Fund managers aren’t in the business of being right, according to Artemis' Stephen Snowden, who has learnt not to fight the narrative in the short term, even if he suspects it is wrong.
The main theme currently driving the direction of bond markets is heightened inflation and interest rate expectations, which has caused yields to spike and sent the price of these assets tumbling.
Yet Snowden, who runs the Artemis Target Return Bond fund, said interest rate expectations are based on inflation forecasts from the world’s major central banks, which should be treated with a healthy dose of scepticism, at best.
For example, the manager pointed to one graph showing the European Central Bank (ECB) has historically been far too hawkish in its inflation predictions.
He then pointed to another showing the Federal Reserve’s conviction in its forecasts, with zero indicating it is certain and one showing no confidence at all.
With the graph currently at one, Snowden said: “The Federal Reserve is telling you it is 100% confident it has no confidence.
“You really shouldn't listen to anybody on inflation. Least of all me. I would like to think the people at the Fed and the ECB might know a bit more about economics than I do, but that graph shows you that they really struggle with the concept of forecasting inflation.”
Snowden said this was important as, although the surge in the cost of living is dominating headlines in the UK, it is likely the rise in inflation will tail off as quickly as it began.
While he accepted this may sound far-fetched, he pointed out that with wages struggling to keep up with inflation, people with the largest propensity to consume – those on lower incomes – will have less money to spend, which will in turn dampen growth.
“I don't know where inflation’s going to peak,” he said. “But I do know at this point next year, we will be having a rabidly different conversation.
“According to the market, base rates in the UK will be at least 2% this year and 2.3% in the mid-point next year.
“Now, I don't think there's a snowball's chance in hell that base rates in the UK will be 2% this year.”
Yet despite this view, he has generally been positioning his portfolios for higher government bond yields to come, saying the older he gets, the more he has realised he needs to stop fighting the narrative.
“There are lots of managers out there that have been proved to be intellectually correct, but are out of work,” he said. “The truth always outs in the end, but the markets can make a fool of you for a protracted period of time.
“We're not in the job of being right: we are in the job of buying things that go up and selling things that go down. At the minute, the market just wants to come down.”
Snowden said that in a year to 18 months, as inflation dissipates, it will dawn on people that bond yields look attractive and everyone will suddenly pile back in. Yet he said tilting his portfolio in anticipation of this moment would see him lose “a ton of money” in the short term.
Where he has gone against the trend is in buying one-, two- and three-year gilts, which he said are incredibly cheap.
“We have fought the narrative on that very short end of the market, but why wouldn't you buy those? They are going to yield more than the cash deposit,” he added.
“Now, are you going to make money on a real basis? The answer is absolutely not, but will you do better on a real-term inflation-adjusted basis relative to keeping your money on a cash deposit? The answer's yes. We're in the business of trying to protect wealth against the ravages of inflation, and short-dated bonds do that better than cash in my opinion today.”
Data from FE Analytics shows the Artemis Target Return Bond fund has made 7.3% since Snowden took charge in December 2019, compared with 6.1% from its IA Targeted Absolute Return sector. The £271m fund has ongoing charges of 0.4%.
Performance of fund vs sector under manager tenure
Source: FE Analytics
Snowden has made 114.9% since he started managing money in 2000, compared with 106.2% from his peer group composite.