The fund has attracted more than £4bn in new money over the past 12 months alone, causing some analysts to express concern over how much value it can add.
This morning FE Trustnet carried warnings from Kames’ Stephen Snowden that multi-billion pound bond funds could suffer in the coming years.
Woolnough (pictured) admits that the size of his fund is limiting the value he can add through stockpicking, but says that other strategies still allow him to do his job well.
It is up to investors to decide whether the advantages outweigh the disadvantages, the manager says. "In terms of the fund size, we have always talked about the larger the fund gets, the more difficulties we have in terms of doing the anomaly trades," he said.
"It also means if we get trades wrong, it’s more of a problem for me as a manager and for our clients."
"What we are doing to deal with this is improving our dealing team, which has expanded through the years."
"It’s up to the client to look at the things we can do and decide if such a large fund is a good place to be, and if they are relaxed about being in a fund this size and if it has become detrimental."
"It’s up to the investors to decide in terms of their own asset allocation."
"We look at the size of the market place, what’s going on in the market place and try to size the fund appropriately."
Stephen Snowden is not the first manager to raise concerns about fund size in the IMA Sterling Strategic Bond sector.
Recently, Twenty-Four’s John Magrath also warned that funds as big as Woolnough’s are not able to get the benefits from stockpicking that smaller bond funds can.
It has to be said that both commentators run competitor funds, so are hardly dispassionate observers.
However, Woolnough says that exploiting anomalies in bond prices – essentially stockpicking – is now becoming more difficult, endorsing at least part of the critique.
He says that the fund can still take a position on duration and asset allocation to add value, and points to his high weighting to equities and low weighting to high yield as an example.
"That gives a great deal of flexibility still, despite its size," he said.
M&G Optimal Income has won its place at the top of the sales charts through sustained outperformance.
The fund is the third-best performer in the sector over five years, with returns of 70.03 per cent, and is also top-quartile over three.
Performance of fund vs sector over 5yrs
Source: FE Analytics
However, performance has slightly slipped slightly over the past year, in which time the fund is second-quartile, with returns of 13.12 per cent. The average fund in the sector has made 10.34 per cent in this time.
The fund has produced returns outside the top quartile of the sector in only two calendar years since launch, according to FE Analytics: 2010 and 2012.
Performance of fund in calendar years since launch
| Name | 2013 returns (%) |
2012 returns (%) | 2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) | 2007 returns (%) |
|---|---|---|---|---|---|---|---|
| IMA Sterling Strategic Bond | 1.98 | 13.39 | 2.71 | 8.09 | 20.75 | -13.54 | 0.17 |
| M&G - Optimal Income | 4.28 | 12.91 | 5.68 | 8.33 | 32.68 | -4.34 | 2.41 |
Source: FE Analytics
Woolnough says that he is comfortable being in the investment grade part of the market right now, which he thinks is still undervalued.
He says there are anomalies between the pricing of BBB bonds that his team are exploiting, particularly in the banking, utilities and telecoms sector.
He has reduced his weighting to high yield over the past year, and increased the weighting to equities.
Woolnough currently has 11.1 per cent in stocks, and his limit is 20 per cent.
The manager says that he has always retained the ability to buy the equity of a company rather than the debt if he thinks it is better value, and he currently thinks it makes more sense to do so in many cases.
Apple is an example of this phenomenon, where Woolnough says that the management clearly believes it is cheap given it is buying back the equity through the issuance of a 30-year bond at 3.25 per cent.
Woolnough added his voice to those appealing for calm over the rumblings about the end of QE in the US.
He says that he is preparing his portfolio for this to happen in the near future and says that the market could be surprised by how soon it happens.
"They are being gentle about it. They have provided liquidity to the party and need people to leave the party slowly and gently without causing too much chaos."
This means that he is remaining short-duration, and says that he is happy to remain so even if it leads to short-term underperformance.
The manager is also more positive than the consensus on the UK, saying that even though he thinks that interest rates will have to remain lower here for longer, GDP figures understate the real health of the economy.
