interest bearing, the risk is not considered significant and is therefore not disclosed.

Annual Long Report and audited Financial Statements • May 2021 233 M&G UK Select Fund Financial statements and notes

22 Credit risk Credit risk is not considered significant for the fund and is therefore not disclosed.

23 Dividend distribution tables This fund pays semi-annual ordinary distributions and the following table sets out the distribution periods.

Semi-annual distribution periods

Start End Xd Payment

Interim 01.06.20 30.11.20 01.12.20 31.01.21

Final 01.12.20 31.05.21 01.06.21 31.07.21

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

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

Euro Class ‘A’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May Euro ¢ Euro ¢ Euro ¢ Euro ¢

Interim 0.2966 0.4004 0.6970 2.8224

Final 0.0000 0.0000 0.0000 7.7300

Euro Class ‘C’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May Euro ¢ Euro ¢ Euro ¢ Euro ¢

Interim 5.0148 1.5411 6.5559 7.3304

Final 0.0000 0.0000 0.0000 18.0343

234 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

Sterling Class ‘A’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 14.3480 5.6520 20.0000 20.0000

Final 23.7532 20.2339 43.9871 48.6350

Sterling Class ‘A’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 5.0164 5.7390 10.7554 13.2917

Final 25.9259 12.0429 37.9688 39.4525

Sterling Class ‘C’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 10.7621 10.4044 21.1665 20.9104

Final 20.6327 26.1942 46.8269 51.0791

Sterling Class ‘I’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 1.9270 8.0799 10.0069 9.9562

Final 7.0660 14.9956 22.0616 24.2568

Sterling Class ‘I’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 2.1592 5.1892 7.3484 7.8382

Final 11.2893 7.7177 19.0070 20.4749

Annual Long Report and audited Financial Statements • May 2021 235 M&G UK Select Fund Financial statements and notes

Sterling Class ‘PP’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim n/a n/a n/a n/a

Final 0.9673 0.0000 0.9673 n/a

Sterling Class ‘PP’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim n/a n/a n/a n/a

Final 0.8169 0.0000 0.8169 n/a

Sterling Class ‘R’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.4697 0.5209 0.9906 0.9881

Final 1.3400 0.8413 2.1813 2.4050

Sterling Class ‘R’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 0.0977 0.4548 0.5525 0.6439

Final 0.9876 0.5961 1.5837 1.7236

Sterling Class ‘X’ Income shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 12.3753 7.7580 20.1333 20.1335

Final 24.1171 20.1635 44.2806 48.9596

236 Annual Long Report and audited Financial Statements • May 2021 M&G UK Select Fund Financial statements and notes

Sterling Class ‘X’ Accumulation shares

Ordinary Group 2 Group 1 & 2 distributions Income Equalisation Distribution for the year 2021 2021 2021 2020 to 31 May UK p UK p UK p UK p

Interim 4.2534 6.3865 10.6399 13.1491

Final 22.7938 14.7674 37.5612 39.0290

Annual Long Report and audited Financial Statements • May 2021 237 Other regulatory disclosures

Remuneration The amounts shown below reflect payments made in respect of the financial year 1 January 2020 to In line with the requirements of the Undertakings for 31 December 2020. Collective Investments in Transferable Securities

(UCITS) V, M&G Securities Limited is subject to a Fixed Variable remuneration policy which is consistent with the Remuneration Remuneration Total principles outlined in the European Securities and £000 £000 £000 Markets Authority guidelines on sound remuneration Senior Management 582 711 1,293

policies under the UCITS Directive. Other Identified Staff 6,524 22,054 28,578 The remuneration policy is designed to ensure that any relevant conflicts of interest can be managed appropriately at all times and that the remuneration of Swiss investor information employees is in line with the risk policies and objectives For funds registered in Switzerland we are required by of the UCITS funds managed by the UCITS FINMA to disclose the Total Expense Ratio (TER). Management Company. Further details of the For these funds the TERs are the same as the operating remuneration policy can be found here: https:// charges disclosed in each fund’s financial highlights www.mandgplc.com/our-business/mandg- section under ‘Performance and charges. investments/mandg-investments-business-policies. The remuneration policy and its implementation is reviewed on an annual basis, or more frequently where required, and is approved by the M&G plc Board Remuneration Committee.

