He adds: “We’re trying to capture the big ideas in the world and put the portfolio in a place where it will react to those big ideas over time, and not get too confused by the short-term noise that goes on these days.”
Process
He points out the fund has the ability to go both long and short, making it a useful addition to a portfolio. “When markets are doing well it can look like a conventional bond fund, but the aim is we can use our shorting ability to get a positive return in a rising yield environment as well. So it can act not only as a return creator, but at the right time it can act as a risk control as well.”
While the principles behind the fund have not really evolved since launch in 1991, Mr Cowley notes the biggest recent change was the decision in late 2012 and early 2013 to “start using a zero to negative duration on the fund”.
“It has lots of tools to play with in that sense to try and get it right. And it has been difficult to get it right, we’ve had a difficult time, it has to be said,” acknowledges the manager.
Performance
The fund delivered a return of 31.44 per cent for the five years to April 30 2014, outperforming the IMA Global Bond sector average of 29.74 per cent, according to FE Analytics. The short-term performance, however, has been more tricky, with the vehicle recording a loss of 7.02 per cent for the 12 months to April 30, compared with the sector average loss of 5.19 per cent.
Mr Cowley notes: “Some of the things we’ve had to contend with in the past year is Ben Bernanke [former US Federal Reserve chairman] saying in May last year that maybe quantitative easing (QE) wasn’t the best idea they had ever had.
“We anticipated that, but unfortunately we got caught out, like many others, by the collapse in the index linked market which robbed us of all the returns we had made in the first phase of last year, before we recovered a little bit. It was an interesting phenomenon and we learnt a lot from it.”
Looking ahead Mr Cowley highlights a number of trends across the global markets, irrespective of short-term noise. He points to a credit cycle starting in the US, which signals the healing process is over and emergency measures are no longer needed.
“What we expect out of the US is exactly what is happening – the corset is coming off gradually. We are going back to evidence-based market movements, and the evidence is the US is fine. We expect the short-term effects we’ve had will go in Q2 and you’ll start to see clean data come through. Therefore bond yields will rise 50-75 basis points in the next three to six months, so we’re short US bond markets.”
In currency terms, however, the portfolio is long the dollar and avoiding the yen and euro, the latter appearing to be an “at risk” currency. Instead it owns positions in the Brazilian real and Mexican peso on the basis emerging markets could benefit from investor flows shifting out of the euro.
On Europe generally he adds: “What you don’t have in Europe is a functioning banking system. The ECB is also shrinking its support structure. That is why everyone is really scared of deflation, and even negative interest rates in Europe at some point, along with talk of European-style QE.
“The experience of American-style QE is that you basically buy the most risky things. If they [Europe] do QE, that is exactly what they’re going to support – financial assets – so we are actually long Europe. It is not because things are great, it is because it is bad, which is a really odd way of thinking.”
Expert view
Ben Willis, investment manager and head of research, Whitechurch Securities:
“Stewart Cowley adopts a flexible remit, aiming to produce total returns from a diversified portfolio of global bonds. Currency bets will also be made to boost returns. Strategy is formulated from in-depth macroeconomic analysis of global government bonds, and this is where he will predominantly invest. Performance against the quoted benchmark has been excellent, while marginal performance has been achieved against the broad asset IMA Global Bond Sector.”
