Concerns about bond market liquidity have been growing over the past few months with some advisers suggesting you avoid larger bond funds (read more on this). However, some of the larger bond funds also happen to be the ones with the best track records and most highly regarded fund managers.
These include IC Top 100 Funds such as M&G Optimal Income (GB00B1H05049) with assets of over £15bn, M&G Corporate Bond Fund (GB0031285678) with assets of around £5.6bn and M&G Strategic Corporate Bond (GB0033828020), with assets of around £5.2bn. All are run by well regarded manager, Richard Woolnough.
"M&G Optimal Income is quite big which means it will be increasingly difficult for its manager to add value through individual bond selection, so you are instead investing in the managers' wider economic views," says Adrian Lowcock, senior investment manager at Hargreaves Lansdown. "Invesco Perpetual Corporate Bond (GB0033050690) at £5.5bn is also quite large. However, M&G Optimal Income's manager can also hold equities giving some scope to diversify. Optimum fund sizes can vary from manager to manager and across asset classes, so it is therefore difficult to say what is too big. I wouldn't suggest existing investors should sell out, but would recommend alternative options for new investors such as Invesco Perpetual Tactical Bond (GB00B4V7X088) with assets of around £274m."
However, Rob Harley, senior research analyst at Bestinvest, says: "Credit derivative markets are generally much more liquid than the cash bond market and can offer an alternative and more liquid means for the manger to increase or reduce risk. The same can be said for derivative markets which can be used to manage interest rate risk. M&G Optimal Income is able to use both of these kinds of instruments. In addition, the fund can, to a certain degree, use currency and equity - two very liquid asset classes.
"This fund has also made judicious use of leverage. Mr Woolnough remains one of the best strategists: his top down calls and the structural flexibility of his mandate have enabled him to maintain performance in spite of increasing assets under management."
Read more on strategic bond fund suggestions
But he adds: "As bond funds increase in size, performance relating to credit selection tends to diminish as a large fund will often have to hold more securities, which will dilute their individual contribution. Some parts of the cash bond market (high yield) can also be less liquid which can impair tactical flexibility. Smaller funds on the other hand are in a position to be more nimble - for example, Twentyfour Dynamic Bond (GB00B5LHHR01) with assets of £130m and Kames Strategic Bond (GB0033988436) with assets just over £640m."
However, Darius McDermott, managing director of discount broker Chelsea Financial Services warns that "if there is a run on bonds even small funds will be affected, not just the big ones. We are monitoring bond liquidity carefully, but currently don't think there is any need for action".
