M&G Strategic Corporate Bond - a genuinely strategic corporate bond fund

• Richard Woolnough has gradually become more cautious in his outlook for bond markets
• Opportunities have been found among bonds issued by UK, US and European financial companies
• Long-term performance is impressive and we continue to rate Richard Woolnough highly – the fund remains on the Wealth 150

Our view

Richard Woolnough has a good track record of getting the bigger picture economic calls correct and we have been encouraged by his willingness to adopt a flexible approach and seek opportunities outside the UK.

We often remind investors that even the best fund managers don’t get it right every time and in some respects Richard Woolnough has been too cautious in recent years. This has led to a spell of lacklustre performance, but his long-term record remains impressive. Please remember past performance is not a guide to the future.

This is one of our favoured funds for exposure to investment-grade corporate bonds. It remains on the Wealth 150 and currently yields 3.1%; however, this is not a reliable indicator of future income.

Performance review

The weaker spell of performance over the past three years has mainly been caused by the fund’s 'duration' being kept relatively short. This affords some protection against rising interest rates because the prices of short-duration bonds do not fall to the same extent as long-duration bonds when interest rates rise, or are expected to rise. In recent years interest rates have stayed lower for longer than expected. Long-dated bonds have therefore delivered strong returns and it has been the wrong call to be short duration.

With the UK economy in reasonable health, Richard Woolnough believes there could be scope to increase interest rates sooner than many expect, so he is happy to maintain the short duration stance.

The fund’s long-term performance remains impressive. Richard Woolnough has tended to do better than peers during difficult times for bond markets, but performance can be pedestrian when they experience strong growth. We continue to believe he will do a good job for long-term investors, although please remember past performance is not a guide to the future.

M&G Strategic Corporate Bond - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2017

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2017

Portfolio update

In recent years Richard Woolnough has made increased use of his flexibility to invest outside of the UK corporate bond market. This has included investments in bonds denominated in US dollars and euros, by both US and European companies. A small amount has also been invested in higher-risk emerging markets.

This has allowed him to diversify the fund and take advantage of a greater range of opportunities as growth in the UK bond market has stagnated, while the issuance of dollar and euro-denominated bonds has continued to grow. Richard Woolnough expects this trend to continue and for this to become a genuinely international fund over the next few years.

Although it is possible for the manager to invest in overseas bonds, at least 80% of the currency risk will be removed. Presently, almost 45% of the fund is invested in the UK, with 28% in the US and around 20% in Europe, but virtually all the foreign currency exposure has been hedged back to sterling. This means Richard Woolnough can select bonds he believes offer attractive returns, but not take on the associated currency risk, for better or worse.

Most new opportunities are currently being found in the US, where the government is no longer intervening in the bond market (unlike in the UK and Europe). Richard Woolnough has been happy to invest in bonds issued by large, financially robust companies such as Verizon Communications, AT&T and Microsoft, where he sees the additional yield offered over government bonds as attractive for the level of risk he is taking.

Investments in bonds issued by banks and financial companies have also been increased. Bank of America, JP Morgan and HSBC all feature in the portfolio, along with bonds issued by Société Générale, BNP Paribas and Munich Re. Volatility caused by fears over the French election recently provided an opportunity to add to these investments. Richard Woolnough also has the flexibility to invest in high-yield bonds and use derivatives, which add risk. A proportion of the fund could also be invested in bonds issued or guaranteed by an EEA state.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.