Sub Prime, Bear Market & Recession -Investment Opportunity or too much risk? Bankhall Adviser Forum – March 2009 George Pullar – Investment Development Manager

A Stellar time for bonds, the search for extra income? Bankhall and Prudential March 2009 Graeme Abell – Partnerships Director

3 Mission control – countdown to lift off!  A tour of the universe (market update)  Mystic M&G’s predictions for 2009  How to stop being sucked into a black hole (UCITS III)  M&G – our very own stars

4 Mission control – countdown to lift off!  A tour of the universe (market update)  Mystic M&G’s predictions for 2009  How to stop being sucked into a black hole (UCITS III)  M&G – our very own stars

5 Houston we have a problem Huge bust following huge boom – prices falling twice as fast as during Great Depression Source: S&P/Case-Shiller Composite-20 Index yoy, November 2008 % change, yoy Nominal -18.2% Real -20.2% November 2008

6 Its all gone Apollo 13 A three year crash – eight years to regain peak Source: Datastream as at September 2008 UK house prices: the last recession Average House Price Average Annual Income

7 Its all gone Apollo 13 A long way from cheap A ’90s style’ adjustment in affordability would bring a 55% peak-to-trough drop in the average house price Source: Datastream as at December 2008 UK house prices: the current recession Average House Price Average Annual Income

8 Time for re-entry Deflation later this year? Inflation to stay low… % *Sterling overnight index minus 0.12% 3% max limit 1% min limit 2% target M&G’s UK inflation expectations Source: M&G, Bloomberg, 5 February 2009

9 Source: M&G Changes in inflation following banking crises Wall Street Crash 1929 Savings & Loans 1980s Japanese bubble bursting 1980s Swedish Banking Crisis 1990s Asian Financial Crisis 1997 Global Credit Crunch 2007 ? Changes in inflation over two years - 9% - 12% - 2.5% - 7.5% - 3.5% This time it’s no different

10 Over the moon or in a black hole? 2009 Inflation 1.1% below 1%? CoreFood / Energy 1.6%2.2% (82%)(18%) 1.4%0% 2008 Headline inflation 3.8% Source: Bloomberg, as at 31 July 2008

11 Source: M&G, Bloomberg, 06 January 2009 % We’re in for a bumpy ride Low interest rates and low inflation… *Sterling overnight index minus 0.12% 3% max limit 1% min limit 2% target Bond market interest rates expectations UK interest rates will stay lower for longer

12 Mission control – countdown to lift off!  A tour of the universe (market update)  Mystic M&G’s predictions for 2009  How to stop being sucked into a black hole (UCITS III)  M&G – our very own stars

13 Mystic M&G…..

14 “Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value” Warren Buffett, 17 October 2008 Space junk… Cash is trash

15 Cash burns long but dimly… £1000 invested from 31 Dec 1969 to 31 st Oct 2008 (net income reinvested) Source: Morningstar and M&G Statistics as at end December 2008 £7,599 £625

16 Into the vortex - the credit crunch Crunch time for bonds Source: Deutsche Bank, Bloomberg, as at June 2007 June 2007: were investment grade bonds attractive? Recession Economic boom Spreads tightest since 1978 %

17 Oct 2008 : are investment grade corporate bonds attractive now? Are bond spreads still in a hole? Into the vortex - the credit crunch Recession Economic boom Spreads tightest since 1978 % Spreads widest EVER Source: Deutsche Bank, Bloomberg, as at 03 December 2008

18 Into the vortex - the credit crunch Basis points BBB spreads now at 1932 levels BBB spreads since 1925 US data since 1925, Europe & UK since 1997 US 773 UK 758 Source: Morgan Stanley, Moody’s, The Yield Book, NBER, Bloomberg/Merrill Lynch, as at 05 January 2009

19 Heading for a ‘cash’ landing Yield to maturity/interest rate Cash accounts now offer close to zero, but you can receive 7.4% per year for 23 years if you buy a Vodafone bond Yield to maturity/interest rate 7.4% 1.0% Source : Bloomberg, 05/02/2009

20 Some Rocket Science Source : Bloomberg, 14/01/2009 Vodafone 5.9% 2032 breakeven analysis Bond price Distribution yield = 7.0% Yield to maturity = 7.4% Price = 84.9 Return 3.0% = cash % = gilt % = constant % = Pull to par 85.6 Two years Vodafone bond’s price has to fall 11% in the next two years just to break even with cash YTM = 8.2%

