What's going on with M&G Optimal Income?

masonic

It seems to be performing a lot worse than its peers at the moment, falling over 9% in the past month. I can't really understand what it is holding that is causing it to fall so far. Latest factsheet suggests it is positioned fairly conservatively, with ~30% Government bonds (mainly UK, German and US AFAICT) and 35% BBB rated corporates. It seems to have fallen twice as fast as several global corporate bond funds holding even more lower rated bonds. Buying opportunity, or has it messed up some derivatives contracts?

Thrugelmir

Be correction in pricing of high yield corporate bonds. These will be companies at financial risk. If they were to fail. Then loss be a 100% of holding. 
If the companies do not fail. Then you ultimate return will be unchanged. As the outcome is fixed irrespective of short term price movements. 

masonic

Thrugelmir said:

Be correction in pricing of high yield corporate bonds. These will be companies at financial risk. If they were to fail. Then loss be a 100% of holding. 
If the companies do not fail. Then you ultimate return will be unchanged. As the outcome is fixed irrespective of short term price movements. 

That's what I thought at first, but if you compare to global high yield bond funds it is performing like a fund that is mostly high yield, whereas it is actually made up of 50% investment grade corporates and 30% Government bonds. It only holds around 10% high yield bonds. A bond fund with this sort of composition would have typically fallen 2-5%, not over 9%.

It seems like they've either been extremely unlucky with their active picks or there is something else going on.

Thrugelmir

Holding corporate grade bonds may mean little in this crisis. Global companies are going to grind to a halt. Suspension of payment of the interest coupon is therefore a very real possibility. On a case by case basis may just be that certain holdings have taken a hard hit. 

masonic

Thrugelmir said:

Holding corporate grade bonds may mean little in this crisis. Global companies are going to grind to a halt. Suspension of payment of the interest coupon is therefore a very real possibility. On a case by case basis may just be that certain holdings have taken a hard hit. 

I agree with you that perhaps investment grade bonds should be expected to fall further than they have. It must be, as you say, that M&G Optimal has a bunch of corporates that have been particularly badly affected so far.

Thrugelmir

While there may not be much traded volume. Market makers could simply be widening spreads. Randomly browsing at property bonds. As of yesterday, Hammerson 2028, the buy/sell spread is 5%. British Land Plc 5.375% the buy/sell spread is 8%. 
For some issues there's no quoted price as there has been no recent trades. The fund manager could therefore be valuing the stock on a cautious basis. Liquidity issues don't just apply to the Woodford scenario of shares. In difficult markets liquidity becomes an issue across the board. 

masonic

Thrugelmir said:

While there may not be much traded volume. Market makers could simply be widening spreads. Randomly browsing at property bonds. As of yesterday, Hammerson 2028, the buy/sell spread is 5%. British Land Plc 5.375% the buy/sell spread is 8%. 
For some issues there's no quoted price as there has been no recent trades. The fund manager could therefore be valuing the stock on a cautious basis. Liquidity issues don't just apply to the Woodford scenario of shares. In difficult markets liquidity becomes an issue across the board. 

Interesting. In a single priced OEIC like this one where presumably there are daily net outflows and underlying assets with a wider spread, buyers against that trend will be purchasing units from other investors valued at the bid price.

Audaxer

masonic said:

It seems to be performing a lot worse than its peers at the moment, falling over 9% in the past month. I can't really understand what it is holding that is causing it to fall so far. Latest factsheet suggests it is positioned fairly conservatively, with ~30% Government bonds (mainly UK, German and US AFAICT) and 35% BBB rated corporates. It seems to have fallen twice as fast as several global corporate bond funds holding even more lower rated bonds. Buying opportunity, or has it messed up some derivatives contracts?

I also hold this fund and also not sure why the recent poor performance. Looking at the portfolio breakdown, the quality of the bonds look quite good in my view, with 33% AAA and 38% BBB, compared to Jupiter Strategic Bond (which has a much better recent performance) and has 38% AAA and only 12% BBB.  It had a small percentage of equities which will have fallen, but would not have made that much difference. It's just over the last 2 years that the performance has been poor compared to Jupiter Strategic Bond, so not sure what has changed. 

Thrugelmir

Audaxer said:

masonic said:

It seems to be performing a lot worse than its peers at the moment, falling over 9% in the past month. I can't really understand what it is holding that is causing it to fall so far. Latest factsheet suggests it is positioned fairly conservatively, with ~30% Government bonds (mainly UK, German and US AFAICT) and 35% BBB rated corporates. It seems to have fallen twice as fast as several global corporate bond funds holding even more lower rated bonds. Buying opportunity, or has it messed up some derivatives contracts?

I also hold this fund and also not sure why the recent poor performance. Looking at the portfolio breakdown, the quality of the bonds look quite good in my view, with 33% AAA and 38% BBB, compared to Jupiter Strategic Bond (which has a much better recent performance) and has 38% AAA and only 12% BBB.  It had a small percentage of equities which will have fallen, but would not have made that much difference. It's just over the last 2 years that the performance has been poor compared to Jupiter Strategic Bond, so not sure what has changed. 

BMW may sell quality cars, however in € terms the share price is down 44.8% in last three months. Yields nearly 8%. Suggests major concerns from investors about the company.