Portfolio benefits of the M&G (Lux) Episode Macro Fund

4 min read 10 Jun 24

  • The M&G (Lux) Episode Macro Fund implements a highly tactical discretionary macro strategy with a unique investment philosophy combining valuation discipline and behavioural finance influences.
  • Highly flexible, investing across equities, fixed income and currencies across developed and emerging markets.
  • Adding exposure to both traditional and alternatives portfolios can offer material risk/return benefits.

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. Where any performance is mentioned, please note that past performance is not a guide to future performance. 


Philosophy and source of edge

The M&G (Lux) Episode Macro Fund seeks to generate returns by identifying instances when asset prices have moved away from fundamental value, as a result of human emotion. This is based on a belief that these instances have a high likelihood of correcting over the medium term due to the short-term nature of behavioural influences.

The fund will form a predisposition to be long or short of particular assets based on valuation signals and then will engage in tactical exposures (normally in a contrarian fashion) in response to periods of excess volatility (or ‘episodes’).

Flexibility and universe

Positions are taken primarily at the index level via liquid derivative instruments where available, such as futures, forwards and CDX/CDS (for credit) contracts, and occasionally through ETFs and baskets. The strategy can invest flexibly (both long and short) and is focused on directional and relative value bets across all investible asset classes, offering a genuine liquid alternative, in our view.

Please see a link to the fund questionnaire that provides more details on the investment philosophy and strategy here

Absolute investment objective

The fund aims to provide a total return of cash +4-8% a year over any five-year period. 

Investment Performance

In our view, the strategy has delivered on its stated investment objective since inception and most investment horizons (exhibit 1).

Past performance is not a guide to future performance

Exhibit 1: Absolute returns versus cash +4%
Source: Morningstar, as at 30 April 2024, EUR S-H share class, net income reinvested, price-to-price. *Benchmark = Euro Short-Term Rate (ESTR) + 4-8%. Prior to 3 August 2021 the benchmark was 3-month EUR LIBOR + 4-8%. With effect from 3 August 2021 the benchmark is ESTR + 4-8%. Performance prior to 26 October 2018 refers to the EUR class S-H shares of the M&G Episode Macro Fund (a UK-authorised OEIC). The non-sterling share classes of the OEIC merged into the M&G (Lux) Episode Macro Fund (a Luxembourg-authorised SICAV) on 26 October 2018. Tax rates and charges may differ. The benchmark is a target which the fund seeks to achieve. The rate has been chosen as the fund’s benchmark as it is an achievable performance target and best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund's portfolio construction. The fund is actively managed. The investment manager has complete freedom in choosing which assets to buy, hold and sell in the fund.  The fund launched on 26 October 2018 and the EUR Class S-H Accumulation share class launched on 26 October 2018. Benchmark performance has been calculated in EUR.

Performance data does not take account of the commissions and costs that may incur on the issue and redemption of units. 

Calendar-year performance, 10 years (pa %)
  2023 2022 2021 2020 2019 2018 2017 2016 2015 2014
Fund (EUR S-H Acc)  6.4 16.4 -4.1 6.1 11.0 -10.3 7.7 8.9 1.4 10.0
Benchmark * 7.4 4.0 3.4 3.6 3.6 3.6 3.6 3.7 4.0 4.2

The fund can perform well:

  • After bouts of extreme volatility (which creates episodes), eg the equity collapse in H1 2020, or in bonds in H2 2023.
  • Periods in which valuations dislocations adjust, eg the bond sell-off in 2022 and even in less volatile phases like 2019.

The fund is likely to do less well:

  • When valuations on major assets are not at extremes and volatility is low, such as in 2021
  • When valuation dislocations persist or increase eg ‘cheap’ assets getting cheaper such as 2012

However we believe the volatility profile of the strategy itself has been well contained over longer periods, with delivered volatility of the strategy measuring in the high single digits across longer time horizons. These elements in our view, have resulted in the strategy delivering superior risk-adjusted returns than both equities and bonds over the longer term (exhibit 2).

Exhibit 2: M&G (Lux) Episode Macro Fund: 10-year Annualised volatility versus return
Source: M&G, Bloomberg, 30 April 2024. Inception date of the fund: 30 June 2010. Performance and risks statistics calculated net of fees for the appropriate share class using monthly data. Periods over 1 year are annualised. Risk and return is shown in comparison to broad equity and bond indices as a measure of risk and return with in investors’ wider portfolios

Potential diversification benefits to traditional portfolios

In addition to the strategy’s compelling returns, we believe the nature of the return delivery and correlation characteristics vs the major asset classes add to the attractiveness of the strategy as part of a broader portfolio.

In the life of the UCITS vehicle, the strategy has shown modest positive equity correlation, and close to zero correlation to global bonds.

Exhibit 3: Rolling 1 year daily correlation to equities and bonds
Equity correlations are calculated versus the corresponding daily returns for the MSCI All Country World Index (ACWI) and versus the Bloomberg Global Aggregate Bond Index.
Source: M&G, Bloomberg. Inception date of the fund: 30 June 2010. Correlations are based on 260 daily observations (to approximate 1 year of trading days). MSCI All Country World (ACWI) index is a broad equity index covering developed and emerging markets and used here to represent the equity market. Bloomberg Global Aggregate (USD) is a broad global fixed income index covering developed market sovereign, investment grade credit and asset back securities

Since the inception of the strategy in 1999, the portfolio has displayed both long and short exposure to major asset classes.

