Woolnough slashes duration on M&G Optimal Income

M&G’s Richard Woolnough has slashed duration to just 3.3 years on his £3.9bn Optimal Income fund in anticipation of a spike in gilt yields.

Woolnough, who has sold government bond futures to instigate the move, said duration has fallen from five years at the end of 2010, and is well below a neutral position of 5.4 years.

Woolnough is expecting the UK economy to remain weak in 2011, with a stagnant housing market, high unemployment and fiscal austerity weighing on growth.

As such, he expects the Bank of England will tolerate high inflation and keep rates accommodative in order to prevent further economic weakness.

Woolnough has also added index-linked gilts to the top performing fund, taking the position to 6.3% of the fund, in the expectation that inflation will fall back next year.

The manager said given the spare capacity that exists within the relatively weak economy, and with the impact of a VAT hike to come out of the equation, the current level of inflation should be temporary.

Elsewhere, Woolnough has also sold 10-year Japanese bond futures. He is negative duration on the yen by 0.3 years in the expectation Japanese bond yields will rise from their depressed levels.

The fund has outstripped peers in the IMA £ Strategic Bond sector in the last three years, delivering 41.5% compared to the average return of 20.2%.

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