Last year, corporate bonds achieved stable returns and rocketed in popularity, following expectations of falling interest rates across most developed economies. As such, the asset class is entering 2025 at tighter spreads than markets have seen for some time, but also with more attractive yields as interest rates reached highs not seen in several years.

The performance of government bonds has been more volatile, according to industry commentators, and looks set to remain so. The election of Donald Trump as US president, combined with weaker economies across western Europe, means that while interest rate cuts are virtually inevitable, the timing and scale of them is relatively unknown.

Iain Buckle, head of UK fixed income at Aegon Asset Management, says: “We expect bond markets to remain volatile in 2025. The market currently expects a further 75 basis points of cuts from the US Federal Reserve over the next 12 months. The broader US economy still seems robust, however, and those 75 basis points of expected cuts could look optimistic if the labour market remains resilient.

“The political backdrop in the US will also drive volatility, given the market assumes a Trump presidency will lead to looser fiscal policy and higher inflation. We will learn more as he takes office, and the reality may not be what the market has implied. But it’s likely the style of his presidency will only add to the uncertainty and volatility in markets.”

David Knee, deputy CIO of fixed income at M&G Investments, agrees that Trump’s election will increase volatility across markets, as investors anticipate how his second administration pans out.

“The first Trump presidency showed what Trump said he would do and what he actually did was very different,” he reasons. “Bond markets will be watching for key policies such as tariffs, tax and immigration, which could potentially reignite inflation and limit the ability of the Fed to act, as well as add to already growing deficits.”

Over in Europe, Buckle says the outlook is “slightly more certain”. “Core European economies have been struggling for some time, negatively impacted by a weak Chinese consumer and growing competition from within China itself.

“We expect the European Central Bank (ECB) to continue to cut rates, with 125 basis points of cuts expected by the end of the year. It would take a further deterioration in the outlook for the market to price in further cuts, but that is certainly a possibility as we learn more about US tariffs early in 2025.”

To read more on the outlook for government bonds, credit, equities, emerging markets consolidation and Consumer Duty, visit the January edition of Portfolio Adviser Magazine

Sullivan-Bissett joined M&G in July from Amundi, where he was an investment specialist for the global fixed income team starting in 2023. Previously, he spent over nine years with Insight Investment.

In his new role, Sullivan-Bissett will report to David Parsons, head of fixed income investment specialist team.

“Joe’s fixed income experience will be invaluable as we help clients navigate financial markets in the current macroeconomic backdrop,” Parson said.

“He joins at a time where we expect significant opportunities to materialise for our clients within bond markets as the rate cycle starts to move. I look forward to him playing an integral role in sharing the fund management team’s views and insights with clients.”

See also: HSBC appoints Pierin Menzli as global CIO of equity

M&G’s fixed income team manages over £137bn in assets, with teams across the UK, Europe, US, and Asia.

Sullivan-Bissett added: “I’m excited to have joined M&G’s highly regarded fixed income division, whose capabilities are renowned within the industry, not least its deep heritage and long track record of delivering best-in-class solutions to investors. I’m looking forward to bringing my ideas and experience to a team which has consistently delivered outstanding performance to clients over many years.”

The fixed income team also brought in Riccardo Cumerlato earlier this year, who will focus on fundamental credit strategies, and promoted Henry Bullamore to investment director, now with almost a decade of experience at M&G.

In the firm’s latest half-year results, published today (4 September), adjusted operating pre-tax profit weighed in at £375m, a 3.8% dip compared to H1 2023’s profit of £390m, and a 52.9% fall compared to H2 2023’s pre-tax profit of £797m.

IFRS losses after tax amounted to £56m, compared to a £309m profit during H2 last year and a £75m profit during H1 2023.

While operating capital generation came to £486m, less than half of what was made during H2 2024 and a £19m fall compared to the same timeframe last year, total capital appreciation more than doubled compared to H2 2024 at £813m. It also marked a ten-fold increase compared to capital generation of £73m during H1 2023.

See also: Ninety One company results: Pre-tax profit falls 20% amid ‘challenging’ year

In total, assets under management as at the end of H1 2024 stood at £346.1bn, compared to AUM of £343.5bn at the end of last year.

