M&G Strategic Corporate Bond - a flexible approach to corporate bond investing

Kate Marshall | Mon 01 July 2019

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• Richard Woolnough thinks the global economy's in good shape
• This could be supportive for slightly higher-risk investment-grade corporate bonds, where the fund's focused
• We think the manager has a good long-term track record

Our view

Richard Woolnough aims to be as flexible as possible with this fund.

He takes into account his outlook for the global economy, including his views on economic growth, inflation, and interest rates. This is combined with research on sectors, companies, and bonds, to identify what he thinks are the best opportunities in the current environment.

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

The fund isn't currently on the Wealth 50 list of our favourite funds. There are other managers investing in corporate bonds we rate at least as highly, but with lower charges.

Is the global economy stronger than you think?

Richard Woolnough thinks the global economy looks healthy. The recovery we’ve seen since 2008’s financial crisis is long by historical standards, but he doesn’t currently see anything on the horizon to derail it.

In countries like the US and UK, Woolnough says unemployment is low and wages could grow from current levels. This could boost consumer spending, which is ultimately good for the economy and for business.

This supportive backdrop means it's more likely businesses will be able to pay off their debts and the interest due to bondholders. As a result, Woolnough's prepared to take on a little more risk and around two-thirds of the fund is currently invested in BBB-rated bonds.

These are at the higher-risk end of investment-grade, corporate bonds, and they pay a higher rate of interest to compensate for the extra risk. He also thinks they offer more value than other parts of the investment-grade market.

A number of asset-backed securities are currently held in the fund. These bonds are backed by the assets a company owns, such as property or cash flows. It means bondholders can make a claim on these assets if the company isn't able to pay back its debts. Woolnough's recently increased exposure to these investments and current examples include bonds issued by Thames Water.

He's also recently invested in other bonds issued by companies such as ENI, an Italian oil & gas company.

Elsewhere, he's sold some bank bonds, including JPMorgan, Aviva and Bank of America. He also sold some telecoms bonds, such as Verizon, Telefonica and Vodafone, which recently performed well. This gave him the chance to take a profit, and reinvest the proceeds in areas he thinks have more potential.

The fund also has the ability to invest in high yield bonds and derivatives, both of which increase risk.

How's the fund performed?

The fund hasn't performed as well as the average fund in the Corporate Bond sector over the past year. This is mainly because its ‘duration’ is relatively short.

This provides some shelter if interest rates rise, 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. So long-dated bonds have delivered stronger returns and it’s been the wrong call to be short duration.

Woolnough has an impressive longer-term track record. Since the fund's launch in February 2004, it's grown 146.0%* compared with 83.4% for the Corporate Bond sector average. Please remember past performance isn't a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2019

Given the way the fund's currently invested, we think it'll hold up better than some other funds if bond markets see a setback. It might not perform as well when they're stronger though.

Find out more about the fund, including charges and how to invest

Key information document