At the moment the fund is bucking the trend and delivering strong performance, it also appears to be able to take advantage of illiquid markets.
For many investors moving out of cash to purely equity based investments provides too much perceived risk.
There are two ways that investors can reduce the perceived risk, firstly to take one step up on the risk ladder to bonds, or secondly to blend bonds with equities.
Bonds are an attractive asset class for several reasons, firstly they are seen as low risk, and secondly they have delivered strong returns over the past ten years.
The difficulty is that much of the assessment is based on the past and it is very difficult to predict the future. This is important for several reasons.
Firstly we assume that because bonds have been less volatile and therefore less risky this will continue, and secondly we assume that because in the past performance has been strong it will continue. However, what is becoming increasingly clear is that the bull market for bonds is coming to an end. This means that returns will be lower and potentially volatility will increase.
We are already starting to see this where one of the weakest sectors last year was gilts and this year it has reversed that trend against all expectations. An additional factor is that different asset classes will perform differently within the bond market, so for example does an investor select investment grade, high yield, gilts etc.
Investors are becoming more aware of these challenges, as are investment houses that are bringing to market a raft of different investment solutions. This makes it incredibly hard for investors to choose the direction they should go.
One fund which continues to attract new money is the M&G Optimal Income Fund with assets over £20 billion. Unlike other funds which have got bigger it continues to deliver strong returns for investors. (Please remember past performance is not an indication of future returns).
This fund may be attractive to investors looking for bond exposure but not sure where to turn. The manager can go across the spectrum to deliver the best returns and can also invest up to 20% in equities if he feels better returns can be obtained through the equity component compared to the bond.
In this update we will share some of the thoughts from the manager and also highlight some things investors need to consider.