M&G’s flagship bond fund has lost nearly a quarter of its assets during the coronavirus-induced market sell-off, heaping pressure on the FTSE 100 investment group, which has had a turbulent start since floating on the London Stock Exchange in 2019.
Investors have pulled about £2.5bn from M&G Optimal Income since mid-February — equivalent to almost £100m a day — after pandemic fears spooked bond markets and led to a rush towards cash, estimates from Morningstar show.
The fund, which is run by star manager Richard Woolnough, known for being one of Europe’s best-paid fund managers, suffered performance losses of about 15 per cent between February 19, when US markets hit an all-time high, and March 25.
The problems mark a reversal in fortunes for Optimal Income, which at its peak ran about £24bn and up until last year ranked as the UK’s largest retail fund.
The fund now stands at about £16bn, according to FTfm analysis of Morningstar data to March 25, compared with £21bn just five weeks earlier. This comprises the UK version of the strategy and a Luxembourg mirror fund that was set up last year to allow M&G to sell in the EU after Brexit.
The fall for Optimal Income adds to the turbulence M&G has experienced since breaking away from parent Prudential and listing on the stock market five months ago.
The newly independent group, which comprises asset management and a UK insurance business, has lost a third of its stock market value since its October float.
Ryan Hughes, head of active portfolios at investment platform AJ Bell, said M&G was hamstrung by the maturity of its fixed income business, with investors who piled in to funds such as Optimal Income after the 2008 crisis now redeeming as they near retirement.
He added Optimal Income’s poor performance last year and during the first few months of 2020 may have accelerated the pace of redemptions.
“The fund’s performance has been challenged in this crisis due to its large corporate bond holdings, short duration [positioning for a rise in interest rates] and ability to invest in equities,” said Mr Hughes.
In a webcast for Optimal Income investors this month, Mr Woolnough acknowledged “fund performance [would] detract in the current circumstances” as a result of its positioning for economic growth.
Mr Woolnough defended the fund’s heavy exposure to investment grade corporate bonds, which did not escape the mass sell-off of recent weeks, saying that “even in the scenario of wider credit spreads”, these bonds were “more robust and stable than lower-rated companies”. He said he was “monitoring the situation carefully with regards to shifting valuations”.
M&G is also battling wider outflows from its retail fund franchise. According to Morningstar, the group was the worst-selling active asset manager in Europe in February, bleeding €1.6bn, its worst monthly redemptions in a year.
RBC Capital Markets forecasts outflows from M&G will reach £5.2bn for the whole of 2020 and £4.7bn for 2021.
M&G said that all asset managers were experiencing outflows due to the recent market sell-off. It added that retail funds only represented 20 per cent of its total business.
Another headwind for M&G is its equity funds’ tilt towards value investing, a style that has long underperformed as growth stocks have rallied. M&G’s value-focused Recovery and Global Dividend funds have bled assets in the last year, shrinking by 27 per cent and 14 per cent respectively.
Speaking to the Financial Times this month, M&G chief executive John Foley said the group was reviewing its “value” house style. “Given value has been out of fashion for a while, what we’ll probably do is become more flexible [and] have strategies that are not just value strategies.”
In December, an M&G product became the first open-ended property fund since the UK’s Brexit referendum to halt trading after it was unable to sell properties fast enough to meet redemption requests. The £2.3bn fund remains suspended.