M&G Optimal Income - change afoot

• The global economic recovery is on track, according to Richard Woolnough
• He thinks high-quality US bonds will perform well
• He’s added some investments in shares as well as bonds

Our view

Flexibility is the name of the game for this fund. This is why we like it.

Richard Woolnough, the manager, invests across a wide range of bonds and even some company shares. The fund will often be invested differently to other bond funds and the manager will sometimes change his view quickly when he spots opportunities. This means it will perform differently to other bond funds too.

It’s an approach that’s worked very well over the long term. But Richard Woolnough doesn’t get it right every time and the fund will fall in value as well as rise.

We think it’s a great choice for a slightly more adventurous approach to earning some income and capital growth from the bond market. The fund remains on the Wealth 150 list of our favourite funds.

Performance review

Bond markets performed pretty well in 2017, but the first half of 2018 saw quite a reversal. The prospect of higher inflation and interest rates in the US, trade tensions between the US and China, and political conflict in Italy all contributed.

It’s at times like this a flexible approach can come into its own. The fund achieved a small gain of 1.2% over the past year, compared with just 0.1% growth for the average fund in the sector*. Past performance is not a guide to future returns.

Past performance is not a guide to the future. Source: Lipper IM *to 31/07/2018

During the latter half of 2017 the fund’s investments in euro zone peripheral government bonds, bank bonds, and investments in the technology, media and telecoms sectors performed well.

The story in 2018 has been quite different. Political tension in Italy caused the prices of peripheral euro zone bonds to fall, for example. Fortunately, Richard Woolnough sold a lot of his investments here and invested in US government bonds instead. This proved to be a shrewd move.

Keeping hold of his investments in bank bonds hasn’t been as successful though and these bonds have detracted from performance. This just goes to show that even the most highly-regarded fund managers don’t get every decision right.

Over the long term Richard Woolnough has got a lot of the big calls right and performance has been excellent.

M&G Optimal Income - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2018.

Outlook

Richard Woolnough expects the global economy to continue growing at a good pace. Even though the recovery we’ve seen from 2008’s financial crisis is long by historical standards he doesn’t currently see anything on the horizon to derail it.

In this environment he thinks bonds will do well. He’s happy to hold US government bonds and high-quality US corporate bonds. He can find good yields here without taking excessive risks.

He’s also happy to invest in some higher-risk high yield bonds and emerging market bonds. These areas make up a relatively small part of the fund. He recently bought a high-yield bond issued by Telecom Italia, and he’s invested in bonds issued by the Mexican, Brazilian and Colombian governments.

Finally, almost 5% of the fund is invested in shares. Richard Woolnough recently increased investments in the shares of European banks. He sees good value in this area after some share price falls.

Richard Woolnough also has the flexibility to use derivatives which can add risk. The fund may invest more than 35% of its assets in securities issued or guaranteed by a single country or supranational body. For a list of possible countries or bodies please see the fund’s prospectus.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund (inc. charges)