In terms of performance, 62% of M&G’s funds achieved top or second-quartile total returns over three years, while 66% achieved the same feat over five years. In institutional asset management, more than 70% of funds have outperformed their benchmarks over both three and five years.

Andrea Rossi, group chief executive officer, said: “Over the last 18 months, we have made meaningful progress transforming M&G by focusing on our strategic priorities: financial strength, simplification, and growth. Against the backdrop of a challenging market environment in the first half of the year, we have delivered another resilient financial performance with adjusted operating profit and capital generation nearly matching last year’s excellent results.

“We have materially improved the financial strength of the business lifting our shareholder Solvency II coverage ratio to 210%, a very strong position.  And we tackled our leverage too, reducing debt by £461m.”

See also: H1 results: abrdn posts 7% dip in net revenue but sees 2% uptick in AUMA

He added that the firm’s simplification agenda “continues at pace”, with £121m in cost savings having been made so far.

“We are continuing to push further on our strategic priorities, combining our Life and Wealth operations to support the acceleration of our growth plan in the UK retail market,” Rossi said. “We also see growth opportunities in our international footprint and in the broadening of our product offering.”

The M&G Recovery Fund and MyM&G, the firm’s online-based service, were both placed in the ‘must improve’ category. In 2023, the M&G Recovery fund was rated as ‘unsatisfactory’ for shortfalls in performance, which led to a review of the fund’s risk management and portfolio construction. This included a change to the fund to allow additional flexibility in stock picking, which was announced to investors in May 2024.

“We are pleased to report the M&G Recovery Fund is not rated as unsatisfactory this year. The fund manager and investment team have made changes to the portfolio construction over recent times which have led to improvements in the fund performance during the review period,” the report stated.

See also: Investors are too optimistic about the second half of the year, warn Natixis strategists

MyM&G received a ‘must improve’ rating for not fully meeting the servicing target for clients, mainly due to “difficulty of driving changes with the supplier to the platform”.

“In 2023, the Board noted issues were identified with the online service myM&G. We are disappointed that all the issues with the platform are not solved, but we will continue to monitor progress to build on the improvements made,” the report stated.

Investment performance ratings, quantified by total assets under management, showed mixed results from a year ago. While no assets fell under ‘unsatisfactory’ in 2024, compared to 3.7% in 2023, 43.7% of assets were rated as satisfactory or above for this year, less than last year’s 46.1%.

By overall fund ratings, 94.7% qualified as satisfactory or above, with 5.3% as must improve. In 2023, 96.4% were satisfactory or above, but 3.6% were marked as unsatisfactory. Overall fund ratings consider quality of services, investment performance, cost of the authorised fund manager, economies of scale, comparable market rates, comparable M&G services, and share classes.

See also: ‘If we cannot afford it, we cannot do it’: Chancellor Reeves hints at tax rises as she sets Budget date

“The market environment of interest rate rises and geopolitical and economic uncertainty during the review period has continued, but we saw notable improvements in several funds’ performance, in particular the M&G Global Convertibles Fund, the M&G Episode Growth Fund and the M&G Managed Growth Fund. Furthermore, the M&G Japan Smaller Companies Fund and M&G Optimal Income Fund continue to deliver value to investors, in relation to their performance,” the report said.

“We are however aware that some of the funds still have challenges with investment performance such as the M&G North American Value Fund and the M&G Global Dividend Fund. However, after a comprehensive review of such underperforming funds, the Board and Investment teams remain confident that the funds’ investment process has the ability to deliver on their investment objectives.”

Currently, 17 firms are signatories of the ACT standard of corporate culture.

City Hive launched the ACT standard of corporate culture in May 2022, aiming to provide professional investors with a framework to assess, measure and be a catalyst for change.

The Stewardship Council consists of 25 fund gatekeepers from across the industry who jointly oversee £2trn in assets.

At an event in London marking the second anniversary of the ACT framework’s launch, City Hive co-CEO Bev Shah (pictured) described the ACT Standard as a “symbol of trust”.

“It is an assurance to the consumer that the values of the organisation managing their investments are aligned with their behaviours. The disclosure framework provides a standardised way for investment companies to understand, create and progress cultural change – and be able to communicate progress effectively via reporting.

“Although it is a voluntary framework and firms are not required to complete it, it supports a firm’s compliance with other mandatory regulatory obligations, specifically under SMRC and Consumer Duty as well as the FCA’s D&I proposals and FCA’s UK ESG rules.

