The fund manager, Richard Woolnough, believes that the primary drivers of performance in the fixed income sector are macroeconomic changes. The fund's interest rate sensitivity, sector weightings, and yield curve positioning are all set to reflect the manager’s views on the future direction changes in macroeconomic factors, such as interest rates, inflation or economic growth might take. Unlike the managers of other fixed income funds however, here he has the flexibility to choose whichever security offers the optimal source of income from a company regardless of its structure. This level of freedom also gives Woolnough greater ability to adjust the funds positioning to suit his market views. He is supported by M&G's large team of bond analysts who aid issue selection, with the manager concentrating on avoiding bonds that could default in order to minimise losses.
Performance since launch – 8 December 2006 to 14 April 2010
Source: Financial Express Analytics
Style and Strategy
Woolnough's top down views are based on the results of a monthly macro policy meeting, held by the macro economic and market value experts within M&G's fixed income team who study possible themes and use a range of economic models to try and identify the best top down strategies. He positions the fund in respect of duration, the funds interest rate sensitivity, and credit risk depending on what he thinks the effect of economy’s current and future conditions is likely to have on each. The team of credit analysts will conduct in depth fundamental and ratio analysis to determine a company’s liquidity and solvency, as well as meeting with company management and accessing possible business problems they may face.
Additionally the analysts will take the time to understand the structure and covenants of the company’s debt and deliver a recommendation including a worst case scenario. This research will be used by Woolnough when selecting bonds for the portfolio, although final say on anything included or excluded will be with the fund manager. Additionally, the fund can invest up to 20 per cent of its assets in equities, and here the manager only holds stocks that are included in M&G’s equity funds.
Holdings and Breakdowns - as of 28 February 2010
| Top ten holdngs |
% Weighting |
| TREASURY 5% GILT 2025 |
1.80 |
| TREASURY 4% GILT 7/09/2016 |
1.58 |
| HSBC BANK PLC 4.75% CALL SUB NTS 29/09/20 GBP 1000 |
1.11 |
| BRITISH TELECOMMUNICATIONS 7.5% NTS 7/12/2016 GBP |
0.81 |
| TNT N.V 7.5% BDS 14/08/18 GBP1000 |
0.79 |
| CENTRICA PLC 7% NTS 19/09/18 GBP5000 |
0.79 |
| JPMORGAN CHASE & CO SUB FLTG RATE NTS 12/10/15 EUR |
0.76 |
| IMPERIAL TOBACCO FINANCE 9% GTD NTS 17/02/22 GBP50 |
0.73 |
| BAA FUNDING LTD CLS 'A' 4.6% UNWRP BDS 15/02/20 EUR |
0.70 |
| WPP GROUP 6% GTD BDS 04/04/17 GBP50000 |
0.70 |
| Top 10 total percentage weighting |
9.77 |
Source: Financial Express Analytics
| Sector Breakdown |
% Weighting |
| BBB |
34.60 |
| A |
23.10 |
| BB |
13.20 |
| B |
10.70 |
| AAA | 7.00 |
| NON-RATED |
4.30 |
| AA |
3.90 |
| MONEY MARKET |
1.80 |
| CCC |
1.40 |
Source: Financial Express Analytics
The fund has a broad mandate and while it is predominantly invested in bonds it also has the freedom to invest limited amounts in equities, derivatives and structured credit instruments. The fund’s bond portfolio is very diverse ranging from government bonds to high yield corporate debt, with a small portion traditionally in overseas debt as well.
What to expect
Over the three years to 31 March 2010 the fund has displayed marginally lower volatility that the IMA Sterling Strategic Bond sector, although not enough to suggest that it is routinely taking less risk. It has, however, made much better returns than the sector average and has outperformed the sector on risk adjusted measures such as Sharpe ratio. The fund manager’s emphasis on avoiding losers seems to be paying off as the loss measures such as downside deviation and max drawdown are superior to the sector average.
Suitability
The fund's broad mandate makes it significantly different from the average fund in this sector, and the funds correlation to the sector index is at the low end of reasonable. This is likely to make the fund less suited to investors looking for conventional bond exposure, but is ideal for someone wishing to outsource entirely the fixed income portion of their portfolio. Despite its name it may not be the best option for income investors either as at the time of writing the funds yield was significantly below average for the sector.
AFI Comment
"One of the objectives of a good corporate bond manager is to identify those bonds that they expect will be either negatively or positively re-rated. In order to be able to identify these anomalies within the market the bond manager must have a significant analytical resource - M&G has more than 50 bond analysts, probably one of the largest teams in the City, says RSM Tenon's David Wynn. The experience and quality of these analysts must also be very high - again, M&G's analysts meet these criteria. We like the fact that the way the Fund works allows Richard Woolnough the flexibility to take high conviction positions within Gilts, Investment Grade Corporate bonds, high yield bonds and some equity.
"In essence, it is the fact that we can delegate the 'tactical' bond call to highly experienced individuals, such as Richard and Jim Leavis, which is most appealing".