The surprise performance of fixed income assets in 2014 caught out the large majority of managers as while many had positioned themselves for a bear market in bonds, yields fell across the board due to equity market volatility, geo-political tensions and falling inflation expectations.
One fund which was positioned incorrectly was Cowley’s Old Mutual Global Strategic Bond fund as it was negative duration in the US and long the US dollar. According to FE Analytics, the fund lost 2.46 per cent in a year when the IA Global Bond sector returned 4 per cent and the gilts delivered double digit gains.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Due to that lacklustre performance, Cowley has had to deal with a steady level of outflows. The fund has shed £300m over 12 months, £120m over six months and a further £30m over the last four weeks.
All told, it means Old Mutual Global Strategic Bond – which had stood at £950m two years ago – now weighs in at just £580m.
However, Chris Metcalfe – investment director at iBoss – says that money has come out at the complete wrong time given that the fund has bounced back this year as Cowley’s calls are starting to pay-off.
He says it is worrying that so many investors have sold on the back of weak period of performance and that it is a good example where a fund can play a certain role in a portfolio as though it underperformed last year; it only struggled as the manager was positioned for a rising yield environment.
“When I saw that money coming out I thought it was interesting as we had had the fund under review and had a number of conference calls with the manager, but we kept faith,” Metcalfe (pictured) said.
“We understand what he is trying to do and the historical data does back up his positions – but they just hadn’t been working.”
“Around £30m came out of the fund last month and those who have sold must be kicking themselves as there have been big moves in the dollar and US treasury yields have been rising. If you had held on for two years but sold the fund in January, I’d imagine you’d be feeling pretty sore.”
Cowley told investors at the start of the year that he had conviction in his position and that he expected the fund’s performance to turnaround as a result.
“In the words of the great Winston Churchill “success is not final, failure is not fatal; it is the courage to continue that counts”,” Cowley said.
“The year has been a frustration with seemingly all government bond markets falling in yield terms, led by the fragile nature of the Eurozone economy plus geopolitical events. For a macro driven fundamental based fund this has borne the cost as performance has suffered, however it makes the story for 2015 even more compelling.”
“We are 12 months on with a US economy gaining continued traction and, 12 months closer to an interest rate hike. The investment strategy that has been prevalent in 2014 will come to fruition in 2015.”
As the market started to anticipate a rise in interest rates in the US due to improving economic data, the yields on 10-year US treasuries increased from below 2 per cent at the start of the year to close to 2.3 per cent last week – which played into Cowley’s hands.
While yields have once again dropped to 2.1 per cent, the increasing strength of the dollar has also acted as a tailwind for the portfolio.
According to FE Analytics, Old Mutual Global Strategic Bond is top quartile with returns of 4 per cent as a result – while the sector average and various government bond indices have fallen substantially over recent months.
Performance of fund versus sector and indices in 2015
Source: FE Analytics
Metcalfe says this sort of outperformance is likely to continue.
“If you look at Cowley’s track record, the last 18 months to two years have been very poor by his standards. Obviously, that was down to some massive calls on QE but he has got his macro calls right most of the time.”
“He kept faith with his process and thank God he did because if he started to change his positioning he could have been whip slammed. We are happy to have the fund in our portfolios and it is been a great boost to performance, as we have seen that corporate bonds have been hammered and index-linkers are down.”
Metcalfe added: “He should continue to outperform from here and it just shows that sometimes you need to keep faith with quality managers.”
Currently, Cowley is “short” duration in the US to benefit from the rising yields and “long” duration in the eurozone as he thinks the ECB’s new quantitative easing measures will force yields lower. Also, to take advantage of the improving US economy, the manager continues to hold a significant core long position in the dollar.
Cowley (pictured) has managed Old Mutual Global Strategic Bond since June 2009 over which time it has beaten the sector with returns of 37 per cent, though that outperformance is now very narrow following its losses last year.
Nevertheless, Cowley has an enviable long-term track record as, prior to running Old Mutual Global Strategic Bond, he ran fixed income funds at BNY Mellon and Newton.
According to FE Analytics, the FE Alpha Manager has returned 179.53 per cent to his investors since he started running portfolios in the IA universe in July 2001, beating his peer group composite by more than 80 percentage points in the process.
Performance of manager versus peer group composite since July 2001
Source: FE Analytics
While FE Research has put Cowley’s fund on hold due to recent poor performance, the team still rate his capabilities and say he will come into his own when yields do rise as he has a good record of using the flexibility of his funds to his advantage.
“Cowley was one of the first fixed income managers in the UK to understand that flexibility is paramount when investing in global bonds,” Charles Younes, analyst at FE Research, said.
“Markets for these instruments move quickly from positive to negative performance and a fund of this type should be able to generate returns either way. The manager developed his own approach at Newton and strengthened it at Old Mutual, where he was given the freedom to build his own fixed income team, and the fund’s performance since 2009 has validated his methodology.”
“Cowley is also respected for his economic views and ability to take positions with strong conviction.”
Younes points out that while the fund has underperformed recently, it is a very different portfolio to other bond funds out there and is a good choice for investors who are worried about the fixed income market.
Old Mutual Global Strategic Bond has a clean ongoing charges figure of 0.65 per cent and doesn’t currently have a yield.