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.

Many of us have an idea of the role bonds can play in a well-diversified portfolio but have been put off them by the past decade’s low yields, inflation fears, and relative complexity of the asset class. Bonds can be daunting.

Indeed, since 2008 low interest rates have increasingly pushed yield-hungry investors up the risk scale towards defensive ‘bond proxy’ equity income.

However, with expectations of reliable income streams severed by recent cuts to companies’ dividends, and with many investors looking for further diversification opportunities to shield against ongoing volatility, now may be a good time to think about bringing bonds back into your portfolio.

Richard Woolnough manages the M&G Optimal Income Fund and the M&G Corporate Bond Fund. With both occupying places on our Select 50 choice of favourite funds, our analysts believe they are two of the best options available.

Optimal Income Fund

Through his stewardship of these two funds, Woolnough has established himself as one of the market’s foremost bond fund managers. Both portfolios benefit from his 33 years of experience in fixed income and one of Europe’s largest teams of credit analysts.

Optimal Income is a flexible bond fund, with a ‘go anywhere’ strategy granting its manager freedom to invest wherever he sees the best opportunities to deliver both income and capital growth.

At least 50% of the fund must be invested in bonds of any credit quality, including bonds representing consumer debt in things like car loans.

Investing across credit quality means Woolnough can opt for lower-risk investment grade bonds, issued by companies that are considered unlikely to default, or branch out into high yield bonds, where credit risk is higher, but so too are returns.

The fund is also unique in allowing its manager to invest up to 20% of the fund in company shares if he feels they are better positioned to deliver on his aims than bonds.

This flexibility allows Woolnough to scour the entire income space to provide ‘optimal’, uncorrelated income streams which remain unavailable to most other bond funds.

Corporate Bond Fund

For cautious investors looking to bonds to provide reliable income or to add another dimension to portfolio diversification, the Corporate Bond Fund is perhaps a good place to start.

Like the Optimal Income Fund, Woolnough aims to provide a combination of capital growth and income. As the name suggests, however, this fund is tightly focused on corporate bonds, setting it apart from Optimal Income.

At least 70% of the portfolio must be invested in investment grade bonds, with exposure to high yield bonds limited to 5%. These allocations keep credit risk low and, as such, assurance of returns higher.

Driving his credit selection process is the belief that corporate bond markets are influenced by a variety of factors, ranging from broad macroeconomic movements to individual company-level changes. As such, Woolnough and his team of credit analysts adopt both ‘top-down’ and ‘bottom-up’ investment styles. They also look to diversify across sectors and geographies to manage credit and interest rate risk.

Currently, Woolnough is carefully observing market volatility to help inform his investment decisions. He is optimistic, as bonds begin to bounce back from the initial lows of the COVID crisis, foreseeing an ‘enormous’ surge in growth to come once lockdowns end.

Whatever the rest of this year and beyond holds, investors in these two bond funds can rely on one of the most experienced heads in fixed income to guide them through. If you’re interested in exploring more of our Select 50 bond funds, you can find an overview here.

More on M&G Optimal Income Fund

More on M&G Corporate Bond Fund

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. These funds use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. 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.

Topics covered

BondsFunds; Interest rates

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