Fixed Income  

Fund Review: M&G Optimal Income

He has been at the helm since the fund was born and suggests the name was “derived from my approach of purchasing those assets that I believe provide the most attractive, or ‘optimal’, income stream for the fund”.

With the aim of providing a “total return” to investors through strategic asset allocation and bottom-up stockpicking, no one can argue that this fund has failed to deliver.

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Mr Woolnough takes an unconstrained, top-down macroeconomic approach, actively managing duration and credit risk according to his outlook for interest rates and credit. He then combines this with bottom-up stock selection.

Changes to the portfolio have been minimal, although the manager explains: “I have long believed that the US economy is well on the road to recovery. As a result, while I made certain changes to holdings following the market volatility in May/June that resulted from Federal Reserve chairman Ben Bernanke’s comments, the fund’s overall exposure to government bonds, investment grade credit, high yield and equities has not changed significantly.”

That said, Mr Woolnough notes the team has been adding incrementally to the fund’s duration in recent months, primarily by reducing short positions in gilt and Treasury futures. Following these changes, the fund’s duration stood at approximately 3.3 years at August 31, up from 2.4 years at May 31 2013, although the manager points out this is still short of what the team considers to be a neutral duration of roughly 5.6 years.

In addition, the team, which includes deputy manager Stefan Isaacs, has also been adding to the portfolio’s high-yield position following the market sell-off. High-yield now accounts for roughly 30 per cent of the fund, up from 24 per cent at the end of May.

Mr Woolnough says: “Having reduced the fund’s allocation earlier in the year, the asset class looked to offer better value after the sell-off. We may look to add to the fund’s holdings in the asset class, particularly in the US, should any further weakness present opportunities.”

Since launch on December 8 2006, the fund has more than doubled the average return from the IMA Sterling Strategic Bond sector, delivering 75.54 per cent to September 24 2013, compared with the sector average of 31.28 per cent, according to Morningstar.

The fund has maintained its strong performance across one-, three- and five-year periods, with the 12-month return of 7.08 per cent still outperforming the 4.47 per cent peer group average, despite the fund suffering in the second half of 2012 and 2013 as bank debt rallied.

Mr Woolnough notes: “While the fund’s longstanding underweight position in financials and peripheral eurozone sovereigns has been one of the key drivers of returns in the past five years, it hurt on a relative basis over much of 2012 and into early 2013 as bank debt, in particular, rallied. I have been adding to financials names in recent months, although the fund remains underweight against its peers. We have continued to increase our investments in select financials and also hold approximately 4 per cent in equities from the sector.”