Of these, only one has been removed from that sector – the obvious question is “Which one?” but given the understandable confidentiality agreements signed with all its member firms, the IMA is keeping tight-lipped.
Usual suspects
When this whole topic is raised, fingers are often quickly pointed at funds like the Jupiter Financial Opportunities which, certainly when Philip Gibbs ran it, would happily take big cash positions, usually for the short term and for the benefit of the end investor.
The Artemis High Income Fund is another that, as a strategic bond fund, has been known to take bigger equity positions than the 20% allowed under the IMA definition, much to the chagrin of other funds in the sector, be they based in London, Henley or elsewhere.
One question raised about the First State Global Resources Fund is why it sits in the Global Equity category when most of its peers, including other single-themed funds, are in the Specialist sector.
It is clear that the IMA sectors are not perfect but some are definitely more perfect than others and the current focus for the association – and some peer-group fund managers – is the Corporate Bond sector.
Without naming names, an IMA spokesperson was able to confirm is that it is currently “in discussions” with funds that appear to be breaching the Corporate Bond sector rules and regulations.
The M&G Corporate Bond Fund is one that – whether or not an IMA missive is on its way – does not on the face of it meet the definition of a corporate bond fund.
The strict definition of a corporate bond fund is: “Funds which invest at least 80% of their assets in sterling-denominated (or hedged back to sterling), BBB-minus or above corporate bond securities (as measured by Standard & Poor’s or an equivalent external rating agency). This excludes convertibles, preference shares and permanent interest bearing shares.”
According to its latest fact sheet, up to 31 October, the £5.2bn M&G Corporate Bond Fund run by Richard Woolnough has 78.7% in investment grade bonds. The rules of the Corporate Bond sector are such that this fund is in breach…but so what?
On one hand…
One school of thought is that the IMA rules are very clear. It is unfair to all of the other funds in the category that do play by these rules and following due process means the IMA should write to M&G and give it four months to correct its position or turf it out of the sector.
M&G may be doing the right thing by their investors but the warning is that those funds that do well in down markets are probably assisted in doing that by being in breach of sector rules. The argument goes that when markets turn – and they will turn – suddenly investors are in a fund that isn’t invested as fully as it should be in the asset class it is meant to be invested in.
…and on the other
The other school of thought is that Woolnough’s fund is only just under the 80% limit so is it worth quibbling over 1.3%?
The 80% figure is fairly arbitrary anyway and a number of intermediaries – whether they own it or not – are more than happy with how Woolnough is running it.
Comments like one from Tim Cockerill, head of collectives research at Rowan Dartington: “It doesn’t bother me at all because the fund is doing what I want it to. It is only marginally below the 80% and what is more important is the investment grade bonds that he is holding” are not unusual.
When asked about the inflection point, and that Woolnough could miss out by being under-invested in top-grade bonds, he added: “The problem with the inflection point is you only know it in hindsight. We are defensive right now and the way we build a portfolio is we hold others that we expect to perform better when markets go up.”
If investors – and more likely Woolnough’s peers – want to be really gung-ho about it, they should force the IMA’s hand and make sure that, quite rightly, the rules are adhered to so investors are more easily able to know exactly what they are investing in. Assuming Woolnough received a "Dear Fund Manager" letter from the IMA four months ago, his fund should now be elbowed out of the Corporate Bond sector and not allowed back in for at least 12 months.
It would be good to know what M&G think about this but, alas, 72 hours after being contacted they have been unable to come back to me.
