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M&G Optimal Income Fund

Daniel Lane

Daniel Lane - Fidelity Personal Investing

“You have to play what’s in front of you,” says Richard Woolnough, manager of the M&G Optimal Income Fund, a Fidelity Select 50 constituent.

And in pursuit of providing investors with a combination of income and capital growth, that’s exactly what Woolnough’s fund lets him do. In contrast to traditional income-orientated funds, the M&G Optimal Income Fund is not compelled to invest in specific parts of the market where returns might be correlated with what’s happening in the economic cycle.

Rather, the fund benefits from the flexibility of investing across a broad range of fixed income assets according to where Woolnough identifies value. Optimal Income is unusual in having the freedom to invest up to 20% of its holdings in the stock of individual companies if they look attractive relative to bonds.

A ‘go anywhere’ fund

This scope, which allows the manager to assess and compare markets around the world, means he can allocate capital as he sees fit - an aspect of the fund Woolnough appreciates particularly in a time of weakened market correlation.

He explains: “Normally everything’s correlated - if you walk in and the S&P has had a good day, the FTSE has a good day. Similarly in the bond market, if interest rates in the US are down it pushes interest rates down around the rest of the world. It has been a bit different this time round and that’s because the cycle is different. So, being a bond fund that can look around the world is very useful.”

In particular, the manager points to the effect of continental crises on how the cycles have played out on both sides of the Atlantic. He explains: “The US had its downturn in 2008/09, Europe had a secondary crisis in 2011/12 and we had a crisis of fear around Brexit in 2016. So the dichotomy this year is driven by the fact that the US economic cycle is further advanced than in the UK and Europe.”

However, Woolnough is confident things this side of the pond will start to catch up, saying he is already seeing employment growth and overall confidence returning after a period of record-low interest rates.

Central bank sympathy

On the UK’s rate rise after the Brexit vote result, the manager is pragmatic about the Bank of England’s actions reflecting their need to meet their own objectives but says Brexit uncertainty has clouded the trajectory of rates since the referendum.

He explains: “It’s very difficult for them to react to something when they don’t know how it’s going to happen. I can understand why they’ve acted the way they have but they responded to the initial result quickly when it was still two years before they knew about any policy effects. People didn’t know if UK-EU trade was on a cliff edge on day one or in two years’ time, and you’ve got no idea if it’s a big cliff, a little cliff, a small bump or just no cliff edge at all. So, that was very difficult for them to do. My view is that you could have waited a little longer before cutting rates initially; I don’t think you needed to act there and then. But I’m more optimistic about the world economy than they are so I won’t be as dovish as them.”

More on the M&G Optimal Income Fund

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Select 50 is not a personal recommendation to buy or sell a fund. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. The fund uses financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.