Ashis Dash: The M&G Optimal Income fund [rated Silver] has seen outflows through the course of 2015, reducing assets under management by about a quarter since January. We believe the primary reason for this has been the fund’s underperformance over the last two years. Furthermore, 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.
The recent underperformance at the fund has been largely driven by manager Richard Woolnough’s short duration stance, broadly in place since late 2011. While this approach proved beneficial in the taper tantrumof 2013, it has since held back returns in an environment of declining core government bond yields.
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. Currency is also an important factor given the European retail investor base, as the appreciation of sterling against the euro for the better part of the last two years has been another headwind. Overall, a combination of these factors has meant that it hasn’t been smooth sailing for the fund recently.
Despite the recent underperformance, we retain our conviction in this strategy. Richard Woolnough is a highly experienced fixed-income manager who has successfully managed funds across multiple credit cycles. At Morningstar, we have a very high regard for his top-down macro views, as well as his ability to asset allocate across the fixed-income spectrum. This is important given the unconstrained nature of the strategy at M&G Optimal Income, and much more so now as the fund is diversified across a large number of issuers, limiting the ability to add value through individual credit selection.
Woolnough is supported by a well-resourced fixed-income team at M&G that he uses well and he has consistently applied the fund’s investment process over the years, reflected in the fund’s strong long-term track record.
