Square Mile has downgraded a trio of funds, worth over £7bn, run by M&G’s Richard Woolnough, alongside a £264m Legg Mason global bond fund, from AA to A in its latest ratings round-up.
Woolnough’s £2.2bn Optimal Income, £3.1bn Corporate Bond and £2.1bn Strategic Corporate Bond vehicles have all been demoted in the rankings due to “continued underperformance”.
Despite being billed as “flexible, all-weather fixed income strategies” that can outperform no matter the economic cycle, Square Mile said Woolnough’s duration positioning “has become something of a structural position” creating an “unintended bias reducing the flexibility of the funds to adapt to evolving market conditions”.
Optimal Income outperformed the IA Sterling Strategic Bond sector over the last year, rising 6.8% while the sector was up 4.2%, according to Trustnet. But on a three-year view it is in the bottom quartile, having returned 9.5% against the 13.3% sector average.
The Corporate Bond and Strategic Bond funds have slightly better three year-track records, returning 13.5% and 13.7% respectively against the IA Sterling Corporate Bond sector’s 13.5%.
Woolnough’s (pictured) Optimal Income fund hit troubled waters during the Covid sell-off. The fund lost £5bn between February and March 2020 as the fund’s assets fell from £21bn to £16bn in just five weeks. Due to Brexit, the bulk of assets have been shifted to Luxembourg with the Sicav holding €18.8bn at the end of February, while the Oeic held £3.2bn.
See also: M&G stock keeps tumbling as Richard Woolnough strategy sheds £5bn
As his funds have delivered middling performance Woolnough has received widespread criticism over the size of his pay packet. He is said to be one of the highest earning mangers in the industry, receiving £17.5m in 2013 and at least £15.3m a year later.
Square Mile said of the decision: “While Square Mile considers these funds to be compelling propositions managed by a highly experienced team, an A rating is more reflective of the analyst’s conviction in the managers’ ability to meet their performance aspirations.
Further downgrades
The Legg Mason Brandywine Global Fixed Income fund was also downgraded from an AA to an A rating.
Square Mile said the managers’ preference for emerging market debt over developed market debt had led to “disappointing relative returns over a number of years,” adding that the fund’s risk profile versus its index had increased over time.
The $369m (£264m) fund has lost 4% over the last year versus the IA Global Bonds -0.4% average and over three years it is one of the weakest performers in the sector, up 0.7% compared with the average fund’s gains of 9.7%, according to Trustnet.
“Nonetheless, Square Mile continues to like the Brandywine team and approach, believing that the fund can play a role in portfolios as a higher risk fixed income exposure although the reduced conviction is reflected in this rating change,” the firm added.
Royal London UK Equity Income rating suspended following Martin Cholwill retirement
The Royal London UK Equity Income fund has seen its rating suspended as its manager, Martin Cholwill, prepares for retirement. He will continue to co-manage the fund alongside Richard Marwood during a transition period.
Square Mile said it would continue to suspend the rating until it can asses Marwood’s strategy. The fund currently manages £1697m and has returned 27.3% over five years, above the IA UK Equity Income average of 22.6%.
See also: UK equity income veteran Martin Cholwill to retire from RLAM
The Jupiter Distribution fund has had its rating removed after its suspension in December 2020 on the news that Alastair Gunn was leaving Jupiter. Having met with Jupiter’s multi-asset team who are taking over the mandate, Square Mile analysts believe it “is very likely that the fund will be run in a different style and approach than it was previously”.
“Although Square Mile thinks Jupiter’s plans for the fund are sensible, they are unlikely to be completed before Q3 2021 and so believes the most appropriate action at present is to remove the rating and monitor the fund’s progress.”
The only fund to be promoted to an AA rating is the Barings Emerging Market Debt Blended Total Return fund.
Square Miles’ analysts are “impressed by the emerging market debt franchise built at Barings since Ricardo Adrogue joined in 2013, with a structured process and a well-resourced investment team.”
“While the high conviction, best ideas approach employed by the managers will tend to lead to a more volatile profile, Square Mile believes investors should be compensated with superior returns over the long-term.”
The £604.11m fund, which is also managed by Cem Karacadag and Natalia Krol, has returned 8.9% over five years.
