M&G (Lux) Income Allocation Fund

A multi-asset portfolio designed to seek income as an outcome

The 'Episode' investment philosophy

The M&G Multi Asset team believes that financial markets often move irrationally because investors allow their emotions to affect their decision-making. Using a robust valuation framework, they examine the economic environment to find occasions – ‘episodes’ – where investor behaviour has moved asset prices away from their long-term fair value.

The bulk of the fund is dedicated to generating a stable income but the fund manager may also take high-conviction asset allocation views in order to generate capital that may be reinvested for income.

Fund proposition

The fund has two aims:

• to provide a growing level of income over any three-year period through investment in a range of global assets;
• to provide capital growth of 2-4% on average per year over any three-year period.

The fund manager expects the fund to have an annualised volatility of between 4% and 8%.

The fund will normally invest directly in a mix of income-generating assets globally within the following net allocation ranges, which reflect the sum total of long and short positions.

*Excluding cash and cash equivalents.

**Mainly real estate-related securities, convertibles and infrastructure assets.

Neutrality is the positioning of the fund if all assets were trading at their ‘fair value’. This can be thought of as a strategic asset allocation. In an ideal world, when all assets were trading at their ‘fair value’, then neutrality would be how a fund was positioned, given its strategy and risk profile. However, assets seldom trade at fair value, so the actual allocation of the fund may not match the neutral position.

The fund derives income from diversified sources, as illustrated below:

Diversification of income (% of fund)

Weighted contribution to the fund’s income (gross)***

Source: M&G, 31 August 2022. ***Expected income for the next 12 months. †The estimated annual yield is based on the gross income, before withholding tax, expected to be received from the underlying investments in the fund as a percentage of the current fund share price. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product. Future performance is subject to taxation which depends on the personal situation of each investor and may change in the future.

Reasons to invest

• The fund has the potential to deliver income, while managing volatility, via a diversified portfolio that can invest in a variety of assets across all major investable markets. This includes equities and bonds issued by both governments and companies.
• The fund therefore offers the opportunity to combine the advantages of different asset classes in a single portfolio, while reducing the risks associated with pursuing income from a single asset class.
• The fund has an innovative investment approach that combines macroeconomic research and in-depth valuation analysis with elements of behavioural finance. This approach has been developed and operated by the M&G Multi Asset team for over two decades.

Valuation framework: Sample of assets, showing real yield against neutrality

The fund managers evaluate the macroeconomic environment and look for instances where investor emotion has moved asset classes away from what the managers assess to be their long-term ‘fair value’ or ‘neutrality’.

Fund

Source: Refinitiv Datastream, 9 July 2022. for illustrative purposes only. The green columns show the expected return or real yield from each type of asset. The neutrality band is the level where the fund managers perceive the real yield to be a ‘fair’ reflection of the assets’ underlying value. *Real yield for equity is defined as an inverted p/e ratio, using forward consensus data. The above data is a hypothetical representation for illustrative purposes only and is not representative of any M&G product or strategy. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. This chart represents just the starting point for the team’s investment process and behavioural finance insights are crucial to its interpretation. M&G does not have house views.

Fund facts

Source of fund facts: M&G as at 31.08.22.

*The fund is actively managed and has no benchmark. Investors can assess the performance of the fund by its objective to provide a growing level of income and capital growth of 2-4% per annum, both measured over any three-year period.

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

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. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

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 is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of currency movements in currency exchange rates.

Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.

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 may lose as much as or more than the amount invested.

Investments in assets from China are subject to changeable political, regulatory and economic conditions, which may cause difficulties when buying, selling or collecting income from these investments. In addition, such investments made via the 'Stock Connect' system or traded on the China Interbank Bond Market, may be more susceptible to clearing, settlement and counterparty risk. These factors could cause the fund to incur a loss.

The hedging process seeks to minimise, but cannot eliminate, the effect of movements in exchange rates on the performance of the hedged share class. Hedging also limits the ability to gain from favourable movements in exchange rates.

Further details of the risks that apply to the fund can be found in the fund's Prospectus.

The fund allows for the extensive use of derivatives.

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.