Exhibit 4: Episode Strategy target weights since inception
Source: M&G, 31 December 2023. For illustrative purpose only, subject to change

Potential diversification benefits to alternative exposures

The strategy’s uncommon approach and philosophy means that it has also delivered returns uncorrelated with other alternative investments, and within the macro space.

Since the fund often seeks to capture tactical opportunities in a contrarian fashion, it can periodically behave differently to other macro strategies that have an emphasis on trending behaviour (such as CTAs) and/or economic forecasting based approaches.

Exhibit 5: Calendar year returns versus various asset classes

Past performance is not a guide to future performance

Source: Refinitiv Datastream, Bloomberg, end 2023. ‘Equity’ = MSCI ACWI USD Total Return, ‘Bond’ = FTSE World Government Bond Index, ‘Commodity’ = Bloomberg Commodity Index, ‘Real Estate’ = FTSE EPRA/NAREIT Global REIT Index, ‘Private Equity’ = LPX50 Private Equity Index Total Return, ‘Leveraged Loans’ = Morningstar LSTA US leveraged Loan Total Return, ‘Cat Bond’ = Swiss Re Global Cat Bond Performance Index Total Return, ‘Market Neutral’ = Credit Suisse Equity Market Neutral Index, ‘Macro: Discretionary’ = Soc Gen Discretionary Macro Index, ‘Macro: CTA’ = Soc Gen CTA Index.

Upside and downside capture

The flexibility in allocating capital across various asset classes from both the long and the short end allows the fund to display varying sensitivities to bonds and equities in different market environments.

This has been the case over the past five years when it has generally exhibited positive beta to bonds and equities in months where they have risen and low / negative beta in weaker markets (exhibit 6).

Exhibit 6: Sensitivity to moves in major asset classes over the last 5 years
Betas are calculated versus the corresponding monthly returns for the MSCI All Country World Index (ACWI) and versus the Bloomberg Global Aggregate Bond Index. Source: M&G, Bloomberg. MSCI All Country World (ACWI) index is a broad equity index covering developed and emerging markets and used here to represent the equity market. Bloomberg Global Aggregate (USD) is a broad global fixed income index covering developed market sovereign, investment grade credit and asset back securities.

Such varying exposure to market beta can be especially attractive to long only portfolios in phases of heightened volatility.

The past five years serve as a very good example of this.  While a balanced 60-40 mix of global equities and bonds has generated a compelling annualized return of close to 8% over this period, the period has seen significant volatility in early 2020 and especially in 2022.

As illustrated in exhibit 7, adding exposure to M&G’s Episode Macro strategy through this period would have significantly reduced volatility and drawdowns, while preserving (indeed enhancing) returns over this period. 

Exhibit 7: Risk return impact of adding Episode macro to a 60/40 portfolio
Source: Bloomberg. For illustrative purposes only. Analysis based on 60 monthly observations for the 5 year period ending 31 December 2023 and assumes adding an incremental allocation of M&G (Lux) Episode Macro Fund (USD S Acc) to a starting portfolio of the Bloomberg Global Equity:Bond 60:40 Index, a broad market index designed to measure cross-asset market performance globally.


In two decades pre-COVID, traditional balanced multi asset funds stood out as providing attractive returns while benefitting from the negative correlation between bonds and equities when they were most needed.

The pandemic and its aftermath appear to have prompted a shift in this regime with consequences for future growth, inflation and real interest rate structures. The experience of 2022 highlighted the dangers of extrapolating historic patterns of returns across bonds and equities and a renewed for flexible strategies.

With consistent philosophy, repeatable (and liquid) process, and a successful track record dating back to the late 1990s, we believe the Episode Macro Strategy offers an opportunity to generate absolute returns while diversifying long only portfolios regardless of the regime.

Fund description

  • The fund typically invests via derivatives in a mix of assets, including company shares, bonds, currencies, and cash or assets that can be turned quickly into cash from anywhere in the world, including emerging markets. The fund may also invest in these assets directly or through other funds. The fund may invest in China A-Shares and in Chinese bonds denominated in renminbi.
  • The fund may invest in asset-backed securities, convertibles, contingent convertible debt securities, other funds and property-related securities. The fund may also invest in cash or assets that can be turned into cash quickly.
  • The fund aims to provide a combination of capital growth and income of 4-8% a year above the Secured Overnight Financing Rate (SOFR), over any five-year period.
  • The recommended holding period is 5 years.

Main risks associated with the fund

  • Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund.
  • The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
  • The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset’s value vary in an unexpected way, the fund will incur a loss. The fund’s use of derivatives may be extensive and exceed the value of its assets (leverage). This has the effect of magnifying the size of losses and gains, resulting in greater fluctuations in the value of the fund.
  • The fund may be highly concentrated at times in a limited number of investments or areas of the market, which could result in large price rises and falls.
  • Investing in emerging markets involves a greater risk of loss as there may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
  • Please note, investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as a building or shares of a company, as these are only the underlying assets owned by the fund.
  • Further details of the risks that apply to the fund can be found in the fund’s Prospectus.

The views expressed in this document should not be taken as a recommendation, advice or forecast. The information provided should not be considered a recommendation to purchase or sell any particular security

This is a marketing communication. Please refer to the Prospectus and the KID before making any final investment decision.

Learn more about the fund

By M&G Investments

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Related insights