M&G Securities Limited is required under UCITS to make quantitative disclosures of remuneration. These disclosures are made in line with M&G’s interpretation of currently available guidance on quantitative remuneration disclosures. As market or regulatory guidance evolves, M&G may consider it appropriate to make changes to the way in which quantitative disclosures are calculated.

The ’Identified Staff’ of M&G Securities Limited are those who could have a material impact on the risk profile of M&G Securities Limited or the UCITS funds it manages and generally includes senior management, risk takers and control functions. ‘Identified Staff’ typically provide both UCITS and non-UCITS related services and have a number of areas of responsibility. Therefore, only the portion of remuneration for those individuals’ services which may be attributable to UCITS is included in the remuneration figures disclosed. Accordingly the figures are not representative of any individual’s actual remuneration.

238 Annual Long Report and audited Financial Statements • May 2021 Glossary

Accumulation shares A type of share where distributions are Comparative sector A group of funds with similar investment automatically reinvested and reflected in the value of the objectives and/or types of investment, as classified by bodies shares. such as the Investment Association (IA) or Morningstar™. Sector definitions are mostly based on the main assets a fund Accumulation units A type of unit where distributions are should invest in, and may also have a geographic focus. automatically reinvested and reflected in the value of the units. Sectors can be the basis for comparing the different Asset Anything having commercial or exchange value that is characteristics of similar funds, such as their performance or owned by a business, institution or individual. charging structure.

Asset allocation Apportioning a portfolio’s assets according Consumer Prices Index (CPI) An index used to measure to risk tolerance and investment goals. inflation, which is the rate of change in prices for a basket of goods and services. The contents of the basket are meant to Asset class Category of assets, such as cash, company be representative of products and services we typically spend shares, fixed income securities and their sub-categories, as our money on. well as tangible assets such as real estate. Convertible bonds Fixed income securities that can be Bond A loan in the form of a security, usually issued by a exchanged for predetermined amounts of company shares at government or company, which normally pays a fixed rate of certain times during their life. interest over a given time period, at the end of which the initial amount borrowed is repaid. Corporate bonds Fixed income securities issued by a company. They are also known as bonds and can offer higher Bond issue A set of fixed income securities offered for sale to interest payments than bonds issued by governments as they the public by a company or government. If the bonds are sold are often considered more risky. for the first time, it is called a ‘new issue’. Coupon The interest paid by the government or company that Bottom-up selection Selecting stocks based on the has raised a loan by selling bonds. attractiveness of a company. Credit The borrowing capacity of an individual, company or Bunds Fixed income securities issued by the German government. More narrowly, the term is often used as a government. synonym for fixed income securities issued by companies. Capital Refers to the financial assets, or resources, that a Credit default swaps (CDS) Are a type of derivative, namely company has to fund its business operations. financial instruments whose value, and price, are dependent Capital growth Occurs when the current value of an on one or more underlying assets. CDS are insurance-like investment is greater than the initial amount invested. contracts that allow investors to transfer the risk of a fixed income security defaulting to another investor. Capital return The term for the gain or loss derived from an investment over a particular period. Capital return includes Credit rating An independent assessment of a borrower’s capital gain or loss only and excludes income (in the form of ability to repay its debts. A high rating indicates that the credit interest or dividend payments). rating agency considers the issuer to be at low risk of default; likewise, a low rating indicates high risk of default. Standard & Cash equivalents Deposits or investments with similar Poor’s, Fitch and Moody’s are the three most prominent credit characteristics to cash. rating agencies. Default means that a company or government Charity Authorised Investment Fund (CAIF) An investment is unable to meet interest payments or repay the initial entity that is both a registered charity and an authorised investment amount at the end of a security’s life. investment fund. The CAIF must comply with charity law as Credit rating agency A company that analyses the financial well as financial services laws and regulations, and is usually strength of issuers of fixed income securities and attaches a treated as a registered charity for tax purposes. rating to their debt. Examples include Standard & Poor’s and Moody’s.

