The £4.9bn M&G Corporate Bond and £4.3bn M&G Strategic Corporate Bond funds, both run by Richard Woolnough, have been downgraded by Morningstar for their lagging performance.
“Despite our positive view on Woolnough and his established process, the funds’ performance woes along with their above-median fees (in spite of their large sizes) have partly dented our conviction,” says Morningstar analyst Ashis Dash.
The funds, managed by Woolnough since 2004, are both now rated silver having previously held a gold rating.
Dash notes that both funds have lagged the Markit iBoxx GBP Corporates index over the last five years.
The funds started underperforming around 2012 when they were underweight in financials, but this underperformance continued as it was underweight in duration.
Asset allocation and credit selection have been “modest and insufficient” to offset the negative of effect of the funds’ short duration positioning over the last few years, Dash says.
However, he adds: “The underweight duration stance, it hasn’t worked in the last couple of years and that’s also because of the environment that we’re in which is being driven by central banks.
“But when the rates go up, there is a likelihood that the funds outperform.
Woolnough also runs the M&G Optimal Income fund, which is rated silver by Morningstar.