Dear investor,
Given high levels of recent market volatility and the meaningful loss of value in The M&G Charity Multi Asset Fund – coming shortly after some significant changes to the structure and management of the fund – we thought investors would appreciate an update on our views.
Primarily, we would like to emphasise that while there have been changes to fund structure and personnel, the key characteristics have not changed. The fund continues to operate with an equity range between 65% and 90%, has the bulk of exposures in Sterling denominated assets, and seeks to maintain distributions that steadily rise in cash terms over time (a yield of at least 3%). This strong bias towards equities reflects the longer-term outlook of our investors and our investment philosophy. We recognise that ‘multi asset’ portfolios come in many different forms and, by and large, those with larger allocations to equities will have suffered more severe falls in March than those with a more balanced/cautious profile; however, it is important to remember that, on the flip side, portfolios that maintain a heavier bias towards equities will maintain more robust income flows during the downturn, and will invariably post stronger recoveries in capital value as we emerge from periods of extreme market stress.
What has changed is the flexibility on offer to the fund to make use of different funds across M&G’s suite of products to diversify exposures and capture a greater range of opportunities, and to make use of fund reserves to smooth the pattern of distributions in the face of volatility.
Nature and drivers of drawdown
As we entered March, the portfolio was positioned toward the middle of its equity range, light on bonds (with some emerging market exposure), and had a relatively high cash position, reflecting the fund manager’s view of the relative attractiveness of equity markets and concerns about very low yields on UK government bonds in particular.
In March itself, it was UK-focused equity positions which were the main detractors from return, given their focus on higher dividend payers. In a month in which diversification was hard to come by, UK and other developed government bonds provided some diversification but were not enough to prevent sharp losses.
Fund Responses
The volatility in March presented the opportunity to add to and diversify the fund’s equity exposures. New positions were opened in the M&G Global Select Fund and M&G Positive Impact fund. These are global equity funds run by the same manager and have a bias toward companies with strong balance sheets; the latter fund holds positions in companies which aim to solve social and environment problems, including health care companies.
Distributions
Dividend payments have been hit hard by the virus lockdown (since the 12th March, 200 UK companies have announced the omission or deferral of dividends), while low bond yields are not in a position to make up the shortfall. It is for just such situations that the fund’s income reserve facility was introduced under the previous ‘NAACIF’ fund structure, and this has been carried over in to the new fund. At present the environment remains very fluid and so we would be wary of looking ahead to make bold forecasts of distributions over the coming year. However, recent years of good performance and strong income growth have allowed for a reserve to be built up, leaving the fund in a position to put some of this to work to distribute to clients. At this stage, we foresee no reason why the fund cannot maintain the same level of income in 2020/21 as we delivered last year (3.50p per income unit). Since conversion in November 2019, this fund now has a broader remit to access a wider range of income streams from different global assets.
Conclusion
It is our firm belief that the fund is well positioned to take advantage of a strong recovery when it comes. At present valuations (end of April), the distribution yield now stands at 4.60%; this is attractive both for those seeking a strong income cashflow, and as a significant contribution to future total return.
As more clarity emerges we will endeavour to communicate as much as possible. Part of this will be in the form of our new monthly fund reports, the first of which are attached.
If you have any further questions regarding performance or portfolio positioning on the M&G Charity Multi Asset Fund, please contact me directly on 020 3977 3623, or via email at charities@mandg.co.uk. I am also available for ‘virtual’ meetings if your Investment Committee or Trustee Board would appreciate a more comprehensive update, along with my colleagues Tristan Hanson (Fund Manager) and Stuart Canning (Deputy Fund Manager).
Should you have any administrative queries, or require copies of valuation statements and distribution vouchers, please contact our Charities Helpline on 0800 917 4472 or email info@mandg.co.uk.
Richard Macey
Director of Charities, UK Distribution
M&G Investments