M&G star bond manager Richard Woolnough has cut back on his equity holdings in the £18.8bn Optimal Income fund as the asset class is no longer as cheap compared with bonds.
Mr Woolnough described himself as a “tourist” in equities in spite of his fund having approximately 12 per cent in the asset class last summer - roughly equal to £1.8bn of the fund’s £15bn of assets at the time.
The manager has now cut this back to nearer 5 per cent, with most of the cut coming in the past two months.
“We have brought our equities right down because they are not as cheap versus high yield,” Mr Woolnough said. “We only got involved when equities were ridiculously cheap. If equities are fair value compared to bonds, we don’t own equities.”
The manager also argued that BBB-rated bonds - the lowest rung of investment grade - were still cheap compared to longer-term historical valuations, in spite of yields having fallen significantly in the past five years as prices have risen.
He said the peak yield of BBB bonds coincided with “people thinking we were going back to the 1930s”, and pointed out that the bonds’ longer-term spread - the difference in yield above government bonds - was much lower than its current level, implying potential for prices to rise further.
The M&G Optimal Income fund has rapidly become M&G’s biggest product since its launch in 2006 and is selling strongly across Europe as well as in the UK. Since inception the fund has gained 84.3 per cent, compared with an average 37.8 per cent return from funds in the IMA Sterling Strategic Bond sector.
