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Richard Woolnough

M&G’s fixed-income manager has had a great year and feels there is still a once-in-a-decade opportunity for bonds Interview by Chris Salih

This year will probably not be remembered as a vintage year for many fund managers despite the market rally but for M&G fixed-income manager Richard Woolnough 2009 has been a year to savour.

Woolnough has seen his trio of funds swell their assets under management by almost 300 per cent and continue to top performance tables.

He says: “The fallout of Lehmans has been a great opportunity for fund managers. I do not want things to be perfect, I want things to be mispriced. Before this blew up and we were underweight credit, the markets were priced beyond perfection. Now, post-Lehmans, it is all priced for Armageddon. Those environments provide opportunities. Normally, they were stock by stock but the Lehmans’ event saw it happen across the market en masse.”

After stints as a gilt salesman at both Lloyds Merchant Bank and Prudential-Bache Securities, Woolnough moved into the fund management industry in 1987 when he joined Italian insurance comp-any Assicurazioni Generali. It was there that Woolnough chose to move into the fixed-income area.

He says: “Very few managers are given the opportunity and experience to work on both asset classes. I was doing equity and credit and I decided to focus on the latter, with the route being to move to one of the leading market-making houses.”

In 1993, Woolnough joined SG Warburg as part of its sterling bond trading team and says it was a culture shock. “It was a completely different environment to fund management, where you are allowed to plan, focus and take a medium to long-term view. A trading environment is spontaneous and reactive. I am better for it simply because I know what is going on in those places in terms of the pressure that traders are under.”

Woolnough joined Old Mutual in 1995. Early on, he managed an internal annuity portfolio before it was sold off in 1999. The group then launched a corporate bond fund in March 2000.

He says: “Obviously, in March 2000, discussing the launch of a corporate bond fund did not get the reaction you may expect as we were at the height of the TMT bubble and high-yield was popular. We thought that was the right thing to do and the fund grew rapidly.”

Woolnough says the choice to move to M&G in January 2004 was a simple one. “I needed to learn more about corporate bonds and higher yield and I felt that M&G was the best place to develop my skills. The important thing to remember is that as the market becomes more sophisticated, you also have to improve as standing still is moving backwards.”

The trio of products that Woolnough now runs is proof of the widening of his skills in the past few years. He took on the flagship corporate bond fund when he joined the firm.

“It was the first launch in the sector and is very traditional, with risk controls and a risk profile at the blue-chip end of the sector, and the way I had run my fund before was a normal bond fund and not in that conservative fashion so I wanted to launch something in that vein”

Woolnough’s strategic bond fund launched a month later in February 2004. The fund has grown to £1.9bn and is top of the IMA corporate bond sector over three years, having returned 27.6 per cent compared with an average return of 0.5 per cent for the sector. The £4.1bn corporate bond fund is second over three years, having returned 17.6 per cent.

“Over the course of my time here, the industry has become more sophisticated. So has the client and our mandates have done so. We saw the launch of optimal income in December 2006, which catered more directly to the drivers of bond returns, which are duration and credit risk.

“What it offers is a range that appeals to all types of investors, whether it is flexibility through the optimal income fund or a more conservative approach in the corporate bond fund or the strategic fund which sits between the two.”

This year has seen corporate bonds lead a bounceback in markets, with managers declaring a “once in a lifetime” and more recently a “once in a decade” opportunity for investors. The average return for corporate bond fund in the past 12 months has been 16.4 per cent and the sector was the best seller for 10 consecutive months, according to the IMA statistics.

However, there have been questions of a bubble in the sector, which Woolnough dismisses. “Corporate bond spreads are still historically very wide and cheap and the fact is that the track record for the sector is not that great.”

Woolnough says that despite a small exposure to Lehmans courtesy of a piece of high-yield paper in optimal income, his funds largely escaped the problems that ensued at the end of 2008.

He says: “The effect of Lehmans was not about the default, it was things like the market behavioural breakdown that followed. That was great for us as we were in conservative, less risky and liquid instruments in comparison with our peer group because we were concerned about the economic outlook and the event brought it all to a dramatic conclusion. You suddenly had good, safe companies and assets at a time when people had assets they did not want to hold any more and were desperately trying to get rid of them so we were able to recycle our portfolio out of safe, good quality investments to riskier investments.

“The whole thing provided two opportunities over three to six months. First, the market behavioural breakdown for the first three months and, second, the resulting falls in the UK and US economies and the distress that led to risk premiums going through the roof in spring 2009.”

Woolnough says he remains positive on the sector, given that it is nowhere near the value it was in 2007. “Corporate bond spreads are still priced for a normal nasty recession and that happens once every 10 years so it remains a once in a decade opportunity for bonds and other asset classes.”

In terms of his own future, Woolnough says he is happy with more of the same. “I am still learning here, I am still picking up new ideas and garnering new skill sets. We have a strong fund management team as we await the next part of the cycle as the economy continues to recover.”

Born: Derbyshire
Lives: Surrey
Education: London School of Economics
Likes: Running, tennis, chess
Dislikes: Football commentators
Drives: A Renault
Book: Open: An Autobiography by Andre Agassi
Film: Sleuth
Album: Queen Greatest Hits
Career ambition: Do a good job
Life ambition: Family
If I wasn’t doing this I would be…An academic

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