“We are delighted the Stewardship Council is seeing value in the Standard and are pushing for transparency around the issue of corporate culture at their asset management partners. It is with moves like this that the investment industry can build trust with consumers again.”

See also: #TalkAboutBlack launches fourth Skills Workshop to tackle underrepresentation

Emma Wall, HL head of investment analysis and research, said: “The ACT Stewardship Council has set a target of 50 signatories to the ACT standard by the end of this year. It is punchy but I don’t think as an industry that is stretching ourselves too far.

“Hargreaves Lansdown has committed to the ACT Alliance – we have skin in the game – and we were the first firm to introduce the ACT Framework into our fund due diligence for all our investment solutions – this includes HLFM funds, the Wealth Shortlist, our model portfolios and Pathways solutions. This shows how we promote good corporate culture where we work and the firms we invest in.

“Companies that become signatories to ACT understand that good corporate culture inspires better decision making and good outcomes. There is a fear around transparency – but being transparent is our pass mark – completion of the ACT Framework is a pass for us and means inclusion into our investment universe.”

Justin Onuekwusi, CIO at St James’s Place, added: “From an investment perspective the strength of any research process is the importance you place on the quality and understanding of culture and diversity of thought whether its de-biasing, devil’s advocate, channelling the debate, evidence of groupthink, as well as exploring different backgrounds and life experiences and the motivations of people – this can be a key driver of edge.

“A lot of talk and debate in the industry is around D&I, and while that’s clearly very important, ultimately, culture is the foundation of those inputs.

“One of the things I’ve implemented since I joined SJP is to really get a handle on investment culture – I have set up a culture working group with the idea of thinking about culture, aspirational values and the way things are done, how people behave and make decisions within a company.

“In general, culture is very hard to define but it’s the responsibility of manager researchers to ask these questions. ACT helps to provide a common framework, which is important because otherwise people would be asking questions and thinking about things in a different way. With this, we have a benchmark of questions and thinking around culture specifically for the investment industry.”

It reported fund inflows of £1.5bn for 2023 in its latest annual report published last week, and Pinto said the firm wants to continue building momentum by expanding its services.

“Moving forward, we want to keep growing our franchises, especially in private markets,” he said. “We are looking at recruiting new investment teams by eventually buying small boutiques to integrate.

“We are gifted enough to have the M&G life insurance branch as a partner, which is very keen to invest in private markets as well.”

Pinto hopes that launching new products with exposure to private assets will appeal to institutional clients in the UK, who withdrew £6.2bn from M&G last year.

This was triggered by the mini-budget crisis in 2022 and exacerbated by the ongoing de-risking of Defined Benefit pension funds.

These schemes are increasingly moving away from active equity products and instead seeking private assets, which gives M&G an opportunity to meet that demand, according to Pinto.

See also: A year on from the fall of SVB and Credit Suisse: US and European banks are diverging

“They have a cap on fees, so they tend to buy passive products as far as public markets are concerned because they are much cheaper and give them more space in respect to fees,” he said.

The firm appointed Emmanuel Deblanc as CIO of private markets at the end of January to oversee this plan, but M&G is also looking to create new funds specialising in other areas too.

“We have to take a different strategy here,” Pinto said. “To help the de-risking of DC pensions, we are providing fixed income products to them and we are deploying those strategies as we speak.

“We have several products in the market already that are up and running, and we want to keep adding new strategies in those aisles for the UK, European and Asian market.

“We are launching new strategies in the UK, including for the DC segments, on top of which we are looking at new investment teams, either by buying boutiques or integrating teams, so we are currently reviewing a number of those initiatives and ideas.”

Acquisitions are nothing new to M&G. The wealth branch of the business has made several purchases in recent years, including that of Sandringham Financial Partners in 2022 and Continuum last year.

See also: Premier Miton’s Rayner: Inflation and interest rate debate masks geopolitical headwinds

The fund plans to hold 50 to 70 companies across enablers, providers and beneficiaries in the artificial intelligence space. These will include companies that create technology to make AI solutions possible; firms that are able to offer AI products directly to customers; and firms using the technology for their own benefit.

