M&G’s star bond fund manager Richard Woolnough has further reduced duration on his £11.2bn M&G Optimal Income fund in the belief that interest rates in the UK will rise in 2013.
Richard Woolnough cut the fund’s duration - a measure of the fund’s sensitivity to movements in interest rates - from three years to 2.7 years during December by selling futures contracts on UK, US and German government bonds.
The manager maintained the duration positions of five years on his £5.8bn Strategic Corporate Bond fund and 6.4 years on his £6.4bn Corporate Bond fund.
The Bank of England has held the base interest rate at 0.5 per cent since March 2009 - almost four years - but speculation has risen that interest rates may be raised if inflation remains significantly above the Bank’s longstanding 2 per cent target.
Mr Woolnough also added to his equity holdings, bringing the Optimal Income fund’s equity exposure to 8.8 per cent at the end of December compared with 5.4 per cent in October. He topped up positions in JPMorgan Chase and Caterpillar, saying the stocks should benefit from a US recovery.
The Optimal Income fund has swelled dramatically in size during 2012, from £6.3bn at the end of January 2012 to its current size of £11.2bn.
This comes as M&G has been trying to dissuade large investors from putting more money into Mr Woolnough’s Strategic and Corporate Bond funds, a measure the manager has said is necessary to preserve performance.
The Optimal Income fund was the second best performer in the IMA Sterling Strategic Bond sector in the five-year period to January 22 according to FE Analytics, gaining 65.7 per cent and beaten only by Richard Hodges’ £1.6bn L&G Dynamic Bond fund, which returned 69.9 per cent.