M&G's Richard Woolnough is maintaining a zero weighting to equities in his Optimal Income fund while he waits for the "risk reward premium" to improve.
Woolnough (pictured), who manages the £16bn M&G fund with Stefan Isaacs, has been steadily reducing his equity exposure over the past couple of years.
The fund is permitted to hold 20% in equities alongside its fixed income allocation and this has been as high as 12% in the past, invested in companies such as Intel and BMW.
Woolnough said:"The equity market is currently too expensive and the recent decline is a necessary pullback for the market.
"The Optimal Income fund currently has a 0% exposure to equities, from as high as 12.3% in 2013. We will not look to increase our allocation until the risk reward premium is greater."
Meanwhile, the manager is also avoiding European government bonds as he believes they have been distorted by the actions of the European Central Bank. Instead, he is favouring the UK and US.
"We have no exposure to European governments from a duration perspective, finding better value in the UK and US instead. In the future, we may look to increase duration. However, at current levels the risk reward trade-off is insufficient to enter the market," he said.
Woolnough also commented on the impact of record low oil prices on global markets, including fixed income.
"A falling oil price is positive for economic growth and the idea that a falling price kills jobs growth is generally unfounded. Volatility in the oil market is likely to continue but investors should not be focusing on it day to day.
"Instead, we look at the long term and have increased credit risk in the portfolio. We are seeing opportunities in investment grade credit, with the market unfairly punishing many credits."
The M&G Optimal Income fund has lost 3.8% over one year to 27 January, according to FE Trustnet, versus an IA Sterling Strategic Bond sector average fall of 2.7%