Using the same strategy, the fund will be offered to both UK investors and to investors outside of the UK through the M&G (Lux) Global Artificial Intelligence fund. M&G said the fund will have exclusions for thermal coal and controversial weapons, as well as ‘exercise revenue limits’ for specific social and environmental sectors.

Fabiana Fedeli, CIO of equities, multi-asset and sustainability at M&G Investments, said: “We are at the start of a multi-decade growth theme that has the potential to generate pervasive change in the broader economy and reshape the competitive landscape across all industries.

“We see plenty of attractive AI-related investment opportunities, but as with all disruptive market forces, we expect an intense period of industry euphoria. Understanding where the strongest growth areas are will be the key to providing better outcomes for clients as they navigate this exciting market opportunity.”

M&G said AI technology could inject an estimated $2.6trn to $4.2trn into the global economy, across a wide range of industries and sectors.

Jeffrey Lin, co-manager of M&G Global AI Themes fund, said: “The disruptive power of technological innovation derives from its potential to create a better or cheaper product capable of growing a company’s market share or, indeed, a whole new market.

“As active investors, we focus on identifying the intersection between technological innovation and its implementation in business processes. Our background as computer engineers, and our continued tenure in the investment industry, equip us with the broad-based experience and expertise necessary to understand what it takes for a business to be very successful in this space.”

Seeing negative returns – even in the short term – can provoke anxiety among investors. For investors who don’t like to see their returns in the red, Portfolio Adviser has identified five IA Global sector funds with the best maximum drawdowns compared to the sector average of 14.5%, while also achieving top-quartile returns over a three-year period and a higher-than-sector-average Sharpe ratio. All data was gathered using FE Fundinfo.

JOHCM Global Opportunities

The £532m JOHCM Global Opportunities fund has been managed by Ben Leyland since its launch in 2012, and alongside co-manager Robert Lancastle since 2017.  The strategy had 40 holdings in its portfolio at the end of October, with stakes in Philip Morris International, Henry Schein, and Sempra among its largest positions.

The fund has a maximum drawdown of 4.54%, the second best among the 467 IA Global constituents. It has also achieved top-quartile returns of 26.58% over the last three years.

VT Cantab Sustainable Global Equity

The £40.8m VT Cantab Sustainable Global Equity strategy aims to provide income and capital growth over the long term (five years plus). Run by ex-Investec manager Mark Wynne-Jones, the fund has an average of 30-35 holdings in its portfolio. It was launched in 2019 and has an OCF of 0.64%.

It pays particular attention to ESG characteristics and excludes companies involved in industries such as the production of fossil fuels, alcohol and tobacco, gambling or controversial weapons.

The fund may also invest in other transferable securities, money market instruments, deposits, cash and near cash, which it has recently utilised with an 8.8% weighting to cash and cash equivalents.

By region, it has a 48.6% weighting to North America, with Akamai Technologies (4%) and Alphabet (3.9%) making up the largest holdings in the portfolio.

Over the last three years, the fund has returned 32.11% and has a maximum drawdown of 5.38%.

Latitude Global

The £247.2m Latitude Global fund seeks to achieve strong returns throughout market cycles. Managed by Freddie Lait, the fund comes with a 1.18% OCF.

Investors would have lost just 6.14% if they had bought and sold the fund on the worst possible days in the last three years. Over that period, it has returned 29.88% – double the IA Global average.

M&G Global Strategic Value

This £328.7m value fund is run by co-managers Richard Halle, Daniel White, and Shane Kelly. The managers aim to beat the MSCI ACWI index over any five-year period, net of the 0.91% OCF. It has a max drawdown of -6.43% over the last three years.

It has returned 32.16% over three years, placing it among the top returners in the sector. Notably, the fund returned 4.41% in 2022, a year when the average fund in the sector fell 11%.

UBS FTSE RAFI Developed 1000 Index

The only passive offering in the list, the UBS FTSE RAFI Developed 1000 Index fund comprises 1,000 large, medium and small companies in developed markets, selected and weighted using a composite of factors including total cash dividends, free cash flow, total sales and book equity value.

It is managed on a day-to-day basis by Stuart Newman, senior portfolio manager within the UBS indexing team, and charges 0.25%. The fund has returned 37.73% over three years, while its maximum drawdown over that period is 6.60%.

