Guru watch

Richard Woolnough, fund manager, M&G

Investors who pulled more than £14bn from funds run by Richard Woolnough in recent years were right to do so, the veteran bond manager tells Citywire. Woolnough’s Optimal Income funds peaked at almost £24bn in July 2018, making it the largest fund in the UK retail market, but outflows soared as rates hit rock bottom.

“Why buy a bond when it yields very little?” says Woolnough. “When bond yields were zero or negative, do you think clients should have had billions and billions of pounds in that asset class? I would argue no.” But conditions now offer a “far better starting point” for investors to return to bonds.

Yields in the UK recently hit the highest since they’ve been in 1997, with gilts topping 5%, while inflation is coming down. That means room for capital gains as yields drop and bond prices rise, while it is hard to see scenarios that lead to a large capital loss. “Are interest rates going to 5%- 6%? Is inflation going to 3%- 4%? Is economic growth going to be 3%-4%?. If you believe that, then, yes, there is still a downside to bonds. But if you think inflation is going to be around 2%, if you think growth is going to be 2% or lower, then bond yields at 4% and above are attractive.”

The big question now is what happens as inflation gets back towards central banks’ target of 2%. “Will we have a repeat of where we were from 2012 to 2020, with central banks hitting their inflation target [or] failing to hit it by being too low, or will it go back to a world where they’re always above it?”

Markets expect inflation to remain higher, but a return to the 2% target is likely, says Woolnough. Over the past couple of years, “central banks could have gone easy on inflation… they could have gone for an approach where we don’t have an inflation target any more… That would have been terrible news for bonds. As it is, it seems the central bankers, the politicians and the people all want inflation back under control and that’s a good backdrop for bonds.”