M&G Optimal Income - too good to be true?

wobblegobble

I have recently been hearing stories about bonds being overvalued etc and M&G themselves have advised investors to stop investing in bonds. My question is just how risky is this fund? I know it has a Trustnet Risk Rating of 25 (compared to 100 for the FTSE 100) During the recent economic crisis it only fell 4% in 2007/8 and has since then delivered positive returns every year. During the past year it has returned 10%+

I know you shouldn't have all your eggs in one basket, but if it only loses 4% during the worst economic crisis of the past 50 years then I can live with that. Am I missing something fundamental here? I am quite risk averse but I am considering redirecting to this fund as opposed to earning +- 3% in a cash ISA. It seems a no brainer?

cheerfulcat

It's a no brainer if you think that interest rates will remain at their current lows.

Jegersmart

cheerfulcat wrote: »

It's a no brainer if you think that interest rates will remain at their current lows.

To expand on this a bit, as it may seem a bit cryptic - bond funds in general have done unbelievably well over the last 4-5 years - partly due to extremely low interest rates and partly due to asset inflation because of the monumental money printing that has and is going on. Personally I feel the bond market will suffer some serious falls once (as has been mentioned) interest rates go up. This may take a year or two yet, but it will happen sooner or later.

If I was giving advice and I was risk averse, I would probably recommend putting a suitable amount in a deposit account with the best interest rate you can find, and then consider high growth areas like China that has taken a massive bashing for 2 years and are due a good bounce. In any case, do your own research, but in general it may not be a good idea to invest in a market or fund that has done really well for a long period of time, that would be a time to take profits if you got in earlier.

Hope that helps

J

talexuser

I've held Optimal Income Acc since beginning of 2010, quite happy so far, around 27% up for me, all that time I've had big bold letters alongside it on the spreadsheat "MONITOR FOR INTEREST RATE RISE". It hasn't happened yet, and I can't see it for a while yet :think:

gadgetmind

This fund is a trifle odd for the sector as it often has up to 10% in equities. I actually prefer it for this and my wife hods this and Old Mutual Global Strategic Bond as the active bond allocation in her ISA.

dipswitch

M&G Optimal Income is a Stategic Bond fund which I understand gives the manager more flexibilty in his choice of investment and the ability to hedge against interest rate rises. The adverse comment I have read on bond funds is directed primarily at corporate bonds where the manager generally has less flexibility, and the fund often includes gilts which are at historically low interest rates. These will certainly fall in value when interest rates rise.
If you are still worried about the risk, why not invest half the amount you were considering in the fund, and put the remaining half into a notice deposit account? This way you would be halving the potential risk, and halving the potential benefit. if you become more comfortable with the risk as time progresses, you always switch the remaining amount to bonds fund at a later date.
Like talaxuser I also have been invested in this fund and am very happy with the result, having added to the original investment.

wobblegobble

Thanks for all the replies. Fund still appeals to me, with the caveat to look out for interest rate rises.

If this fund is less risky than a "standard" equity fund what should one expect when interest rates start to rise? 5% 10% 20% decrease in value? Appreciate no-one can predict the future but what should one prepare yourself for in the worst case scenario?

Buffett

"Past performance is no indicator of future success"

Many believe bonds are in a bubble right now.

talexuser

wobblegobble wrote: »

If this fund is less risky than a "standard" equity fund what should one expect when interest rates start to rise? 5% 10% 20% decrease in value?

If I knew that, I would not be wasting my time here... by now I'd be in the Bahamas on the yacht

Seriously, set yourself a fall price and sell if it gets there. Myself I would try and sell as soon as a downward trend is apparent with changes in interest rates, and buy back when I reckon it's tanked to the bottom. But no-one can predict the best times, and if you can't live with that, then funds are not for you.

Linton

wobblegobble wrote: »

Thanks for all the replies. Fund still appeals to me, with the caveat to look out for interest rate rises.

If this fund is less risky than a "standard" equity fund what should one expect when interest rates start to rise? 5% 10% 20% decrease in value? Appreciate no-one can predict the future but what should one prepare yourself for in the worst case scenario?

Currently long term safe bonds are typically priced 30% (130/100) higher than par. So an eventual 23% (1-100/130) drop would not be surprising. However short term bonds trade close to par as they are anchored to the par redemption at maturity.

With less safe but high return bonds the value of the bond is more dependent on the market's view of the likelihood of the bond issuer going bust. Such bonds typically rise and fall with share prices as in bad times companies are more likely to go bust. So these bonds should rise in value when the current problems are resolved.

Conclusion - it all depends on the type and duration of the bonds held. Some information on this should be available from Trustnet. However in my view 30% seems a reasonable worst case prediction. This is not likely to be an overnight crash, more a gentle fall as interest rates rise.

wobblegobble

Linton wrote: »

Currently long term safe bonds are typically priced 30% (130/100) higher than par. So an eventual 23% (1-100/130) drop would not be surprising. However short term bonds trade close to par as they are anchored to the par redemption at maturity.

With less safe but high return bonds the value of the bond is more dependent on the market's view of the likelihood of the bond issuer going bust. Such bonds typically rise and fall with share prices as in bad times companies are more likely to go bust. So these bonds should rise in value when the current problems are resolved.

Conclusion - it all depends on the type and duration of the bonds held. Some information on this should be available from Trustnet. However in my view 30% seems a reasonable worst case prediction. This is not likely to be an overnight crash, more a gentle fall as interest rates rise.

Excellent reply. Thanks Linton. Just what I was looking for.