Top Bond Manager Woolnough Rebounds With Bullish Call on Economyby
Fund beating 79% of peers, helped by wager on stocks, rates
‘There are no headwinds,’ Woolnough says in interview
Listening to Richard Woolnough talk about the economy, you wouldn’t think he’s a bond manager.
Woolnough, whose 15.5 billion pound ($19.2 billion) M&G Optimal Income Fund has beaten 83 percent of peers over the past five years, says low interest rates are working, economies are recovering, and investors have gotten too worked up about macroeconomic risks. He’s so bullish, he started buying equities for the first time in two years, saying they’re more attractive than bonds.
“There are no headwinds and you need a headwind to slow the economy down,” he said in an interview from M&G’s headquarters in London. “We bought our first bank the other day,” a stake in a European lender whose name he didn’t disclose.
Woolnough’s optimistic outlook is at odds with many of his peers, who have criticized ultra-low interest rates globally as distorting markets, and warned of the implications of a British exit from the European Union. A macro investor who oversees almost 24 billion pounds in total for M&G Investment, Woolnough says such a move is another two-and-a-half years away. While that will create "some issues" for the U.K., a weaker pound will partly offset any economic setback.
His calls paid off this year as the fund rebounded after two years of trailing peers. He is beating 79 percent of similar funds this year, with a gain of 7.3 percent, according to data compiled by Bloomberg. Outflows, he says, have stabilized, after assets shrank by more than 9 billion pounds in less than two years.
“He has been investing since 1985 and gone through a number of credit cycles, and been able to pick out the inflection point,” said Ashis Dash, an analyst at Morningstar Inc., said by telephone. “You can see the benefits of his allocations starting to come through.”
Woolnough is one of the best-known bond managers in the U.K., having run Optimal Income since its inception 10 years ago. Assets at the fund swelled to a record 24.7 billion pounds at the peak in January 2015, helping him to be the best-paid employee at Prudential Plc, M&G’s parent, in 2014, even beating the Chief Executive Officer.
He isn’t flustered by the outflows -- “it just is what it is” -- but says comparing him with other U.K bond managers is misleading because he invests globally. His has been among the first bond funds to give managers the flexibility to invest in a broad range of assets and position for rising interest rates, a style that has surged in popularity in recent years as the multidecade rally in bonds looked to peter out.
Since the Brexit referendum over the summer, Woolnough has been buying stocks to take advantage of the selloff. For him, equities are cheap relative to bonds. Today, stocks make up roughly 5 percent of the fund and while he can allocate up to 20 percent, he has only ever gone as high as 12 percent.
‘Bias Towards Europe’
“I’ve got a bias towards Europe, strangely,” said Woolnough. “I’m not in the mining sector, but into more traditional cyclicals like auto-relating companies.”
He also benefited from a rally in global stocks following the surprise victory of Donald Trump in the U.S. presidential election. Woolnough also likes corporate and high-yield debt, allocations he has maintained throughout the U.S. election and which have started to pay off as those markets rallied.
With the prospect of higher interest rates in the U.S., he has brought down the fund’s average duration -- a measure of sensitivity to changes in rates -- to two years, compared with a longer-term average of around five years. In the aftermath of the Brexit referendum, which saw a surge in the bond prices, he briefly took the portfolio’s U.K. assets to negative duration for the first time in its history, in a bet that investors had overreacted.
“Where was the immediate danger and problem to the economy? We thought the market reaction was inappropriate,” Woolnough said.
Dash at Morningstar says while it’s too early to say whether Woolnough called the market turn correctly again, reducing the fund’s duration has helped performance in recent months.
“He’s had success in calling the credit cycle, which defines how you change your allocations,” said Dash. “That is what is important.”