Strategic bond funds have surged in popularity as investors seek defensive assets, but 68 per cent of inflows have gone exclusively into M&G Optimal Income, which many experts believe illustrates the lack of diversity in the sector. FE Alpha Manager Richard Woolnough’s (pictured) portfolio has seen net inflows of £1.73bn over the past year, with the second most popular fund only taking in £465m. In total, the £7.5bn fund currently accounts for around a quarter of all the money invested in the sector.
Of IMA Sterling Strategic Bond's £27.8bn AUM, £12.3bn – or 44 per cent – is invested in just three of 70 funds – M&G Optimal Income, Invesco Perpetual Monthly Income Plus and L&G Dynamic Bond.
AUM of funds in the Strategic Bond sector
| Name |
Fund size (£m) |
| M&G - Optimal Income |
7541.4 |
| Invesco Perp - Monthly Income Plus |
3279.6 |
| L&G - Dynamic Bond |
1480.1 |
| Henderson - Strategic Bond |
1020 |
| Fidelity - Strategic Bond |
1007 |
| Jupiter - Strategic Bond |
972.4 |
| Cazenove - Strategic Bond |
712.1 |
| Santander - Premium Sterling Bond |
673.1 |
| Henderson - Preference & Bond |
577.2 |
| Artemis - Strategic Bond |
552.4 |
Source: FE Analytics
The study comes in light of a recent FE Trustnet interview with Thames River multi-manager Gary Potter, who said he was alarmed by the lack of diversity in the industry.
"When I look at the various asset allocation tools that are now on the market, I find it amazing how much money is going into just a few funds," he commented.
Meera Patel, senior analyst at Hargreaves Lansdown, is surprised by the figures.
"It can be a worry when so much money is attracted into one fund, but it depends on conditions in the market," she said.
"If there are a lot of new issues coming to the market and lots of liquidity, then it doesn’t matter and I believe it’s the case with lots of types of bonds right now."
"Strategic Bond funds have got a wide universe of bonds to choose from. If they have huge amounts of money coming in they know they can put it in lots of different investments."
"Richard Woolnough is an excellent manager and funds tend to be attracted to the superstars in each sector."
According to FE data, M&G Optimal Income is the best-performing fund in its sector since its launch in December 2006 by some 12 per cent. It has returned 54.32 per cent during this time, compared with 20.24 per cent from its sector average.
Performance of fund vs sector since launch
Source: FE Analytics
While Adrian Lowcock, senior investment adviser at Bestinvest, acknowledges that there is a degree of risk in backing a single manager so strongly, he has faith in Woolnough.
When given the 68 per cent figure, he said: "That’s very, very high indeed. There’s always a risk when so much is in one manager, as there are always unforeseen circumstances you can’t call."
"However, the key here is that Richard Woolnough is an unparalleled manager and investors are always going to ask: Why can’t I hold him if everyone else is?"
"Bond funds can handle mass inflows far better than equity funds, so there are no worries about the size of the fund at the moment."
"That said, investors should be aware of the equity exposure in the fund and shouldn’t hold it as their exclusive bond portfolio. If you hold the Optimal Income fund, you should hold something not managed by M&G – perhaps one managed by [Ian] Spreadbury, who’s very defensive at the moment," he added.
Patel agrees: "Investors should be diversifying into different funds in the space. The Jupiter Strategic Bond fund has a good manager. He has been making his mark in the industry. The fund is still small and nimble enough to be able to move around."
M&G Optimal Income is one of only six out of the 70 funds in its sector to have more than 5 per cent in equities. At present, Woonough’s portfolio has just under 8 per cent of its assets invested in equities, which is higher than some funds in the IMA Mixed Investment 0-35% Shares sector.