The manager of the £18.8bn M&G Optimal Income fund says in the medium term developed markets will bounce back without any major headwinds, buoying the global economy despite certain worries in emerging and frontier markets. He says he couldn’t think of a single major headwind that was worrying him, which has encouraged him to add more risk in his portfolio.
“I am quite relaxed about [the global economy]. I think the markets – the US and the UK – are strong,” he said.
"Growth is fine, housing markets around the world are fine, inflation isn’t a particular issue and so I can't see any major headwinds whatsoever. That's why I have a lot of credit risk in the portfolio and short durations."
Woolnough says that a strong housing market underpins his market view: “Big monetary policy works through the housing market and the housing market in the UK and the US is set fare for the next 18 months or so, if not more.”
“Both of those markets should be OK for the next few years.”
He thinks any likely rate rise in the US and an end to QE will be muted at best, and isn’t forecasting a mass sell-off as a result.
“It takes at least 18 months for interest rate policy to work because of the lag effect,” he said. “As soon as you put rates up – let's say in a year's time – as long as they do it slowly, you’ve got at least three years, so with that in front of us, we’re fine.”
The manager adds he is unconcerned with the wider European economy, including a potential deflationary scenario.
“I think deflation [in this instance] is good, but then there is good deflation and bad deflation,” he said.
“Everyone always uses Japan as an example of bad deflation but what about Switzerland? They have low inflation and growth.”
He says the same lagged effect of interest rates will mean a favourable environment for the wider European economy.
“[The eurozone] has a lot of financial easing coming through after a very difficult 2012 because everything was tightened in 2011, but all their interest rates have continued to keep coming down and so that works on an 18 month lag, I think Europe is going to be stronger.”
M&G Optimal Income has returned 84.50 per cent since its launch in 2006, through which Woolnough has been solely at the helm.
It has been a top quartile performer over one and three years, returning 28.29 per cent over the longer period – almost 8 percentage points more than its IMA Sterling Strategic Bond sector average.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Fixed income has been a testing place to be in past 12 months; however the fund did manage to stay ahead of the majority of others in the IMA Sterling Strategic Bond sector, with returns of 6.84 per cent.
The fund is a big investor in corporate bonds, including companies with indirect exposure to emerging markets. He is relaxed about this, however.
“The companies [in the portfolio] are mainly exposed to the US and the UK and Europe and even if they have big business in China such Microsoft. Their revenue is not dependent on it, so if does slow it won't be as deeply felt,” he said.
Woolnough joined M&G from Old Mutual in 2004 and has a total of 28 years’ experience in fixed income.
He says his bullish outlook may also be due to his decades of experience.
“I'm so used to bad news, I've got used to it," he finished.