21 The search for income Source: M&G, 03 October 2008 % Investment grade bond yields

22 Assessing the gravity of the situation Source: *Moody's 2008 annual default study. **Merrill Lynch sterling indices as at November Implied default rates On average, only 3%of BBB rated bonds have defaulted within 5 years What’s the default rate been historically? Rolling 5 year average global default history ( ) INVESTMENT GRADE Default Rate % Bond Rating HIGH YIELD

23 Assessing the gravity of the situation Source: *Moody's 2008 annual default study. **Merrill Lynch sterling indices as at November Implied default rates : Deutsche Bank, Oct 2008 INVESTMENT GRADE Default Rate % Bond Rating HIGH YIELD Even assuming zero recovery rate, almost 30% of investment grade bonds have to default in next 5 years to not beat gilts What are current corporate bond spreads implying? Implied default rate - average recovery Implied - average recovery Rolling 5 year average global default history ( )

24 Mission control – countdown to lift off!  A tour of the universe (market update)  Mystic M&G’s predictions for 2009  How to stop being sucked into a black hole (UCITS III)  M&G – our very own stars

: UCITS III wider powers, enables the use of new instruments within UCITS funds 2004: FSA remodels NURS regime Underlying must be eligible and derivatives may not be used to circumnavigate the rules February 2007: All groups must indicate if complying with UCITS or NURS How to stop being sucked into the black hole European and UK regulators have become more comfortable with derivative use in retail funds (UCITS III) - an expanded universe

26 Iceland’s banking system – utter lunarcy! Source: Prudential M&G Buying protection on Kaupthing generated a profit for the fund

27 How does a CDS work? We think KAUPTHING will default so we buy protection from investment bank

28 How does a CDS work? KAUPTHING defaults, we receive payoff

29 Mission control – countdown to lift off!  A tour of the universe (market update)  Mystic M&G’s predictions for 2009  How to stop being sucked into a black hole (UCITS III)  M&G – our very own stars

30 The stars in our constellation Source: M&G Investment Information, as at February 2009 FUM £78bn 1 st HY corporate bond fund st UK corporate bond fund st leveraged loan fund, Europe analysts M&G for a galaxy of stars in the bond fund market

31 The Analysts Over 2000 Lehman bonds in the galaxy!

32 Galactic performance across every single bond fund we manage M&G Corporate Bond Fund*1111Richard Woolnough M&G Strategic Corporate Bond Fund*111N/ARichard Woolnough M&G Optimal Income Fund*11N/AN/ARichard Woolnough M&G Gilt & Fixed Interest Income Fund*1112Jim Leaviss M&G High Yield Corporate Bond Fund*1112Jim Leaviss M&G Global Macro Bond Fund*2222Jim Leaviss M&G Emerging Markets Bond Fund**1111Jim Leaviss M&G Index-Linked Bond Fund*1113Jim Leaviss M&G International Sovereign Bond Fund*1111Jim Leaviss M&G European Corporate Bond Fund***2111Stefan Isaacs M&G European High Yield Bond Fund***1111Stefan Isaacs 6m 1y 3y 5y Fund manager Performance relates to quartile positions Source:* IMA sectors** Morningstar Fixed Income Global Emerging Markets, as at 31 December 2008, A share class, bid to bid, net income reinvested *** Morningstar Spanish database (Fixed Income EUR – Corporate sector/Europe High Yield, as at 31 December 2008, C share class, bid to bid, net income reinvested

33 A meteoric rise to fame Fund manager - Richard ‘Wookie’ Woolnough Number one fund * Total return (%) *Morningstar, 07/07/2000 (Old Mutual Corporate Bond Fund launched) to 30/6/2003 (Richard Woolnough resigns from old Mutual), bid-bid, net of tax ** Morningstar, 20//02/2004 (Richard Woolnough takes over M&G Corporate Bond Fund) to 31/12/2008, bid-bid, net income reinvested, A share class Outperformed by 13.6% since 2004**

34 Bonds the brightest stars in the galaxy? Low interest rates, low inflation Spreads at all time high Cash has crashed Bond opportunity of a lifetime? It is a stellar time for bonds!

35 Light years ahead of the competition! WINNER Best Fixed Interest Group Best Fixed Interest Group

FOR INVESTMENT PROFESSIONALS ONLY. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England number This document is not intended as an offer to acquire or dispose of any security. Information given in it has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. This information is not intended to constitute a basis for any specific investment decision.