Credit risk Risk that a financial obligation will not be paid and a loss will result for the lender.

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Credit selection The process of evaluating a fixed income Diversification The practice of investing in a variety of assets. security, also called a bond, in order to ascertain the ability of This is a risk management technique where, in a well- the borrower to meet its debt obligations. This research seeks diversified portfolio, any loss from an individual holding should to identify the appropriate level of default risk associated with be offset by gains in other holdings, thereby lessening the investing in that particular bond. impact on the overall portfolio.

Credit spread The difference between the yield of a Dividend Dividends represent a share in the profits of a corporate bond, a fixed income security issued by a company, company and are paid out to the company’s shareholders at and a government bond of the same life span. Yield refers to set times of the year. the income received from an investment and is expressed as a Duration A measure of the sensitivity of a fixed income percentage of the investment’s current market value. security, also called a bond, or bond fund to changes in Default When a borrower does not maintain interest interest rates. The longer a bond or bond fund’s duration, the payments or repay the amount borrowed when due. more sensitive it is to interest rate movements.

Defaulted bond When a bond issuer does not maintain Duration risk The longer a fixed income security, also called a interest payments or repay the amount borrowed when due. bond, or bond fund’s duration, the more sensitive and therefore at risk it is to changes in interest rates. Default risk Risk that a debtholder will not receive interest and full repayment of the loan when due. Emerging economy or market Economies in the process of rapid growth and increasing industrialisation. Investments in Derivatives Financial instruments whose value, and price, are emerging markets are generally considered to be riskier than dependent on one or more underlying assets. Derivatives can those in developed markets. be used to gain exposure to, or to help protect against, expected changes in the value of the underlying investments. Equities Shares of ownership in a company. Derivatives may be traded on a regulated exchange or traded Exchange traded Usually refers to investments traded on an over the counter. exchange, such as company shares on a stock exchange. Developed economy/market Well-established economies Ex-dividend, ex-distribution or XD date The date on which with a high degree of industrialisation, standard of living and declared distributions officially belong to underlying investors. security. Exposure The proportion of a fund invested in a particular Dilution adjustments The dilution adjustment is used to share/fixed income security, sector/region, usually expressed protect ongoing investors against the transaction charges as a percentage of the overall portfolio. incurred in investing or divesting in respect of creations and cancellations. The dilution adjustment is made up of the direct Fixed income security A loan in the form of a security, usually and indirect transaction charges. In the financial statements issued by a government or company, which normally pays a the direct transaction charges as a percentage of average fixed rate of interest over a given time period, at the end of NAV will be disclosed. This percentage will take account of which the initial amount borrowed is repaid. Also referred to those direct transaction charges that have been recovered as a bond. through the dilution adjustment leaving a percentage that just Floating rate notes (FRNs) Securities whose interest represents the costs incurred in portfolio management. (income) payments are periodically adjusted depending on the Distribution Distributions represent a share in the income of change in a reference interest rate. the fund and are paid out to Income shareholders or Foreign exchange The exchange of one currency for another, reinvested for Accumulation shareholders at set times of the or the conversion of one currency into another currency. year (monthly, quarterly, half-yearly or annually). They may Foreign exchange also refers to the global market where either be in the form of interest distributions or dividend currencies are traded virtually around the clock. The term distributions. foreign exchange is usually abbreviated as ‘forex’ and Distribution yield Expresses the amount that is expected to occasionally as ‘FX’. be distributed by the fund over the next 12 months as a percentage of the share price as at a certain date. It is based on the expected gross income less the ongoing charges.

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Foreign exchange (FX) strategy Currencies can be an asset Income yield Refers to the income received from an class in its own right, along with company shares, fixed income investment and is usually expressed annually as a percentage securities, property and cash. Foreign exchange strategy can based on the investment’s cost, its current market value or therefore be a source of investment returns. face value.

