Some big US based household names such as Apple have been added to the strategic bond fund fund, quadrupling equities exposure.
“We have taken the opportunity to add a number of stocks to the portfolio in July, including companies such as Apple, Time Warner, Daimler and BMW,” Woolnough said. “The fund’s equity exposure now stands at 4.1% of NAV, having been at considerably less than 1 per cent since January 2015. The stocks we have bought have shown attractive potential income characteristics relative to debt, due to the result of credit spread compression and falling government bond yields.”
Woolnough explained that in some cases equity has become a more attractive part of the company’s capital structure to own, with the earnings yield appreciably higher than the bonds’ yield-to-maturity and thus offering adequate compensation for taking the risk of owning equity rather than a bond.
“The stocks we have bought follow the fund’s long held equity investment process, with the most important consideration we make before buying an equity is the relative value of the company’s equity versus its debt; or a proxy, like a credit default swap in those cases where a company hasn’t issued any public bonds, he continued. “This naturally means the universe of stocks to select from is narrowed towards large, financially secure companies given that smaller companies do not tend to issue public debt.”
The £14.8bn M&G Optimal Income fund has performed broadly in line with the IA strategic bond sector average over the past three years, according to FE.
Woolnough and his team will continue to look for further opportunities in the equity market and invest if valuations warrant it, he added.
The M&G Optimal Income Fund’s ability to own equities is part of its long held equity investment process’ which has been in place since inception in 2006, the company said. Its highest equities holding has been 12% of NAV.