M&G Strategic Corporate Bond - opportunities in the UK and beyond

Richard Troue | Wed 21 November 2018

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• It’s been a tough year for bonds and lots of bond funds, including this one, have fallen in value
• Richard Woolnough continues to find opportunities outside the UK, including in the US
• Long-term performance is impressive and we continue to rate Richard Woolnough

Our view

Richard Woolnough tries to be as flexible as possible with this fund. He incorporates his outlook for the global economy with research on sectors, companies, and bonds, to identify what he believes are the best opportunities for the prevailing environment.

He looks at the outlook for things like economic growth, inflation, and interest rates globally, for example, and invests overseas if that’s where the opportunities are. About half the fund is currently invested outside the UK.

We like this flexible approach and Richard Woolnough has a good track record of getting the bigger picture economic calls correct but he doesn’t get it right every time. We think he’ll do a good job for long-term investors.

The fund is on the Wealth 150 and it currently yields 3.2%; however, this isn’t a reliable indicator of future income.

Performance review

Richard Woolnough’s long-term track record and performance are impressive. He’s tended to do better than similar funds during difficult times for bond markets, but lag behind a little when they’ve been strong. This isn’t a guide to how the fund will perform in future though.

His funds performed relatively well in the wake of the global financial crisis, for example, but haven’t quite kept pace during the rising markets we’ve seen over the past few years.

The weaker spell of performance is mainly because the fund’s ‘duration’ is relatively short. This affords some protection against rising interest rates because the prices of short-duration bonds don’t fall as much as long-duration bonds when interest rates rise, or are expected to rise. In recent years interest rates have stayed lower for longer than expected. Long-dated bonds have therefore delivered strong returns and it’s been the wrong call to be short duration.

The fund’s short duration has helped at times over the past year though. Interest rates and bond yields have started to rise in the US, and bond prices have fallen as a result. The fund hasn’t been immune but it’s held up a little better when this has happened, most recently during September, although it underperformed over the year as a whole.

Past performance is not a guide to the future. Source: Lipper IM to 31/10/2018

Richard Woolnough’s outlook

We’re almost ten years into the recovery from the global financial crisis. We’ve now seen a long period of global economic growth by historical standards. But Richard Woolnough doesn’t think that means it’s set to end.

Over in the US unemployment is low and consumer confidence is at its highest level since the financial crisis, for example. He thinks wages could rise and provide a further boost to the economy if people spend the extra money.

There are risks, of course. Interest rates could rise faster than expected in the US, and the UK still has a Brexit deal to finalise. But as it stands Richard Woolnough thinks the global economy will keep growing.

With this view in mind he’s still using his flexibility to invest outside of the UK corporate bond market. This includes investments in bonds denominated in US dollars and euros, by both US and European companies. Bonds issued by Microsoft, AT&T, Bank of America, and JPMorgan are among his biggest investments.

It’s possible for the manager to invest in overseas bonds, but at least 80% of the currency risk is removed. Just over 40% of the fund is currently invested in the UK, with about 28% in the US and a little over 20% in Europe, but virtually all the foreign currency exposure has been hedged back to sterling. This means Richard Woolnough can select bonds he believes offer attractive returns, but not take on the associated currency risk, for better or worse.

Richard Woolnough also has the flexibility to invest in high-yield bonds, emerging market bonds, and use derivatives, which add risk.

M&G Strategic Corporate Bond Key Investor Information Document

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