The £4.5bn M&G Corporate Bond fund was launched in April 1994 to invest mainly in high-quality corporate bonds, with the aim of delivering higher income and capital growth than that available from investment in UK government fixed income securities of similar maturities. The vehicle debuted in this year’s Investment Adviser 100 Club, winning the Sterling Corporate Bond fund category at the first attempt.
The portfolio, which has been managed by Richard Woolnough since February 2004, may hold up to 20 per cent in other fixed income investments. “Exposure to these assets can be gained through physical holdings and the use of derivatives,” the manager explains.
Mr Woolnough and deputy manager Ben Lord are assisted in credit selection by an in-house team of independent analysts, including some based in Chicago to support the team on the US credit side. He notes the fund is run without reference to a benchmark and is not constrained to investing purely in investment-grade debt. Instead, he can “emphasise higher-quality bonds” if he believes default rates are likely to rise, or add lower-rated bonds if the outlook for the higher-yielding area of the market is improving.
The manager adds: “The investment strategy is based on the principle that returns in the corporate bond market are driven by a combination of macroeconomic, asset, sector and stock-level factors. A dynamic investment approach is applied as different factors dominate returns at different stages of the economic cycle. We change the blend of duration and credit exposure in the portfolio to give appropriate weight to those drivers of returns at each stage of the economic cycle.” This involves the formation of a macroeconomic overview for the fund, with the team comparing their views on factors such as economic growth, inflation and the yield curve with the market’s expectations.
“In light of this analysis, we will, for example, lengthen or shorten the fund’s duration depending on the outlook for interest rates,” Mr Woolnough says. “The asset allocation and sector positioning of the portfolio are also influenced by the macroeconomic view. I may, for instance, increase or decrease the amount of credit risk within the portfolio in response to the view of the health of the economy and hence the outlook for corporate profitability.”
The fund’s I share class sits at a risk-reward level of three out of seven with an ongoing charges figure of 0.66 per cent, data from its key investor information document shows.
For the five years to November 24 the fund has delivered performance in line with its peers, returning 34.5 per cent in sterling terms compared with the IA Sterling Corporate Bond sector’s average of 35.1 per cent, FE data shows. Over the longer term the vehicle has outperformed the sector, with a 10-year return of 85.8 per cent against the sector’s 52 per cent.
Mr Woolnough notes: “The fund delivered a solid return in a quarter dominated by the fallout from the UK’s vote to leave the EU. Sterling investment-grade credit delivered robust gains over the quarter, spurred on by an announcement from the Bank of England of another stimulus package that was larger and broader than expected. We took profits in a number of sterling investment-grade credit names that have performed strongly and now look expensive.”
In the medium to longer term the manager attributes performance to the compression in both yields and spreads. He explains: “In relative terms we have been underweight duration. This particularly affected performance in 2014 and also year to date. In addition we are underweight in financials and this would have been a detractor to performance in 2012. We prefer to remain underweight financials mainly because it represents around a third of the iBoxx Sterling Corporate index, and as we want to have a more diversified portfolio we would not allocate a third [of the fund] to one single sector.”
With 2016 posting some surprise events, Mr Woolnough notes recent changes include an increase in fund duration in response to the ‘Leave’ vote in June, which meant duration “hovered around 7.1 years over the third quarter”.
