Woolnough’s M&G Optimal Income has been the best performing IMA Strategic Bond fund since launch with returns of 84.29 per cent and has seen strong inflows off the back of this, being by far and away the most popular fund of its type.
Performance of fund vs sector since Dec 2006
Source: FE Analytics
Some analysts warn that large funds find it harder to add value and Woolnough admits it is an issue.
“We have said this for a number of years now and we have had that question for a variety of our funds,” Woolnough said.
“The answer is: it makes it harder. Each time a fund gets larger, no matter what the fund, it makes it harder to add value through individual stock selection and it makes it harder to move things around.” Our data shows that M&G Optimal Income was a substantial £3.95bn this time three years ago. However, the fund has continued to grow and added a further £5bn over just the last 12 months. The issue of size has been posed to Woolnough on a number of occasions. The manager told FE Trustnet in June last year that the fund’s AUM at £14.5bn was affecting his day-to-day portfolio management.
M&G Optimal Income is now the third largest fund in the whole IMA universe.
Nevertheless, the manager isn’t looking to soft-close the portfolio. Instead, Woolnough says the group are trying to mitigate any issues surrounding liquidity by increasing their team and their expertise.
“You combat that in a number of ways,” he said. “You combat that by improving your skill set. The team has expanded rapidly from three fund managers to the number we have now. Our skill set has improved in the international markets, for instance. We have a lot more in the US than we used to.”
One example of this, Woolnough says, has been the appointment of Claudia Calich from Invesco Perpetual. She joined M&G last year and now runs their Emerging Markets Bond fund as well as helping Woolnough manage his portfolio.
“The liquidity argument is a two-edged sword. It’s a sword that you can use to your advantage as well as it being a disadvantage,” Woolnough said.
“You will tend to find that if you look back through my performance record on my other funds as well as this one, we do better relative to the peer group when liquidity is an issue, even though we are a large fund.”
“That is because we are conservative; we are not just looking for a high headline yield.”
As Woolnough points out, the fund has still consistently outperformed despite its growing AUM.
Data from FE Analytics shows that the fund has been a top quartile performer over rolling one and three year periods and has beaten the sector over a cumulative five year period.
M&G Optimal Income has only underperformed against the sector in two calendar years since its launch. They were in 2010 and 2012.
The fund was a top quartile performer in the crash year of 2008 with losses of just 4 per cent and in 2013, which was a notably bad year for bond-holders, the fund was again top quartile with returns of 7.26 per cent.
Performance of fund vs sector in 2013
Source: FE Analytics
However, the fund did have decent weighting to equities last year.
Amandine Thierree (pictured), analyst at FE Research, says that while M&G Optimal Income’s performance has still been strong, the size of a fund is becoming a major issue.
“Personally, I think the size is an issue,” Thierree said. “He does have the resources and he is used to running a lot of money.”
“However, he doesn’t have the freedom to do whatever he wants anymore. I’m sure M&G won’t have any plans to close it because the performance has still been good.”
“Because of that, it is hard to say whether size is affecting performance. They have brought in Claudia Calich which is good and it shows they are increasing their skill set, but they just going to reach this same point at a later stage.”
David Thornton, fund of fund manager at Premier, agrees with Thierree.
His colleague, Simon Evan-Cook, has warned investors on a number of occasions about the impact size can have on a fund’s performance and Thornton says that at its current size, the outlook for M&G Optimal Income looks challenging.
“With liquidity greatly reduced from where it was, from even a few years ago, any change in investor sentiment towards credit will mean it will be very challenging for a manager of a fund of this size, in this asset class,” Thornton explained.
He added: “To counter this and because of the sheer size of assets, the fund holds many hundreds of credits, diluting alpha opportunities.”
Gavin Haynes, managing director at Whitechurch, doesn’t use M&G Optimal Income fund for his clients and one of the reason behind that is because of its ever-increasing size.
“It would be interesting to know at what level they soft-close the fund,” Haynes said.
“They do use derivatives and CDS to help with liquidity. However, there must be a point where they will have to admit that size is an issue, especially if it is creating a significant drag on performance. However, the performance has still been pretty strong so they have been justified. There has to be a point where it will be a problem, though.”
However, he says that M&G does have “undisputedly the best bond team” with Woolnough, Jim Leaviss and Ben Lord and is therefore using the slightly smaller, but still £5bn M&G Strategic Corporate Bond fund to gain access to their expertise.
Woolnough’s M&G Strategic Corporate Bond fund has been the best performing portfolio in the IMA Sterling Strategic Bond fund over 10 years with returns of 99.12 per cent.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Liker M&G Optimal Income, it has beaten the sector over rolling one, three and five year periods. It has also only underperformed against the sector in one year over the last decade, which was in 2012 when the fund still returned 11.4 per cent.
M&G Strategic Corporate Bond yields 3.23 per cent, while Woolnough’s Optimal Income fund has a yield 2.74 per cent. The former’s clean share class’ ongoing charges figure (OCF) is 0.66 per cent, which is around 30 basis points lower than the M&G Optimal Income’s.
Click here to learn more about bonds, with the FE Trustnet guide to fixed interest.