Following M&G’s decision to suspend its £565m Property Portfolio with an intention to shutter the portfolio, there are now 12 constituents in the IA UK Direct Property sector, the largest being the £1.4bn Legal & General UK Property fund.

The M&G closure followed a similar announcement from Canada Life, which confirmed its intention to shutter its own open-ended UK property fund last week.

Canada Life’s decision came due to a raft of redemptions which resulted in WS Canlife UK Property ACS assets dwindling to £102m from £254m, leaving it ‘no longer commercially viable’.

Over the last five years, the average IA UK Direct Property sector fund was down 0.2% in total return terms. Over the same period, the M&G Property Portfolio returned a negative 20.1%, according to FE Fundinfo data.

According to industry commentators, the sector as a whole has struggled with liquidity mismatch issues in recent times, with funds having to balance liquidity requirements for daily dealing while investing in a highly illiquid asset class.

See also: UK property is ‘essentially uninvestable’

“While it is unexpected, it isn’t a massive surprise to see the M&G fund call time and begin liquidating,” said Oli Creasey, equity research analyst at Quilter Cheviot. “In the past we’ve argued that a fund below £1bn in assets under management may struggle to be sustainable, as the lack of scale makes it hard to put together a diversified portfolio of property assets.

“And while the fund does not appear to have had liquidity issues this time around – it held 19% in cash and a further 6% in relatively liquid equities as of 31 August – the fund has struggled in the past, suspending in December 2019. This combined with a general lack of interest in the sector from investors, plus the overhanging threat of FCA regulation, has driven management to throw in the towel.”

He added: “It’s a shame to see another long-standing property fund exit the sector, but it may not be the last. Only a handful of funds remain, and while they tend to be the biggest/best, even they have seen shrinking AUM as property values fell in the second half of 2022, and net redemptions reduced portfolio sizes further.

“It’s also worth noting that while the M&G fund expects the liquidation process to take around 18 months, lower than average property transaction volumes may make this difficult to achieve. We note that while the Janus Henderson fund successfully liquidated in short order in 2022, with a single buyer taking the entire portfolio, others have not been so lucky.

“Aegon suspended in March 2020, and has been liquidating a relatively small portfolio since summer 2021, a process that is still ongoing. Will the last one out of daily-dealt property funds, please turn off the lights?”

‘Writing on the wall‘

Ryan Hughes, head of investment partnerships at AJ Bell, believes the decline of the sector has been coming for a sustained period of time.

He said: “The writing has been on the wall for open-ended property funds ever since they suspended again in the depths of the Covid crisis. That triggered funds in the sector to begin closing down given the evident problems with liquidity that resulted in a fundamental mismatch in the demands of investors against the liquidity of the underlying assets.

“Offering a daily dealing structure for an asset that can take months to sell was an accident that happened all too often and one that ultimately undermined investor confidence.

“The FCA looked to address the issue through tentative proposals to limit access but while this was a potential solution, the likelihood was always that retail investors would want the comfort blanket of daily dealing even if they didn’t need to access the asset.”

“The suspension of the M&G Property Portfolio fund is not a surprise given the uncertainty hanging over open-ended funds ever since the FCA announced its review, with assets coming out of the sector as investors looked to get ahead of any further announcements,” Hughes added.

“The fund is widely owned by retail investors and they will now enter a frustrating period of having to wait for the assets to be sold.”

Daily dealing misconception

However, the Association of Real Estate Funds (AREF) managing director Paul Richards said there is a misconception that retail investors require daily dealing for property funds.

“The wave of open-ended property fund suspensions seen during the Covid crisis was not due to any liquidity issue,” he said.

“The problem was one of ‘material uncertainty’ clauses being invoked by the independent valuers. With those clauses, the managers could not price the funds with confidence and were compelled to suspend trading in them. 

“There is a misconception that it is the retail investor that requires daily dealing for these funds. Generally speaking, consumers display little interest in the issue. Rather, it is their advisers and wealth managers, whose processes struggle to cope with anything other than liquid assets. The same can be said for investment platforms, whose systems and processes preclude less liquid property funds.”

“Regulation is yet to help the sector by coming up with the tools to improve liquidity management, changes that would allow these funds to have longer notice periods for redemptions, addressing the liquidity mismatch issue. It is to be hoped future regulation will be more benign. 

