M&G’s Optimal Income fund has shed £5.5bn so far this year, dropping from its peak of £25bn in assets.
The fund has seen consistent net outflows this year from a high of £24.6bn in assets at the end of January to £19.1bn at the end of August.
June and July marked the worst months of outflows, with £1.4bn and £1.2bn respectively of net outflows each month.
The outflows are partly a broader rotation away from bonds and into equities, but are also a reaction to the fund’s size and its recent underperformance, says Jake Moeller, head of UK and Ireland research at Lipper.
“Irrespective of the recent China-induced volatility there has been quite a strong rotation into equity income, it has been a major theme of the last year,” he says.
Tilney Bestinvest managing director Jason Hollands agrees that the fund is likely bearing the brunt of moves out of fixed income.
“I think this is largely a reflection of broader outflows from fixed income, as investors have been adjusting positions ahead of future monetary tightening, but understandably it has been the very large, widely held funds that have borne the brunt of this,” he says.
Recent Investment Association data showed fixed income net outflows in August were the largest since June 2013, at £333m.
The M&G Optimal Income outflows are also likely a result of quick money moving out of the fund, says Moeller.
“I think a lot of hot money has gone into bond funds lately and that’s come out again. I suspect part of the outflows in M&G Optimal Income would be the last money that came in and the first money to come out.”
Despite the £5bn in outflows, the fund is still too large, says Moeller.
“Has it become too big? Yes. It’s not about a pound amount it is all about the number of securities these guys are holding,” he says.
Speaking earlier this year, Richard Woolnough, manager of the fund, said that investors need to be aware that the larger a fund gets the harder it is to make asset allocation decisions.
“The larger the fund by definition it makes it harder to add individual stock selection or asset allocation ideas,” he said. “That’s something we’ve seen in the last 10 years.”
Performance of the fund has lagged recently. Over the past year to the end of August it has lost 1 per cent compared to a 1 per cent gain for the sector average.
While the fund generated an annualised return of 8.45 per cent from January 2007 to July 2015, above the 3.05 per cent for its peers, short-term performance has not been so impressive, says Morningstar analyst Ashis Dash.
“It has slipped behind the pack in more recent years as its aggressive short-duration stance held back performance in 2014 and the first half of 2015,” Dash says.
However, the recent outflows should also be a red flag for investors to focus on bond liquidity, says Hollands.
“Given the potential for these fixed income outflows to gather pace as investors adjust their thinking on interest rates, a potential fixed income liquidity crunch is a risk in the event of a stampeded for the exit,” he says.
“In this respect a lot of asset managers will quietly admit that daily dealing is not at all helpful – as we saw when enhanced cash funds came under pressure during the credit crisis.