Since mid-2014, concerns over a deteriorating outlook for the global economy have pervaded bond markets. Demand for 'safe haven' assets has pushed up the prices of bonds issued by the US, UK and German governments. Meanwhile, corporate bond prices have lagged, attributed in part to concerns over a slowdown in the US and China, and sharply falling commodity prices.
Richard Woolnough, manager of the M&G Strategic Corporate Bond Fund, believes these concerns are overstated. The positive effects of policy stimulus, such as quantitative easing, over the past five years are beginning to appear, in his view. He is also cautiously optimistic in his outlook for developed economies.
In the US and UK, signs of inflation are beginning to appear and Richard Woolnough believes a robust labour market should continue to support this. Household spending should also be supported by a low oil price. In the US, while the manufacturing sector has been in decline for some time, the service sector looks in better shape. A relatively healthy economic backdrop could prove supportive of corporate bond markets, in his view.
The manager sees plenty of opportunity in the bond markets at present. He continues to take advantage of periods of market weakness, such as when markets faltered earlier this year, by investing in favoured or new opportunities. He has found value in longer-maturity, US dollar-denominated, BBB-rated bonds. This portion of the portfolio has performed well since mid-February following the market setback and more recently the manager has taken profits.
While corporate bond markets have performed well more recently, the manager continues to see value in current yields, which look particularly attractive against low-yielding government bonds. Less than 5% of the portfolio is currently invested in government bonds. A minimum of 80% of the fund will always be invested in investment grade corporate bonds, although it also has the flexibility to invest in government bonds and higher-risk high yield bonds.
Source: M&G, correct at 29/04/2016
The fund currently has a lower duration position than the broader UK corporate bond market. Duration is a measure of the fund's sensitivity to rising yields or interest rates. Interest rates have remained stubbornly low meaning the fund's low duration stance has proven a headwind. However, when interest rates rise, this low duration stance should provide an element of shelter to the portfolio.
Our view on this fund
Richard Woolnough is one of our favourite bond fund managers. He is also supported by a high-quality team of bond specialists at M&G. The manager and his team have demonstrated an ability to read the economic environment and reposition the fund accordingly, which has added significant value ahead of the peer group over the long term, although this is not a guide to how the fund will perform in future. Our analysis suggests the fund has tended to come into its own during tougher conditions for bond markets, although performance has looked pedestrian against the peer group during stronger periods.
In our view, this fund remains a good choice for investors seeking long-term exposure to investment grade corporate bonds. The fund currently features on the Wealth 150 list of our favourite funds across the major sectors.
Please note the manager has the flexibility to use derivatives which, if used, increases risk.