M&G Optimal Income

M&G is perhaps the biggest name in the UK bond space, and M&G Optimal Income is its flagship offering. This 'go-anywhere' fund has a flexible mandate, which enables the manager to shift the interest rate exposure and to invest across the fixed income spectrum. The fund can, and often does, invest in some equities, and also derivatives.

Our opinion

Few fixed interest managers can demonstrate that they can add value through interest rate exposure management, asset allocation and stock selection. Richard Woolnough is one of those few. The Optimal Income strategy has attracted large amounts of investor money (there are ‘mirror funds’ across Europe), so M&G is closely monitoring the liquidity of the fund (to make sure the underlying bonds can still be easily bought and sold). We still have confidence that Richard can managed the money very effectively.

Fund manager

Richard Woolnough joined M&G in January 2004 and is also manager of Elite Rated M&G Corporate Bond and M&G Strategic Corporate Bond funds, as well as the M&G Optimal Income fund. Richard began his career at Lloyds Merchant Bank in 1985. In 1995, he became a fund manager at Old Mutual. Richard graduated from the London School of Economics with a BSc in Economics.

With this flexible bond fund, I can invest across all of the fixed interest asset classes, allowing me to express my views on the direction of interest rates and the relative attractiveness of government and corporate bonds without constraints.

Richard WoolnoughFund manager

Investment process

Richard forms a macroeconomic overview of the fund, based on his assessment of the likely direction of growth, inflation and interest rates within different economies. These views, along with bond-specific factors, inform his opinion regarding where the relative value lies among the various fixed interest asset classes. When investing in a particular company, Richard examines its capital structure to choose the bond that best suits his requirements. At times, a company's equity can appear cheap compared with its debt. Under those circumstances, Richard may buy the equity for the fund instead of a bond.

ESG

ESG - Integrated
M&G has clear and defined categories for the ESG focus of its fund range. The explicit ESG range includes impact, sustainable and plus features. Other funds have different levels of integration, with a focus on investment stewardship. There are also some company-wide exclusions for all funds, such as cluster munitions. This particular fund uses ESG analysis to protect from potential downside risks. This work is carried out by the in-house credit analyst team, which identifies the risks and potential impact, and determines whether this diminishes the investment opportunity.

As the fund manager, Richard can choose whether he wishes to take these risks. As well as identifying risks, understanding ESG can also be a source of returns, whereby a firm with a product or service that is a solution to ESG issues may have improved fundamentals as it capitalises on this opportunity.

The team uses a proprietary, firm-wide system, for scoring ESG. This not only helps with thought leadership, but also supports monitoring and engagement after investment. Debtholders typically have less direct influence than shareholders over a corporate’s strategy, but engaging helps better understand, manage, and potentially reduce ESG risks.

Risk

As M&G Optimal Income can invest in equities, it can be more risky than many of its peers. However, managing risk is integral to the investment approach and the fund is subject to investment guidelines and limits. A separate risk team provides ongoing analysis to assess the fund's behaviour in various market scenarios.

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Read more about this fund

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