Woolnough (pictured) has defended the size of his fund on numerous occasions and says he battles the constant inflows by increasing his team’s resources and therefore opportunity set.However, he told FE Trustnet last week that as the fund has grown, he has found it more and more difficult to add value on a stock-by-stock basis and is instead now having to rely on getting his macro calls right in order to outperform.
Richard Scott had used M&G Optimal Income in his PFS Hawksmoor Distribution and Vanbrugh funds in the past and has a lot of respect for Woolnough.
However, he is concerned about the ever-growing size of the fund and says that if investors want an alternative that relies purely on top-down calls, they may as well turn to the much smaller £1bn M&G Global Macro Bond fund, as it is even more flexible.
“Jim Leaviss is the lead manager on the fund and he is in charge of M&G’s very capable fixed income investment team,” Scott said.
“He is the main man on the fund and the mandate he runs is incredibly flexible as, for instance, he can go negative duration if he sees fit. The fund is the freest expression of ideas the team has and it isn’t as big or unwieldy as some of the other M&G bond funds or others of the sort.”
Leaviss launched the M&G Global Macro Bond fund in October 1999 and has delivered superior returns over the longer-term.
According to FE Analytics, it is up 88.9 per cent over 10 years, beating the IMA Global Bonds sector by close to 20 percentage points in the process. The fund has also outperformed the sector over three and five years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund has also beaten the sector in eight of the last 10 calendar years, the exceptions being 2005 and 2009.
As Scott points out, M&G Global Macro Bond is described as a “go-anywhere” portfolio as Leaviss can implement his top-down views by using all the global fixed income asset classes available to him. He uses physical assets as well as derivatives within the portfolio.
The majority of the portfolio is invested in government bonds, but Leaviss also has decent exposure to corporate credit through both investment grade corporate bonds and high yield corporate bonds.
However, one of the major reasons why Scott likes M&G Global Macro Bond at the moment is because the manager uses different currencies.
Leaviss’s largest currency exposure is the US dollar, which Scott sees as an advantage, especially over the short-term as the price of sterling has dropped over concerns of Scottish independence.
He also says there is scope for the dollar to continue to strengthen as the market begins to focus on the Fed’s first interest rate hike, so it is a good portfolio for investors to play that theme.
The one issue with M&G Global Macro Bond is that it is a total return fund and its current yield of 0.6 per cent means investors aren’t getting much in the way of income.
However, Scott points out that Woolnough’s Optimal Income fund currently yields less than 3 per cent, so it isn’t much of an income play either.
Despite his concerns about the size of M&G Optimal Income, Scott says that he still rates Woolnough very highly and views him as one of the best top-down managers in the business.
According to FE Analytics, the five crown-rated fund is the best performer in the IMA Sterling Strategic Bond sector since its launch in December 2006, with returns of 88.41 per cent.
Performance of fund vs sector since Dec 2006
Source: FE Analytics
M&G Optimal Income has also beaten the sector over one, three, five and seven years and has only underperformed in one calendar year – 2012 – since its launch.
The issue of fund size, especially in the various IMA bond sectors, has been a major talking point recently with a number of experts such as IBOSS’s Chris Metcalfe warning that managers running larger portfolios will struggle to protect investors in the expected rising yield environment.
Our data shows that at £22.3bn, Woolnough’s portfolio now accounts for 70 per cent of all assets in the IMA Sterling Strategic Bond sector.
Some commentators have also questioned whether the M&G Optimal Income fund’s underperformance this year is an early sign that the sheer size of its AUM is beginning to have an impact.
Performance of fund vs sector in 2014
Source: FE Analytics
Woolnough has said that the fund’s lacklustre returns this year have been because of his contrarian call on Europe, a market where he feels bonds are massively overpriced as the economic situation is nowhere near as bad as most investors think.
Scott says the reason he is avoiding the fund is not because he expects it to materially underperform.
“My take on what he said is that he is going to struggle to keep the fund’s performance at the level it has been in the past,” Scott explained.
Ben Willis, head of research at Whitechurch, agrees with Scott that M&G Optimal Income is too big. He also views the M&G Global Macro Bond fund as a good alternative.
“Woolnough admits that he cannot really add value at a stock level because he knows the fund is way, way too big to do that,” Willis said.
“I wouldn’t be comfortable buying his fund now because of its size, but if you want something that is a little more nimble but acts in a similar way, then why not use the Global Macro Bond fund? Leaviss is a highly regarded manager and he should be able to express his views better because he has far more liquidity.”
M&G Global Macro Bond has an ongoing charges figure (OCF) of 0.81 per cent, which is 0.10 percentage points lower than Woolnough’s Optimal Income fund.
