Cowley: “You’re bound to get things wrong at some point”
Outgoing bond manager Stewart Cowley has carried out one of his final trades after relinquishing his fund amid a reshuffle at Old Mutual Global Investors.
Mr Cowley, who is set to leave the group at the end of June, handed his Global Strategic Bond fund to new hire John Peta and colleague Christine Johnson this month.
The manager’s performance has been behind peers in the past five years and he has lost money in the past three, even as many funds in his sector were making money, according to data from FE Analytics.
A major headwind has been Mr Cowley’s belief the ultra-low levels of bond yields would reverse, meaning prices would fall and bond managers would be hit.
His portfolio was positioned for such a scenario for roughly 18 months, yet it wasn’t until he passed on the fund that government bond markets saw a short but sharp sell-off.
Mr Cowley said he sold out of a derivative position that gave him exposure to ultra-long dated German bunds and since the move, that security has fallen 13 per cent in price terms.
“The only reason I did it was 30-year bund yields were below 0.5 per cent, which even with the European Central Bank’s quantitative easing programme, seemed ridiculous,” he said.
“Let’s just call me lucky on that one as I am at a loss to explain the extent, if not the size, of the price declines in such a short period of time.
“It’s the sort of thing you would expect from highly speculative equities rather than so-called ‘safe’ government bonds.”
Mr Cowley also warned bond managers that their margin for error was now “less than the volatility in the market”.
“In other words, you are bound to get this wrong at some point if you are a bond manager,” he said.
“It’s a mathematical certainty and a piteous position to be in, even if you do get the paid the big bucks.”
Mr Cowley said he thought the European bond market was now the key bellwether and that not even “utterances” from Federal Reserve chair Janet Yellen could fully contain global bond market movements.
He said the sell-off in government bonds could have also been sparked by the 28 per cent rise in oil since mid-March.
“If the massive fall in Q4 2014 was responsible for perpetuating low bond yields, the converse must also be true,” he added. “Certainly, implied inflation rates started to rise again in mid-March as the oil price started to rise. It’s not a great scenario for bond investors.”
Unless interest rates rose, he said, bond markets would be “in the grip of two irrational forces” – the actions of the European Central Bank and the geopolitics of oil.
“It would, of course, be a supreme irony if the Great Bond Bear Market that I have been so vocal about and have been trying to capture for about 18 months should have started just at the moment that I ceased bond management,” he said. “But, as things stand, that isn’t proven yet.
“We may just be experiencing one of those tiresome mini-cycles that can destroy months of careful work in the blink of an eye. We’ve seen it before and no doubt we see it again before the big one turns up.”
