According to a recent BofA Merrill Lynch Fund Manager Survey, 79 per cent of managers think that bonds are overvalued due to the low level of yields on offer and, on top of that, those who were polled predicted that fixed income would be the most volatile asset class in 2015.
Given that information, our data shows UK multi-managers are sticking with the most experienced bond managers to steer them through what is likely to be a difficult period in fixed interest – with portfolios run by the likes of Ian Spreadbury, Ariel Bezalel and Stephen Snowden all joining Woolnough on the list of most popular bond funds.
Also, though concerns have been raised about larger fixed income funds given the declining levels of liquidity in the corporate bond market, our study showed managers are happy to stick with multi-billion pound portfolios for their exposure to the asset class.
Source: FE Analytics
As the table above shows, Woolnough’s M&G Optimal Income fund – which is the largest UK domiciled fund in the IA universe – is the standout favorite with fund managers, as it crops up in 36 top 10s.
The funds which hold the giant include HL Multi Manager Strategic Bond, IFSL Brooks Macdonald Defensive Income, Threadneedle Diversified Income and two funds from Marcus Brookes and Robin McDonald’s Schroder MM range.
It’s not just Woolnough’s Optimal Income which is popular with experts, as his £5.2bn M&G Corporate Bond fund is held by 16 funds as a top 10 holding – making it the eighth most popular fund – and his £4.8bn M&G Strategic Corporate Bond is joint tenth as it features in 13 top 10s.
Given the size of M&G Optimal Income it probably isn’t too surprising that it is so widely held, but the fact that it is highly flexible – it sits in the strategic bond sector – along with Woolnough’s (pictured) long successful track record which have also contributed to its popularity.
The fund was launched in December 2006 and, according to FE Analytics, it was been the sector’s best performing portfolio with returns of 90.79 per cent, more than doubling the sector average’s gains in the process.
Performance of fund versus sector since December 2006
Source: FE Analytics
M&G Optimal Income has beaten the sector in six out of the last eight years since its launch – the exceptions being 2012 and in 2014’s rising market, when the Woolnough’s negative view on Europe hindered returns.
It must be noted that while M&G Optimal Income was the most popular bond fund with managers when this same study was conducted last year, 10 fewer funds count it as a top 10 holding this time around.
The manager has come under criticism recently over the ever growing size of his portfolio, but has said on a number of occasions that it isn’t something that concerns him. He also admits that, as the AUM surges, it becomes harder for him to add value on a stock-by-stock basis, but says the fund has also been run on a macro, rather than micro, strategy and so future returns shouldn’t be hindered.
However, one manager who has slammed large funds in the past is Stephen Snowden, who told FE Trustnet last year that some of his peers in the sector would have to dilute performance by holding more bonds to deal with the size of their AUMs and the lack of underlying liquidity.
Interestingly, Snowden’s £996m Kames Investment Grade Bond fund is now the second most popular bond fund with managers as 22 portfolios count it as a top 10 holding.
They include four funds from the Architas MA range, five funds from Bambos Hambi’s Standard Life MyFolio range and David Coombs’ Rathbone Total Return fund.
Snowden started his career at Kames and moved to Old Mutual in 2004 before rejoining the Edinburgh-based group in 2011.
Our data shows since Snowden started co-managing Kames Investment Grade Bond with Euan McNeil in September of that year, the portfolio has been a top quartile performer in the IA Sterling Corporate Bond sector and has had the best risk-adjusted returns of the sector, as measured by its Sharpe ratio.
Performance of fund versus sector since Sep 2011
Source: FE Analytics
Kames also has another fund on list; namely Philip Milburn and Claire McGuckin’s £1.4bn Kames High Yield Bond fund, which is the standout favourite IA Sterling High Yield bond fund with managers as 14 portfolios count it in their top 10.
However, the group has taken steps to stem inflows into the popular portfolio.
The second most popular manager to feature on the list is FE Alpha Manager Ian Spreadbury as his £3.2bn Fidelity Moneybuilder Income and £1.5bn Fidelity Strategic Bond funds are the third and fourth most popular bond funds with the experts.
Spreadbury is renowned for his more defensive approach to the fixed income market, but this strategy has clearly paid off over the years as FE data shows he has comfortably beaten his peer group composite since the turn of the century with returns of 163.86 per cent.
Spreadbury and Woolnough are the only two bond managers to have held their FE Alpha Manager rating in every year since they were introduced in 2009.
Like last year, the passively managed £1bn Blackrock Corporate Bond Tracker fund is among the list of most popular funds with multi-managers as 17 funds – including Architas MM Monthly High Income and Santander MultiManager Balanced International Tracking – hold it in their top 10.
Ahead of that, however, is FE Alpha Manager Ariel Bezalel’s £2.6bn Jupiter Strategic Bond fund which is a top 10 holding in 19 funds.
Our data shows it has been a top decile performer in the IA Sterling Strategic Bond sector since its launch in June 2008 with returns of 86.4 per cent, beating its iBoxx Sterling Non-Gilt All Maturities benchmark by more than 20 percentage points in the process.
Performance of fund versus sector and index since June 2008
Source: FE Analytics
However, the fund is held by five less funds than this time last year and has slipped from third to fifth most popular on the list. This coincides with the fund’s underperformance over the last 12 months, especially relative to its benchmark.
One fund which has completely fallen off the list, however, is the £1.2bn L&G Dynamic Bond fund – which was the second most popular fund in the sterling-dominated bond sectors this time last year.
The fund had been managed by the highly popular Dickie Hodges until he left the group for Nomura Asset Management in October last year. Martin Reeves took over in May 2014, over which time it has underperformed the strategic bond sector with returns of just 0.39 per cent.
Nevertheless, the fund still has its backers as our study showed that 13 funds count it as top 10 holding.