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Concerns grow on £11.2bn M&G strat bond fund’s ‘unhealthy’ dominance

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Asset allocators have warned on the amount of money going into Richard Woolnough’s M&G Optimal Income fund after Fundweb research suggested it won the vast majority of flows into the IMA £ Strategic Bond sector last year.

FE Analytics shows over £3.7bn flowed into the M&G Optimal Income fund over the course of 2012, making it the top selling fund and, according to our analysis, meaning it took 71.9 per cent of the net flows into the year’s most popular sector.

The fund almost doubled in size from £5.7bn at the start of 2012 to just under £11.2bn by the year’s end and is now responsible for 40 per cent of the assets in its sector. However, its dominance of the space has been labelled as “unhealthy” and questions have been asked about how effectively funds can be managed when they grow at such a pace.

Woolnough’s reputation and ability to run fixed income assets is well established, with everyone spoken to stressing the manager’s experience and fund management skills.

The M&G Optimal Income fund gained an average of 10.4 per cent a year in the five years to 31 December 2012, outperforming the 5.7 per cent rise in the IMA £ Strategic Bond sector. However, it must be noted that the fund slightly underperformed its peers during 2012.

Multi-managers have questioned how any fund manager can implement their style and replicate past success when there is such a large increase in the money they have to run.

Rathbone Unit Trust Management head of multi asset investments David Coombs says: “Everyone just thinks a manager that did well running a £200m fund will automatically be able to do well running £20bn. That is a massive leap of faith. You are investing in something you have no way of analysing and yet everyone goes out and buys it.”

David Coombs MM blog

Coombs does not hold any strategic bond funds in his three multi-asset portfolios. He argues that the sheer size of the M&G fund is making the sector “almost uninvestable”, owing to its risk that its trades could affect the whole market.

“It is unhealthy on all sorts of levels. This has got nothing to do with Woolnough’s ability. What we are talking about is structure, both in terms of the fund and the market,” he explains.

“Such a large fund in the bond market, which is not the most liquid in the world, is going to have a huge impact on the market when it trades. Whether they like it or not they are going to be conflicted quite often in terms of what they do in that market – that is not healthy and that disturbs me. People say ‘I won’t buy that fund, I’ll buy one that’s smaller’. Well, you are investing in the same market with the same liquidity.”

“Such a large fund in the bond market, which is not the most liquid in the world, is going to have a huge impact on the market when it trades”

Thames River co-head of multi-manager Gary Potter is also worried by larger funds such as M&G Optimal Income dominating sales and the sectors they reside in. Potter claims investors concentrate too much on a fund’s size – believing that a larger size can act as a kind of “safety valve” – and not enough on the manager’s capacity to generate future returns.

“That everybody is going down the same channel very seriously concerns me. I do not think the trend is a positive one for future capability and potential future returns,” he says.

“The reason I say that is not because those bigger fund managers are destined to have a bad time – in fact they are very good and in many cases have adapted quite well to running much larger amounts of money. But however good a ship’s captain is, the bigger the vessel you give that captain to navigate the harder it is to slow down, stop and turn it around.”

M&G Optimal Income is featured on Hargreaves Lansdown’s Wealth 150 list of favourite funds. Hargreaves Lansdown investment analyst Richard Troue recommends the fund when a strategic bond manager is needed to call sectors or the wider economic environment but would “look elsewhere” if seeking a manager to choose between individual credits.

“On the fund itself I think it is important to recognise you are really buying in for Richard Woolnough’s ability to call the macro environment correctly and make sector calls,” he says.

“This remains a highly flexibly fund able to invest across the fixed interest spectrum, as well as hold some equity positions and uses derivative and CDSs, which tends to be a liquid market. At present I don’t have any concerns over the managers ability to move the fund around to suit his views.”

M&G has looked to slow flows into its fixed income funds before, telling advisers last year not to put more of their clients into Woolnough’s £6.4bn Corporate Bond fund and £5.8bn Strategic Corporate Bond funds. Troue takes confidence from this.

“I think this is something to be aware of and it is certainly something we are keeping an eye on, but I do not feel there is cause for panic,” Troue says.

“M&G showed last year they were being proactive on the issue of fund sizes when they took steps to stem flows into their Strategic Corporate Bond fund. Having demonstrated their ability to act once I believe they will be willing to do so again if and when they believe it necessary to stem flows into Optimal Income.”

However, the asset manager currently has no plans to limit money heading into the fund. A statement from M&G says: “It has never been our intention to slow inflows into Optimal Income – it is a very flexible fund with a global remit and the scope to range across the different bond markets.”

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  1. I would be more ‘concerned’ with the lack of competition in this asset space. Why is everyone investing with M&G for strategic corporate bonds….?

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