The first three months of this year have been positive for fixed income with all sectors delivering solid returns: from 3.65 per cent for IA UK Gilts, up to 6.08 per cent for IA UK Index Linked Gilts, according to total returns data from FE Analytics for January 1 to March 31 2019.
Rising interest rates are naturally bad news for bonds, so the fact the US Federal Reserve has ruled out any further hikes in 2019 – as well as European Central Bank President Mario Draghi also claiming there would be no increases if economic data continues to struggle – has brought some security to the asset class.
Corporate bonds are a strange beast that require both balance and flexibility to master. So it takes skill to manage a sterling corporate bond fund through market cycles.
This week’s best in class is one of the largest funds in the sterling corporate bond sector and is managed by one of the most well-known bond fund managers in the UK: it is the £2.7bn M&G Strategic Corporate Bond fund, managed since launched in February 2004 by bond guru Richard Woolnough.
Mr Woolnough joined M&G in 2004 but began his career at Lloyds Merchant Bank in 1985.
He also manages the £3.6bn M&G Corporate Bond fund and the mammoth £17.8bn Optimal Income. This means he is directly responsible for more than £24bn of assets at the firm.
Since launch, the Strategic Corporate Bond fund has returned 50.39 per cent, compared to 41.55 per cent for the IA Sterling Corporate Bond sector, according to FE Analytics, total returns in sterling, February 20 2004 to April 10 2019.
The fund aims to maximise total return through investing mainly in investment grade, sterling-denominated corporate debt.
Mr Woolnough also has the flexibility to invest up to 20 per cent of the portfolio in high-yielding corporate bonds, government debt, convertibles and preference stocks.
The investment strategy of the fund 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.
As different factors dominate returns at different stages of the economic cycle, the manager therefore applies a dynamic investment approach.
He changes 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.
For newly researched credits, analysts will generally meet company management before producing a comprehensive note including an event risk assessment, worst-case rating, momentum indicators and, finally, relative valuation.
Managing a total of £177bn of assets as at June 30 2018, M&G is a leader in the fixed income space in the UK and, as such, it has no problem accessing these types of companies.
The asset manager also has one of Europe’s largest teams of credit analysts – another competitive advantage.
Mr Woolnough forms a macroeconomic overview for the fund, comparing his and the team’s views on factors such as economic growth, inflation and the yield curve, with the market’s expectations. The two main drivers of bond returns are duration and credit risk, and he aims to add value through taking active positions in both, relative to his peers, at the appropriate times.
