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Woolnough: why we've trimmed HY exposure

Woolnough: why we've trimmed HY exposure

High yield is an interesting asset class, but investment grade bonds are better value, according to M&G’s Richard Woolnough.

‘That tends to be a geographic thing where the US investment grade bonds are cheap because there has been lots of supply due to corporate M&A and there has been less demand because the Fed is not buying corporate bonds,' he told Citywire Selector.

'But the ECB is and the bank of England are buying them, which means that there’s an attractive asset class there.'

Woolnough who currently runs the €20.87 billion (£18.5 billion) M&G Optimal Income fund, said a neutral high yield position for the fund would be about a third, and that over the life time of the fund, the position has climbed to highs of 50%.

‘At the moment we are at around 22%. Over the course of this year, we have found that financials and subordinated financials have been very good value versus high yield.

‘This year we have gone from a neutral position in high yield at the start of the year, down towards 20%, and that’s gone in favour of other risk assets.’

Edging out of equities

One hotly contested topic surrounding Woolnough’s fund is its equity holdings. In 2014 the fund had 20% allocated to equities, which was drastically trimmed in 2015 to 0.6%.

‘For us, we are not a multi-asset fund, we are not an asset allocation fund with equity as a neutral position. At that point (2014) there were lots of equities that were very good value on an individual basis and therefore it made sense to construct a portfolio, getting hold of those long term income streams available from equities, as opposed to long term income streams available from bonds.

‘Occasionally we would find that the optimal income stream sits in the equity part of the capital structure and not the debt part of the capital structure. In 2015/2016 those opportunities went, so we went back to neutral, and neutral for this fund is zero.’

Too big to manage?

Over the course of the fund’s 11-year life, it has hit highs of €28.20 billion in assets under management (£25 billion) and has also dipped down to €16.92 billion (£15 billion), but Woolnough said it’s up to the client to decide whether they choose big players or boutique bets.

‘We have gone from it growing, gone from it shrinking, we have been able to apply our general big macro, credit and duration views and sector views.

‘Two things can happen as the fund gets bigger, and we always say this to clients. One is that adding stock selection becomes harder because it’s limited in what you can do in terms of – there might only be a €112.78 million (£100 million) deal outstanding, you might only want to own €10.15 million (£9 million) of it, and if you’re running a large fund you can’t add as much.’

Woolnough said the second factor is scale, and that as the strategy grew bigger, specialisms such as high yield, investment grade, and emerging markets were introduced.

‘The thing about asset management is, the ideal world is to have all the resources and a small amount of money to manage, but that’s a diagram that then doesn’t always work together.

‘So do you go to a niche player that’s based on one person that’s small, or do you go to a large player that’s got all of the resources, but why have they got that? Well, it’s because they run more assets - it’s up to the client to decide where to sit in between those two challenges and how they decide to allocate their money.’

Over the three years to the end of May 2017, Woolnough returned 11.23% in the sterling strategic bond category. This compares with a 13.31% sector average over the same time period.

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