A deteriorating trade situation between the US and China would not be good for M&G’s star bond manager Richard Woolnough (pictured) but he is sticking to his guns and keeping duration short on the basis a recession is not likely next year.
During a Q&A session at the seventh annual M&G Bond Vigilantes conference Woolnough and M&G UK Inflation Linked Corporate Bond manager Ben Lord were asked how their funds which are both short duration would fare if the US/China trade war derailed.
Lord’s £877m fund’s duration was at 1.12 years by the end of September, according to the fund’s latest factsheet, while Woolnough’s M&G Optimal Income fund was at 1.52 years, close to its lowest level ever.
“It would go against us in the short term, there’s no doubt,” said Lord, “especially because we’ve had 40bps to 50bps of rising yields in the US, Germany and the UK recently on the general improvement in sentiment, albeit from a really overdone desperate global recession level.”
Woolnough agreed that worsening relations between the US and China would trigger a flight to quality.“We’ll go down as much as everybody else so relatively we’ll do as good a job,” he said on the impact to M&G Optimal Income.
But long-term he thinks there are more important factors to growth than China like money supply and trade deficit levels.
“The US economy was very, very strong and existed before there was trade to China and it’ll be very strong and continue to exist if there was no trade with China.” He added one thing it would do is reduce growth slightly but it would also make the price of US labour go up.
Woolnough hits back against consensus
Until recently Woolnough’s M&G Optimal Income fund held the title for largest fund in the UK holding a colossal £23bn in assets. However, he lost that crown to Terry Smith’s Fundsmith Equity as M&G Prudential transferred £34bn worth of assets to Luxembourg in May 2018 as part of its Brexit contingency planning.
The Oeic version of his fund currently stands at £3.7bn, just slightly bigger than his £3.5bn M&G Corporate Bond fund, which he co-manages with Lord, and over £1bn bigger than the M&G Strategic Corporate Bond fund the pair also manage.
Woolnough has stuck to his guns on keeping duration in the fund short and remaining biased toward investment grade credit on the basis that a recession is not around the corner and therefore rates are unlikely to move down.
He realises this puts him in “a very different place” to a lot of other fund managers, a decent chunk of whom think a slowdown will happen in 2020.
“The general consensus out there is nothing works anymore,” said Woolnough. “Interest rates being cut doesn’t work. Everything’s a failure. So, I look at the data and see something different. I see the UK has got full employment; I see the US has got full employment; I see Europe’s got almost back to record low unemployment.”
Economy missing the hallmarks of a recession
Only one of the typical warning signs of a recession – the inversion of the US treasury yield curve – has happened, said Woolnough.
The other harbingers of doom, the US housing inventory and the oil price, are not in dangerous territory yet though he admits “there are strange things going on in the housing market right now”.
Woolnough’s preference for short-duration and decision to pile on lots of credit risk made his Optimal Income fund “very volatile” in 2018 but lately performance has picked up.
While the fund is still third quartile over three and five years and toward the bottom of the IA Sterling Strategic Bond sector performers over one year, it has risen to the first quartile on a three month view.
| 3m | 6m | 1yr | 3yr | 5yr | |
| M&G Optimal Income | 1.7 | 2.6 | 5.4 | 11.6 | 18.2 |
| IA Sterling Strategic Bond | 0.5 | 3.9 | 7.2 | 12.3 | 19.9 |
