Money and Finance

Stewart Cowley, the Bond-Fund Manager Who Can't Stand Bonds

Thanks to Matt for passing this along.

Stewart Cowley manages $1.5 billion in the Old Mutual (ODMTY) Global Strategic Bond Fund. One place he generally avoids investing that money: bonds.

Mr. Cowley doesn't hold conventional U.S. Treasury bonds. He doesn't hold traditional U.K. gilts. He doesn't hold Japanese government bonds.

"I'm the bond manager who doesn't like bonds," he says, sitting in the modern London headquarters of Old Mutual Global Investors, a unit of Old Mutual PLC, which is a venerable City institution with roots going back to 19th-century Cape Town, South Africa.

Managing a bond fund these days is a peculiar business. Global central banks have aggressively supported government bonds, driving up—many would say distorting—their prices. Market observers generally agree that support will eventually ebb, bringing prices back down and bond yields up, but no one can be certain when. What is an investor to do?

Many fixed-income managers have shortened their "duration"—a measure of how sensitive a bond portfolio is to changes in interest rates—to mitigate damage from potential rate increases, and have trimmed their holdings of safe-harbor bonds.

Mr. Cowley has gone into hyperdrive with a highly unorthodox strategy: He has taken large negative positions on major government bonds by "shorting" (or betting against) contracts tied to the bonds' future performance. His duration is minus-four years, meaning his fund will rise on average 4% for every one-percentage-point rise in the average interest rate for the bonds in his fund. It is the only duration below zero of any U.K. fund tracked by Morningstar. While he hasn't bought conventional U.S. Treasurys or British gilts, he has bought inflation-protected debt from those countries.

Behind Mr. Cowley's bearishness is a conviction that central banks' sizable stimulus programs, known as quantitative easing, are bound to end. Markets, he thinks, are addicted to the easy-money policies and are in for a rude awakening when economic fundamentals reassert themselves.

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