“The sector once had over £20bn invested in it and was growing nicely. The obsession with daily dealing is profoundly unhelpful and narrows the opportunities for investment portfolios of retail investors and pension savers and reduces the capital available for levelling up and developing suitable housing.”

The fund has been suspended while M&G informs clients on the next steps before closing.

The M&G Property Portfolio, in line with the wider UK property sector, has seen a steady decline in assets in recent years, from £2bn in 2021 to around £550m today.

See also: Canada Life to shutter UK property fund after wave of redemptions

The fund was previously suspended in 2019 before reopening in 2021.

An M&G spokesperson told Portfolio Adviser that the decision was made following consultations with clients. It will take up to 18 months to shutter the fund, which currently has 25 properties currently in the portfolio.

As part of the process, the firm will make an immediate 30% reduction to the fund’s management fees and will waive all cash management charges.

Neal Brooks, M&G’s global head of product & distribution, said: “When we launched this strategy in 2005, we – alongside our peers – provided access to an asset class which had historically been unavailable to long term savers in a pooled structure.

“The market has since evolved. Declining retail investor interest across the sector for this fund structure, alongside uncertainty around their future composition is posing challenges to the future viability of funds like the M&G Property Portfolio – particularly for those investors who require daily liquidity.

“We considered various options, but believe this is the right decision for our investors.”

Earlier in October, Canada Life Asset Management announced it was in the process of winding up its own UK property fund after deeming it as no longer ‘commercially viable’.

In the newly-created role, Nicoll will be responsible for the firm’s private market investment strategies as it looks to expand its capabilities in the sector.

He joins from M&G, where he held the role of private and alternative assets CIO, leading a team that managed around £70bn assets.

Nicoll also held roles as co-head of alternative credit and head of institutional fixed income at M&G.  

Piers Hillier, CIO at Royal London Asset Management, said:  “As part of our continuing commitment to deliver best-in-class investment solutions and services to our clients, we place significant focus on carefully assessing markets to identify where the most attractive opportunities lie and how investors can best access these.

“We believe that private markets have an important role to play in portfolios, with current market conditions providing a very conducive entry point for our business as we seek to expand our range of capabilities into this space.  

“Will brings extensive experience and a proven track record of building and managing investment capabilities in this area, and we believe his experience will be invaluable to our clients as we embark on this exciting new initiative.”  

See also: GAM’s Elmar Zumbuehl appointed CEO

M&G’s public fixed income investment division is launching an 18-month fixed maturity bond strategy.

The firm said the fund aims to capture what it describes as ‘the most compelling opportunity presented in credit markets in the past decade’.

The fund will invest mainly in euro denominated investment grade bonds globally.

It will also seek to increase returns by investing in high-yield bonds with minimum rating of B-. Up to 35% of the assets will be deployed in this way, with a target allocation of 25%, whilE maintaining an investment-grade average rating for the whole fund.

See also: Weekly outlook: European sentiment surveys due and AG Barr reports

The new strategy will be co-managed by Stefan Isaacs, deputy CIO for public fixed income, and Matthew Russell. The pair have been managing the M&G (Lux) Short Dated Corporate Bond Fund strategy since 2018.

The Luxembourg-domiciled Article 8 fund will be available for subscription from 25 September until 3 November, and will launch on 7 November.

Isaacs said: “Fixed income is in vogue right now with meaningful yields on offer for the first time in a decade. The inversion of the yield curve means investors can get most of the yield available in corporate bonds without having to stretch to long maturities.

See also: Unexpected fall in inflation opens door to Bank of England rate hold

“This 18-month short maturity strategy can offer an opportunity to lock in compelling positive yield levels available now with relative low risk and high visibility on returns.” 

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PA EVENT: Autumn Congress, September 27^th– 29th | RSVP via email

Hosted at The South Lodge Hotel. Transport and accommodation will be provided for the duration of the event.

Our Autumn Congress will serve as a comprehensive platform for discussing the key trends, challenges, and innovations shaping the wealth management landscape. It will bring together thought leaders and industry professionals for enlightening discussions and networking opportunities. Register link | 

Sponsors include Alliance Bernstein, Alger, Boston Partners, Baillie Gifford, CCLA, Janus Henderson, GAM, Jupiter AM and much more! Please see the full line-up on our website: AC2023