Fixed Income  

Woolnough touts ‘levers to pull’ on Optimal Income

Woolnough touts ‘levers to pull’ on Optimal Income

Richard Woolnough has said he still has “levers” to pull within his £19.1bn M&G Optimal Income portfolio and dismissed suggestions that size or outflows have unduly affected the fund.

The manager’s £19.1bn fund has seen more than £5bn in outflows over the past six months, according to FE Analytics, while relative performance has also struggled in recent months. Asked last week on a client webcast how he coped with the size of the portfolio, Mr Woolnough said he still had plenty of flexibility.

“The levers you can pull are still enormous in this fund. When the fund gets larger and larger it’s harder to add [value] with individual stock selection. But there are advantages to being large in terms of the depth and quality of the team.

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The manager added he was not concerned by the level of outflows from the portfolio.

“We are in a period of outflows and we adapt and change just as we would in a period of inflows,” he said, suggesting the fund would may hold more cash at the margin but otherwise remain the same.

Optimal Income had 3.5 per cent in cash as of September 30, slightly down on the 4 per cent held at August 31.

On performance, Mr Woolnough said returns had been affected by a “bear market for bonds - duration risk and credit risk.”

He has positioned his portfolio for this duration risk, saying performance relative to longer-duration funds would improve when yield curves normalise, but acknowledged the difficult market for credit had surprised him.

The fund had shifted towards investment grade credit, as Mr Woolnough said he continued to prefer credit risk to taking on duration. The fund’s average duration is now 2.4 years, with spread duration 5.7 years.

On the risk curve, however, the manager said he was seeing most value at the bottom-end of the investment grade spectrum, specifically in BBB-rated bonds.

The manager said even with an upward pressure on spreads, BBB bonds are offering 2.5 per cent over the risk-free-rate – which was attractive in the low-default market, with fail rates below the 4.5% average.

Overall, the it holds 52 per cent in investment grade bonds, 26 per cent in government and 17.1 percent in high-yield, according to M&G.

Deputy fund manager Stefan Isaacs said the fund takes credit exposure by either buying higher beta high-yield bonds or lending for longer to investment-grade companies, but is focusing on the latter at the moment.

“It is a constant question over risk/reward. At the moment we [see] better risk adjusted returns in long-dated investment grade bonds. But there is value in high yield and it is unlikely the two will trade in an entirely different fashion. We want an exposure to both, and we’re very selective about how we take that,” he said.

On markets, Mr Isaacs said he had seen more value in US credit this year, but suggested this may change as European valuations become more attractive.