“Bond yields are attractive compared to cash. People fear that interest rates are going up. But a steeper yield curve signals bigger returns,” he said.
Woolnough, who has managed the M&G Optimal Income Fund since its inception in December 2006, believes that as yields move higher, this will affect his position on duration.
“We take a different view, remaining short on duration but increasing as yields move higher,” he said.
His stance reflects how he runs the fund. More traditional bond funds have tight restrictions on duration and credit risk, making them “slaves to the economic cycle”. Woolnough said he takes a more flexible tactic with a top down approach. This means he focuses on macro-economic views including duration and where this is positioned on the yield curve.
But he does not wholly exclude long duration bonds, citing as example the EDF 100 year bond. Credit spread tightening in long duration bonds can be powerful drivers of returns.
Liquidity is a two-edged sword for Woolnough, who believes investor can use it for their benefit.
“You can use liquidity to your advantage and disadvantage. The fund tends to do better when liquidity diminishes because it is conservatively managed. It’s about price value opportunities,” he said.
On deflation, his view is that the current situation of near-deflation is good. Inflation is more of a tricky business, as there are “good and bad” kinds of inflation.
Looking ahead at 2014, Woolnough is generally relaxed about the world economy and does not see any immediate headwinds in fixed income markets.
“I think the world economy is fine. I can understand that people are worried but I can’t see the fears of economic valuation and the pricing of bonds,” he said.
For him one issue that always hovers on the horizon is a reverse of globalisation, for example trade barriers. He is in favour of globalisation which he believes allows growth and strengthens economies.
In the past 3 months the performance of the Optimal Income Fund has dropped, delivering 1.9% compared to the 2.1% of the Sterling Strategic Bond index, according to data from FE analytics. Over the past 12 months, the fund has delivered a 6.8% return, compared to the 3.3% of the index.
The fund is heavy weight in sovereigns, a 24.26% of the fund. Securities and banks make up the second and third tier, with 11.64% and 9.83%, respectively. Regionally, the fund invests 51.02% in the UK, followed by 17.52% in the US.
