Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Morningstar Fund Analyst, Ashis Dash, to discuss two M&G bond funds being downgraded.
Hi, Ash.
Ashis Dash: Hi, Emma.
Wall: So why have the M&G Corporate Bond Fund and the M&G Strategic Bond Fund being downgraded?
Dash: So, yes, as you mentioned, both the funds have been downgraded. Our conviction on both funds was predominantly driven by the manager Richard Woolnough's experience. So his macroeconomic analysis as well as his experience in managing credit funds goes quite a long way in the ratings of these funds and that has obviously been reflected in the funds' long-term performance. The long-term performance for both the funds have been – they have beaten their benchmark, the IA categories as well as the Morningstar categories.
But over the last five years the performance has suffered quite a bit. They have been below the benchmark. They have been behind the categories as well. The first couple of years [of underperformance] would be '12, '13 when it was because of the underweighting in financials, but after that since then the underweight in duration has held back performance, both on an absolute as well as on a risk-adjusted basis. Plus, the fees on both funds are on the higher side and the funds are quite large, so it can obviously be a little low and help the investors.
Wall: Of course, that's just two Ps of the 5P process which analysts use to rate a fund. And as you say, conviction does remain strong in these, because although they've been downgraded, they still hold a coveted Silver Rating from Morningstar?
Dash: That's true. As I said, our conviction still is with Richard Woolnough. His experience does matter quite a lot. 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. So, we still are with – we still back our Silver rating with that.
Wall: Between the two funds he has a mandate there of about £9 billion which is quite a lot of money. Is that something that you consider when rating the funds?
Dash: That is one of the factors we definitely consider and the fee element does come back to it. If the fund is that large it can obviously – it can be played to the investors' advantage. But as of now, it's one of the more expensive funds in the sector.
Wall: And of course, the performance concerns are not just to the M&G funds. Bonds are facing challenging times and we've got some very highly-rated funds within that sector, offerings from Invesco Perpetual and Fidelity, but performance is more muted at the moment, isn't it?
Dash: That is true. Just speaking about the M&G funds, the duration has dominated whereas contributions from security selection and asset allocation has not been sufficient to offset that. The other funds are also facing similar kind of problems. There are good few offerings within this space, but as we said, yields are quite low and then it's hard to get the returns out of them.
Wall: Ashis, thank you very much.
Dash: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.