Forward contract A contract between two parties to buy or Index An index represents a particular market or a portion of sell a particular commodity or financial instrument at a pre- it, serving as a performance indicator for that market. determined price at a future date. Examples include forward Income shares A type of share where distributions are paid currency contracts. out as cash on the payment date. Fundamentals (company) A basic principle, rule, law, or the Income units A type of unit where distributions are paid out like, that serves as the groundwork of a system. A company’s as cash on the payment date. fundamentals pertain specifically to that company, and are factors such as its business model, earnings, balance sheet Index tracking A fund management strategy that aims to and debt. match the returns from a particular index.

Fundamentals (economic) A basic principle, rule, law, or the Index-linked bonds Fixed income securities where both the like, that serves as the groundwork of a system. Economic value of the loan and the interest payments are adjusted in fundamentals are factors such as inflation, employment, line with inflation over the life of the security. Also referred to economic growth. as inflation-linked bonds.

Futures A futures contract is a contract between two parties Inflation The rate of increase in the cost of living. Inflation is to buy or sell a particular commodity or financial instrument at usually quoted as an annual percentage, comparing the a predetermined price at a future date. Futures are traded on a average price this month with the same month a year earlier. regulated exchange. Inflation risk The risk that inflation will reduce the return of Gilts Fixed income securities issued by the UK government. an investment in real terms.

Government bonds Fixed income securities issued by Initial public offering (IPO) The first sale of shares by a governments, that normally pay a fixed rate of interest over a private company to the public. given time period, at the end of which the initial investment is Interest rate risk The risk that a fixed income investment will repaid. lose value if interest rates rise. Hedging A method of reducing unnecessary or unintended Interest rate swap An agreement between two parties to risk. swap a fixed interest payment with a variable interest payment High water mark (HWM) The highest level that a fund’s NAV over a specified period of time. (net asset value) has reached at the end of any 12-month Investment Association (IA) The UK trade body that accounting period. represents fund managers. It works with investment High yield bonds Fixed income securities issued by managers, liaising with government on matters of taxation and companies with a low credit rating from a recognised credit regulation, and also aims to help investors understand the rating agency. They are considered to be at higher risk of industry and the investment options available to them. default than better quality, ie higher-rated fixed income Issuer An entity that sells securities, such as fixed income securities but have the potential for higher rewards. Default securities and company shares. means that a company or government is unable to meet interest payments or repay the initial investment amount at the Investment grade bonds Fixed income securities issued by a end of a security’s life. company with a medium or high credit rating from a recognised credit rating agency. They are considered to be at Historic yield The historic yield reflects distributions declared lower risk from default than those issued by companies with over the past 12 months as a percentage of the share price, as lower credit ratings. Default means that a company or at the date shown. government is unable to meet interest payments or repay the initial investment amount at the end of a security’s life.

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Issuer An entity that sells securities, such as fixed income Open-ended investment company (OEIC) A type of managed securities and company shares. fund, whose value is directly linked to the value of the fund’s underlying investments. Leverage When referring to a company, leverage is the level of a company’s debt in relation to its assets. A company with Options Financial contracts that offer the right, but not the significantly more debt than capital is considered to be obligation, to buy or sell an asset at a given price on or before leveraged. It can also refer to a fund that borrows money or a given date in the future. uses derivatives to magnify an investment position. Over-the-counter (OTC) Whereby financial assets are traded Liquidity A company is considered highly liquid if it has plenty directly between two parties. This is in contrast to exchange of cash at its disposal. A company’s shares are considered trading, which is carried out through exchanges set up highly liquid if they can be easily bought or sold since large specifically for the purpose of trading. OTC is also known as amounts are regularly traded. off-exchange trading.

Long position Refers to ownership of a security held in the Overweight If a fund is ‘overweight’ a stock, it holds a larger expectation that the security will rise in value. proportion of that stock than the comparable index or sector.

