Allocation

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Multi-Asset investment approach

At M&G, our multi-asset team has been applying its unique investment philosophy and process for over 15 years.

At the heart of their approach is a belief that investors often make judgements based on emotional impulses, like fear or greed, which can lead to irrational decision-making. When this behaviour is repeated throughout financial markets, assets can become mispriced. The team believes that when assets become too cheap, or too expensive, it can present compelling opportunities for long-term investors.

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.

  • Valuation Framework
  • Dynamic asset allocation
  • Diversification
 
 
 
valuation-framework

Source: M&G 2018, for illustrative purposes only. The green columns show the expected return or real yield from each type of asset. The grey neutrality band is the level where the fund managers perceive the real yield to be a ‘fair’ reflection of the asset’s underlying value. Please note that this chart represents just the starting point for the team’s investment process and that behavioural finance insights are crucial to its interpretation. M&G does not have house views.

Establishing which assets appear attractively or unattractively priced is the cornerstone of the investment process. The team assesses a ‘fair value’ for a wide range of assets by looking at expected long-term returns. This ‘neutrality’ is then compared with the real yield of these assets, being the return expected after adjusting for inflation.

Where an asset’s real yield is above or below neutrality because of emotional market behaviour, this could create an opportunity for investment.

 
 
 
dynamic-asset-allocation

Source: M&G, Datastream, 31 December 2017.

Past performance is not a guide to future performance.

M&G’s Multi Asset team have a flexible investment approach and can adapt quickly and successfully to changing environments.

Dynamic asset allocation is achieved by identifying and exploiting opportunities created during ‘episodes’, when human behaviour makes markets do strange and unpredictable things.

 
 
 
asset-class-diversification

All the funds in M&G’s Allocation range are actively managed to exploit opportunities throughout the global investment universe.

By investing across a range of asset classes and sectors, a diversified approach spreads risk. As different types of assets can behave differently under different conditions, it can also help to smooth the overall path of investor returns.

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Episodes

‘Episodes’ when asset prices are moved by investor emotions are usually temporary and can therefore present opportunities to adjust strategic allocation or tactically implement shorter-term ideas. Common characteristics of ‘episodes’ include:
Investors only focused on a single story
Rapid price movement, up or down
Price response inconsistent with observable fundamental factors
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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.

  • Brexit

    Layer 4
  • The election of Donald Trump
    Layer 5
  • Weakness in the Mexican peso
    Layer 6
Market expectation Brexit: market sentiment was very negative in the first half of 2016, which was then compounded by Brexit.
Our reaction We added banking and Asian equity during this period as we believed the market was significantly undervaluing the asset class in light of robust signs of global recovery.
Outcome This decision led to gains for the funds as equities recovered in the second half of 2016.
Market expectation The election of Donald Trump as US president was unexpected and caused considerable market uncertainty.
Our reaction We maintained our equity positioning and increased our allocation to emerging market government bonds ahead of the election in the belief that this political ‘noise’ did not affect the economic fundamentals.
Outcome This meant that the funds were well-positioned for the sustained period of economic growth that developed from the end of 2016.
Market expectation Expectations of political risk and panic selling affected the price of the Mexican currency at the end of 2016.
Our reaction We identified the currency movement as a ‘mini-episode’, meaning that we expected the value of the peso to rebound once fears abated. We therefore increased exposure to the currency in the Dynamic Allocation and Prudent Allocation funds in January 2017.
Outcome This investment was highly successful; in March 2017 the peso rose in value against the US dollar by almost 6%.

M&G Allocation range

A choice of four funds to suit different client needs

M&G (Lux) Conservative Allocation Fund
10% 20% 70% COAL
A flexible fund that targets a conservative level of capital growth.
M&G (Lux) Dynamic Allocation Fund
10% 40% 50% DNA
A highly flexible fund that targets a balanced level of capital growth.
M&G (Lux) Income Allocation Fund
10% 30% 60% INAL
A flexible fund that seeks diverse sources of income across asset classes.
M&G (Lux) Sustainable Allocation Fund
10% 40% 50% DNA
A new fund that combines our multi-asset approach with a strong ESG focus.

Source: M&G, Datastream, 31 March 2019.

Neutral positions
Equity
Fixed income: excludes cash and cash equivalents
Others: (including asset-backed securities, convertibles and infrastructure assets)

The pie charts above show the neutral positions of the funds 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 each fund may not match the neutral position.

Fixed income assets are generally regarded as more stable investments compared to equities, where the returns can be perceived as riskier as they may be less predictable.

The funds allow for the extensive use of derivatives.

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.

Consult the glossary

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The collective investment schemes referred to in this document (the "Schemes") are open-ended investment companies with variable capital, incorporated in England and Wales. Société Générale, Paris, Zurich Branch, Talacker 50, P.O. Box 5070, 8021 Zurich acts as the Swiss representative of the Schemes (the "Swiss Representative") andacts as their Swiss paying agent. The Instrument of Incorporation, Prospectus, the Key Investor Information Document, as well as the annual or interim Investment Report and Financial Statements of the Schemes (each in their respective latest version approved by the Swiss Financial Market Supervisory Authority, in German) can be obtained free of charge from the Swiss Representative in Zurich.


The value of 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.