The manager of the $7.6bn fund has built up a reputation as one of the most bearish fund managers of late thanks to his apocalyptic predictions for both the fixed income space as well as the wider market.
Eigen’s pessimism was evidential in his huge cash weighting last year, which rose up to around 70 per cent of his portfolio. This stance cost him significantly in outflows, as in December these reached more than $3bn from retail clients.
Eigen was and still is expecting a longer term bear market for fixed income, calling last year’s depression of bond yields the calm before the storm. However, he has started to put cash to work in some areas of the market.
“We are getting to a point where it is really dangerous in the bond market. It’s not funny anymore. I look where rates are, I look where economic fundamentals are and I look what central banks have done to these markets and I am the most nervous I have been in my career,” Eigen said back in December.
Government bonds had a sturdy 2014, as the graph below shows, and are continuing to shock the many investors betting that the bond market was bust. The yield on 10-year US treasuries started 2014 at around 2.9 per cent and recently plunged below 2 per cent but has been marginally rising for a week to 1.991 per cent today.
Performance of indices since 1 January 2014
Source: FE Analytics
Eigen has now lowered his cash rate significantly to just under 40 per cent, although this is still very high compared to other comparable bond funds.
“The cash position in my fund is going to be directly proportiona to the size of the opportunity set that exists in fixed income. If the opportunity shrinks incredibly, when spreads are very tight, volatility is very low and there is not a lot of good information ratio trades out there, I am going to raise cash. I need to protect capital in that scenario,” he said
“When volatility picks up my cash position will come down. I spent a lot of money at the end of last year in the energy patch, increasing high yield allocation and also taking advantage of more idiosyncratic trades in CMBS [commercial mortgage-backed securities].”
He says too many investors "still" think fixed income will work to counteract equities within a portfolio in risk-off periods where markets are generally weak.
“It just shows you how detached fixed income has come from fundamentals. What makes me very nervous about that is to your average retail investor the 31-year bull market has created a false sense of complacency that 'I can never lose money'," he said.
"There is just one problem with this: when rates get to zero there is no way for fixed income to do this anymore. Mathematically it can’t act as that part of your portfolio. Liquidity is worse than I have seen in my whole career.”
“We are in a very crazy place right now but we won’t be there for ever. In 2013, Ben Bernanke even suggesting that QE might end at some point caused yields across the US to double and losses for investors, which they have completely forgot about now.”
Eigen says in December 2014 he bought high yield exchange traded funds, having never done so before, because they were down 5 per cent and trading 2 per cent below the net asset value.
“We also bought several closed ended funds targeting loans, high yield and convertibles because they went to double-digit discounts,” he added.
“In emerging markets there was one market I just could understand the behaviour of: Venezuela. Previously everyone loved their bonds. From a premium they went to 30 cents on the dollar which was when I bought them. It has a problem currency but the largest oil reserves in the world. Pretty reasonable collateral."
“I am watching emerging markets very carefully and starting to look at Brazil. It is getting happened with spreads going from 80 to 250, quickly and very quietly. No one is paying attention to this. Part of it is currency and part of it is an economy in downturn.”
The JPM Investments Income Opportunity is a flexible bond fund that sits in the absolute return space and prioritises capital preservation, according to Eigen.
FE Analytics shows the fund made fourth quartile returns in 2014, having been in the sector’s second quartile in 2013 and 2012.
Since launch in 2007 it has returned 47.95 per cent, almost double the return of the average fund in its sector.
Performance of fund vs sector since launch
Source: FE Analytics
JPM Investments Income Opportunity has an OCF of 1.2 per cent.