Macroeconomic Refers to the performance and behaviour of Payment date The date on which distributions will be paid by an economy at the regional or national level. Macroeconomic the fund to investors, usually the last business day of the factors such as economic output, unemployment, inflation and month. investment are key indicators of economic performance. Physical assets An item of value that has tangible existence, Sometimes abbreviated to ‘macro’. for example, cash, equipment, inventory or real estate. Maturity The length of time until the initial investment Physical assets can also refer to securities, such as company amount of a fixed income security is due to be repaid to the shares or fixed income securities. holder of the security. Portfolio transaction cost The cost of trading, such as Modified duration A measure of the sensitivity of a fixed brokerage, clearing, exchange fees and bid-offer spread as income security, called a bond, or bond fund to changes in well as taxes such as stamp duty. interest rates. The longer a bond or bond fund’s duration, the Preference shares Preference shares are a loan to a company more sensitive it is to interest rate movements. that may be traded in the same way as ordinary shares, but Monetary easing When central banks lower interest rates or generally have a higher yield and pay dividends on fixed dates. buy securities on the open market to increase the money in Preference shares have varying characteristics as to the circulation. treatment of the principal and the dividend payment, which includes ranking them above ordinary shares when it comes to Monetary policy A central bank’s regulation of money in dividend payments. circulation and interest rates. Principal The face value of a fixed income security, which is Monetary tightening When central banks raise interest rates the amount due back to the investor by the borrower when the or sell securities on the open market to decrease the money in security reaches the end of its life. circulation. Private placement An offer of sale of securities to a relatively Morningstar™ A provider of independent investment small number of investors selected by the company, generally research, including performance statistics and independent investment banks, mutual funds, insurance companies or fund ratings. pension funds. Near cash Deposits or investments with similar Property Expense Ratio (PER) Property expenses are the characteristics to cash. operating expenses that relate to the management of the Net asset value (NAV) A fund’s net asset value is calculated property assets in the portfolio. These include: insurance and by taking the current value of the fund’s assets and rates, rent review and lease renewal costs and maintenance subtracting its liabilities. and repairs, but not improvements. They depend on the level of activity taking place within the fund. The Property Expense Ongoing Charge Figure The ongoing charge figure Ratio is the ratio of property expenses to the fund’s net asset represents the operating costs investors can reasonably value. expect to pay under normal circumstances.

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Real yield The return of an investment, adjusted for changes Short-dated corporate bonds Fixed income securities issued in prices in an economy. by companies and repaid over relatively short periods.

Retail Prices Index (RPI) A UK inflation index that measures Short-dated government bonds Fixed income securities the rate of change in prices for a basket of goods and services issued by governments and repaid over relatively short in the UK, including mortgage payments and council tax. periods.

Risk The chance that an investment’s return will be different Sovereign debt Debt of a government. Also referred to as to what is expected. Risk includes the possibility of losing government bonds. some or all of the original investment. Sub-investment grade bonds Fixed income securities issued Risk management The term used to describe the activities by a company with a low rating from a recognised credit rating the fund manager undertakes to limit the risk of a loss in a agency. They are considered to be at higher risk from default fund. than those issued by companies with higher credit ratings. Default means that a company or government is unable to Risk premium The difference between the return from a risk- meet interest payments or repay the initial investment amount free asset, such as a high-quality government bond or cash, at the end of a security’s life. and the return from an investment in any other asset. The risk premium can be considered the ‘price’ or ‘pay-off’ for taking Suspended Temporarily halting the trading of a listed security on increased risk. A higher risk premium implies higher risk. on the stock exchange. It can be voluntary (requested by the issuing company) or imposed by regulators. Typically, trading Risk-free asset An asset that notionally carries no risk of suspensions are introduced ahead of important news nonpayment by the borrower such as a high-quality fixed announcements, following technical glitches, or due to income security issued by a government or cash. regulatory concerns. Risk/reward ratio A ratio comparing the expected returns of Swing pricing Swing pricing is a method of protecting long- an investment with the amount of risk undertaken. term shareholders in the fund from bearing the costs of Safe-haven assets Refers to assets that investors perceive to transactions carried out by shorter-term investors. When be relatively safe from suffering a loss in times of market investors buy or sell shares in the fund, the fund manager has turmoil. to buy or sell underlying securities to either invest the cash obtained from investors, or to provide them with cash in Security Financial term for a paper asset – usually a share in exchange for their shares. Swing pricing essentially adjusts a company or a fixed income security also known as a bond. the fund shares’ daily price to take into account the costs of Share class Each M&G fund has different share classes, such buying or selling the underlying securities held by the fund. as A, R and I. Each has a different level of charges and This ensures that transaction costs such as brokerage fees minimum investment. Details on charges and minimum and administrative charges are borne by those investors who investments can be found in the Key Investor Information trade shares in the fund, not by those who remain invested in Documents. the fund. (Also see dilution adjustment).

