M&G’s Woolnough: ‘Sterling corporate bonds are becoming less important’

Fixed income heavyweight extols virtues of global style favoured by Terry Smith and Nick Train

M&G’s Richard Woolnough (pictured) is broadening his focus away from the sterling corporate bond market which looks “less important” next to capital markets in the US and Europe.

Speaking at Morningstar’s annual conference on Tuesday, Woolnough, who is said to be the highest paid employee at M&G, said he has been investing “more and more” in international markets, following in the footsteps of equity managers Terry Smith and Nick Train whose global funds are some of the most popular and best performing in the UK marketplace.

“You look at some of the largest selling funds out there or the best performing funds like Fundsmith or Lindsell Train, they don’t just narrow it down to the UK. They look abroad.”

Woolnough said when he started out in the industry 30 years ago it was “perfectly acceptable” for equity investors to park their money in the FTSE because there was a greater variety of companies.

But the situation is different now. Stock pickers that want to buy into certain sectors like tech must look beyond the UK.

The same line of thinking applies to bond managers.

“We have to look across the world. The sterling corporate bond market is becoming less important as the European currency bloc becomes bigger and the US currency bloc dominates the world.”

‘I want markets to be illiquid’

Woolnough has stuck to his bullish conviction that a recession is not around the corner and maintained his bias toward investment grade bonds. Last November he revealed his £23bn Optimal Income fund had its highest ever exposure to investment grade credit at 60% of the portfolio while high yield and government bonds made up 13.3% and 24.1% respectively.

His preference for short-duration and decision to pile on lots of credit risk made his Optimal Income fund “very volatile” last year but as markets rallied in the first quarter of 2019 performance has picked up.

His fund is now first quartile on a three-month view with returns of 3.5%, ahead of the IA Sterling Strategic Bond’s returns of 2.4%. Over a longer time horizon, the fund is hovering near the middle of the pack in the third quartile over one and five years and second quartile over three years.

3m6m1yr3yr5yr
M&G Optimal Income3.53.91.713.018.6
IA Sterling Strategic Bond2.43.52.712.618.1
Source: Trustnet

After three months of cheerier markets at the start of the year he thinks the consensus sentiment has started to sour once again, despite encouraging economic indicators.

“The market now thinks the US is about to stop,” he said. “I don’t. I think the economy is fine. I think interest rates will continue to go up, they won’t be going down.”

Woolnough thinks a recession is three years away at least. And judging from tight labour markets in the US and UK he expects to see wage growth between 3% to 4%.

“It’s hard to see deflation in the world when that’s happening.”

He isn’t worried about another frequent concern for fixed income investors: liquidity issues. “I want markets to be illiquid.”

“This lack of liquidity is a really big driver of what we’re trying to take advantage of,” he said. “In 2007 the market was one of the most liquid it has ever been and that was the worst time you could have bought the market. In 2009 the market was the most illiquid it’s ever been and that was the best time to buy the market. You want to take advantage of not only the moving economic cycle but the moving liquidity cycle.”

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