Bonds are no longer boring: M&G (Lux) Optimal Income Fund

7 min read 11 Apr 24

The fixed income investable universe has grown significantly since the Optimal Income strategy was introduced in December 2006. Today, investors have a much larger pool of investment opportunities to explore. However, the benefits from having a greater opportunity set have been offset by years of near-zero interest rates, making it challenging for investors to be constructive on bonds. This has now started to change: bonds yields are elevated and as result we think there is more income potential for the patient fixed income investor. The bond market is back on its feet.

An expanding investment opportunity set

The Optimal Income strategy was introduced in 2006 and since then the investable universe for bonds has grown significantly. This, we suggest, has presented investors with a much larger pool of fixed income opportunities to explore (see Figure 1). The M&G team behind the Optimal Income strategy has also grown – more portfolio managers, investment specialists, and expert analysts support the Optimal Income franchise. We now have one of Europe’s largest credit desks, too.

While expansion is one thing, it is fair to say the benefits of accessing a greater opportunity set (more bonds to invest in, typically greater liquidity, and more granular research behind issues) have been somewhat offset by years of near-zero interest rates. It has certainly been challenging for investors to be constructive on bonds in an ultra-low rates environment.

However, the market environment has changed: yields are higher – both on government and corporate bonds - and the bond market is looking perceptively more attractive. We think fixed income is no longer that boring asset class investors would consider for diversification purposes only. For us, it is an exciting and diverse asset class (with investment risks, of course) that can allow clients to grow their capital over the long term.

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Figure 1 Optimal Income’s global investment universe – not including company shares*

Information is subject to change and not a guarantee of future results. *Optimal Income can invest in equities, subject to a limit of 20% of fund assets; historically, allocation has been under 5% and is c0.3% today.

Source: M&G Investments, 29 February 2024.

By The Optimal Income Investment Team

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective. Wherever performance is mentioned, past performance is not a guide to future performance.

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