Richard Woolnough, who manages the £23bn M&G Optimal Income fund, has revealed what he thinks will happen to the UK economy depending on the possible outcomes to the Brexit negotiations.
Mr Woolnough substantially owes his reputation as a bond fund manager to his having refused to invest in bank bonds prior to the global financial crisis.
In the years prior to the crisis he published blog posts warning of a problem with collateralised debt obligations and mortgage-backed securities.
It was the collapse in the pricing of those assets that led to the credit crunch and the subsequent global financial crisis.
Mr Woolnough said that if Brexit were not happening the UK economy would look quite similar to that of the US right now, with economic growth much stronger and bond yields much greater.
He said if the UK exits the European Union with a deal, he doesn't think much would change in terms of the outlook for UK inflation and the economy.
But he said if the UK leaves without a deal, "then the currency would act as a balancer, and there would need to be fiscal action, but the Bank of England would not be able to help."
The currency acting as a balancer means Mr Woolnough expects the value of sterling to fall dramatically, and this would have much the same effect as it did in the immediate aftermath of the Brexit vote.
He said again the economy would receive a stimulus as a result of exports becoming cheaper, while inflation would be higher for UK consumers.
Mr Woolnough’s description of a fiscal solution means the government acting to increase spending in order to generate domestic demand in the economy.
Both of those outcomes would be expected to lead to higher inflation in the UK.
But Mr Woolnough said a hard Brexit is "not one the Bank of England can fix."
Mr Woolnough also believes that inflation will continue to rise in the US, as the central bank of that country, the Federal Reserve, have been too slow to put interest rates up, given the prevailing conditions of low unemployment and rising wage growth.
He said interest rates usually take two years to work through an economy, and that after a period of rising rates, economic growth declines.
That would put the US economy on course for a slowdown in December 2019, he said, but he expects that the tax cuts introduced into the economy by US president Donald Trump to extend the period of US growth into 2020.
Mr Woolnough said that were investors to look at his bond portfolio, "they would think I am doing the things you do when you are cautious, when you think the economy is in bad shape. But actually, while I have those assets, the reason is, I don't think investors are being paid enough to justify buying riskier assets.
"I am positive on the economy, but have become more cautious in terms of the bonds I own."
The M&G Optimal Income fund has returned 120 per cent over the past decade, compared with 80 per cent for the average fund in the IA UK Sterling Corporate bond sector in the same time period.
Matthew Toms, investment manager at Heartwood Investment Management, said he believes buying funds that offer exposure to the UK domestic economy is the better value option right now, rather than investing in funds that focus on the overseas earning potential of UK companies.
John Hudson, manager of the Premier UK Growth fund, said small and mid cap shares represent better value right now because of the volatile nature of some companies in the FTSE 100, such as miners and oil companies.
david.thorpe@ft.com
