Not so the M&G Optimal Income fund however, which despite only turning three on 8 December 2009 already has £1.124bn in assets under management (AUM) at the end of October 2009. This year alone the fund has increased in size by 245.92 per cent from a modest £325m. While some of this change can be attributed to the incredible bond rally witnessed earlier in the year, the fund has still attracted massive investor interest.
The fund is in the IMA Sterling Strategic Bond sector and has rewarded all those who had faith in it by producing top quartile returns for its first three year period. The fund has returned 29.76 per cent for the three years to 8 December 2009, compared to the IMA Sterling Strategic Bond sector index return of just 3.59 per cent over the same period. This outperformance has come with no additional market risk as the fund's weekly volatility over the period is less than that of the sector index.
Performance of fund over 3-yrs
Source: Financial Express Analytics
The M&G Optimal Income fund is the highest ranked fund in the AFI Cautious index and panellist David Wynn, Investment Director at RSM Bentley Jennison Financial Management explains its appeal: "In order to be able to identify the 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. The experience and quality of these analysts must also be very high - again, M&G's analysts meet these criteria.
"We bought the M&G Optimal Income Portfolio for clients in December 2008 because we believed that the opportunity within corporate bonds at that time was fantastic and also, because 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 that is most appealing."
The fund is managed by Trustnet Alpha Manager Richard Woolnough who has over 23 years of experience in fixed income and is well known for managing the M&G Corporate Bond and M&G Strategic Corporate Bond funds, both of which are currently top quartile for three year performance.
The fund takes a top down approach and Woolnough points to the team's bullish stance on the economy as reason for the increase in credit risk, as well as his concern that rising interest rate will be negative for Gilts. In particular he sees the debt of BBB rated companies as offering the best value as these are the companies that were most dependent on banks for financing. These distressed companies are suffering from a liquidity crunch rather than a business crunch and offer sound returns once they recover and their spreads begin to narrow.
Overall, the fund has proven worthy of its early popularity. The combination of a flexible mandate suited to market conditions has given the fund an advantage and a proven fixed income team has been enough to convince investors to forgo the standard three year waiting period.
The success of Woolnough’s other fixed income offerings make this fund much less of an unknown quantity and the weight carried by the M&G brand must also have played its part. Now armed with an excellent three year track record as well expect his funds popularity to dramatically increase.