Share class hedging Activities undertaken in respect of Top-down investing An investment approach that analyses hedged shares to mitigate the impact on performance of economic factors, ie surveys the ‘big picture’, before selecting exchange rate movements between the fund’s currency which companies to invest in. The top-down investor will look exposure and the investor’s chosen currency. at which industries are likely to generate the best returns in certain economic conditions and limit the search to that area. Short position A way for a fund manager to express his or her view that the market might fall in value. Total return The term for the gain or loss derived from an investment over a particular period. Total return includes Short selling This often refers to the practice whereby an income (in the form of interest or dividend payments) and investor sells an asset they do not own. The investor borrows capital gains. the asset from someone who does own it and pays a fee. The investor must eventually return the borrowed asset by buying Treasuries Fixed income securities issued by the US it in the open market. If the asset has fallen in price, the government. investor buys it for less than they sold it for, thus making a profit. The contrary may also occur.

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Triple A or AAA rated The highest possible rating a fixed Volatility The degree to which a given security, fund, or index income security, also called a bond, can be assigned by credit rapidly changes. It is calculated as the degree of deviation rating agencies. Bonds that are rated AAA are perceived to from the norm for that type of investment over a given time have the lowest risk of default. Default means that a company period. The higher the volatility, the riskier the security tends or government is unable to meet interest payments or repay to be. the initial investment amount at the end of a security’s life. Warrant A security issued by a company that gives the holder UCITS Stands for Undertakings for Collective Investment in the right to buy shares in that company at a specified price Transferable Securities. This is the European regulatory and within a certain timeframe. framework for an investment vehicle that can be marketed Yield This refers to either the interest received from a fixed across the European Union and is designed to enhance the income security or to the dividends received from a share. It is single market in financial assets while maintaining high levels usually expressed as a percentage based on the investment’s of investor protection. costs, its current market value or its face value. Dividends Unconstrained The term used to describe the mandate of a represent a share in the profits of the company and are paid fund whereby the manager has the freedom to invest out to a company’s shareholders at set times of the year. according to his or her own strategy, not being obliged to Yield (equity) Refers to the dividends received by a holder of allocate capital according to the weightings of any index, for company shares and is usually expressed annually as a example. percentage based on the investment’s cost, its current market Underlying value The fundamental value of a company, value or face value. Dividends represent a share in the profits reflecting both tangible and intangible assets, rather than the of the company and are paid out to a company’s shareholders current market value. at set times of the year.

Underlying yield Refers to the income received by a managed Yield (bonds) This refers to the interest received from a fixed fund, and is usually expressed annually as a percentage based income security and is usually expressed annually as a on the fund’s current value. percentage based on the investment’s cost, its current market value or its face value. Underweight If a portfolio is ‘underweight’ a stock, it holds a smaller proportion of that stock than the comparable index or Yield (income) Refers to the income received from an sector. investment and is usually expressed annually as a percentage based on the investment’s cost, its current market value or Unit trust A type of managed fund, whose value is directly face value. linked to the value of the fund’s underlying investments.

Unit/share type Type of units/shares held by investors in a trust or fund (unit/share types differ by features such as whether income is to be paid out as cash or reinvested on the payment date).

Unlisted/unquoted stocks Shares of ownership in companies that are not listed on a public exchange, known as private companies.

Valuation The worth of an asset or company based on its current price.

Volatile When the value of a particular share, market or sector swings up and down fairly frequently and/or significantly, it is considered volatile.

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: No. 90776.

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