Morningstar is maintaining its conviction in the M&G Optimal Income fund, despite it shedding almost £8bn in assets this year and underperforming recently.
The ratings agency says it remains confident in manager Richard Woolnough’s ability to recover from the fund’s recent underperformance.
The Optimal Income fund has shed a quarter of its assets so far this year. It has lost almost £8bn in assets since its peak, dropping to £17.33bn in the most recent data from £25bn earlier this year. The fund has also underperformed recently due to its short-duration holdings.
However, Morningstar analyst Ashis Dash says: “We remain confident in the fund’s long-term potential.
“The fund is one of the largest in its Morningstar category and is widely held by European retail investors who tend to be more sensitive to short-term performance and hence more active in their asset allocation.”
“A wider rotation out of the fixed-income space, driven by concerns of an imminent rate rise in the US and the UK, has aggravated redemptions from the fund as well. Overall, a combination of these factors has meant that it hasn’t been smooth sailing for the fund recently.”
Dash says that over the long term the fund has outperformed, returning 8.45 per cent on an annualised basis from 2007 to 2015, ahead of its 3.05 per cent return for the GBP cautious allocation Morningstar sector.
However, over one year it has delivered a 0.73 per cent loss compared to 5.15 per cent for the index and over three years it has returned 4.11 per cent against the index’s 6.09 per cent.
“Our conviction in this strategy stems largely from our confidence in manager Richard Woolnough. His expertise in macroeconomic analysis and ability to allocate across the fixed-income universe underpin the fund’s unconstrained approach,” he says.
Woolnough has had a short duration stance since the second half of 2011, with the fund’s average duration in June 2015 being 2.8 years, compared to the benchmark position of six years. However, Woolnough has increased duration in pockets, namely with euro-denominated duration, which has shifted from -0.65 years up to slightly positive to June 2015.
“Within corporate debt, the allocation remains skewed to investment-grade credit at 57 per cent versus high-yield at 28.2 per cent, with a general preference to US Dollar and GBP-denominated bonds over euro bonds,” says Dash.
Woolnough has also cut the fund’s equity exposure, from about 12 per cent in 2013 to 0.6 per cent split among three holdings.
However, Morningstar is critical of the fund’s charges, saying it is expensive relative to its sector. The fund charges 1.41 per cent as an ongoing annual charge, compared to 1.17 per cent for the median charge for similar flexible bond funds.
M&G were not available to comment.