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Stewart Cowley

The head of fixed income at Old Mutual got into the financial sector after a drunken bet with a member of his jazz quartet and he started when the fund business was going with a swing but now he says he is poised for a jarring change in the note of the bond market, ’a great reversal’ which will see yields soar Interview by Cherry Reynard

Old Mutual dynamic bond and global strategic bond funds manager Stewart Cowley believes that “a great reversal” will take place in global bond markets, which will see bond yields soar but not before there has been a lengthy period of depressed yields. He says that when the shift comes, it will be brutal for investors and portfolios will need to shift quickly and decisively.

Cowley says this reversal is becoming a reality and he will make full use of the Ucits III powers in his portfolios to generate an effective short position on the bond market. He says: “If we get that right, it will be extremely useful.”

The most telling sign that this “great reversal” is happening will be leakage from the Federal Reserve deposits.

Cowley says: “During the crisis, the amount deposited with the Federal Reserve moved from $9bn to $1trn in the space of a couple of months. It was a sign that the banks had stopped lending to each other and to the public. If this money starts to leak out again, it will be because the banking system is more confident.
The Federal Reserve will have no option but to put up rates. Can you imagine what that will do to bond yields?”

However, for the time being, Cowley is still positioning his portfolio for a convergence in government bonds towards Japanese-style yields. He has been long in US treasuries, gilts and European government bonds although he admits that the bull market is now “quite mature”.

His concession to this increasing maturity has been to swap physical bond positions for call options on US Treasury bonds and long-dated German bunds.

He says: “The advantages of using a derivatives strategy in this context is that if prices rise, you go with the market. If the market collapses, all you lose is the options’ premium. How you implement ideas is extremely important. For us, it as helped reduce volatility in the fund.”

Cowley arrived at Old Mutual Asset Management in June 2009 after a successful nine-year stint managing funds for Newton Investment Manage-ment. He has run the dynamic and global strategic bond funds since joining the group. The flexibility of the two funds has given Cowley free rein to implement his broad and often contrarian ideas. Performance has been strong and the strategic bond fund has grown from £35m to its current £390m under his stewardship.

At any one time, Cowley will have eight or nine themes running in the portfolio, which helps make his universe (theoretically, the entire global fixedincome market) more manageable.

For some time, he has been running with the theme of MV=PQ. This economics equation means the supply of money multiplied by the velocity of money should equal inflation multiplied by GDP growth. Velocity has been slow, which is why there has, to date, been little growth and inflation in the system in spite of liquidity pumped into the system.

The resumption of QE in an attempt to speed up money flow round the system has validated his stance. This theme has also kept the yield curve relatively steep and ensured that Cowley has remained fully invested during market volatility.

Cowley has taken the view that economies are largely split into those that have money and those that have debt. Generally, developed markets are in the debtor camp and emerging markets are capital-rich. He believes that the emerging markets will not continue to fund the deficit forever. This “discretionary capital” theme is building so he is avoiding all the highly indebted nations.

“We have no Spain and Italy, only Germany. We believe that you will continue to get episodes when the euro will be weak. A solution will be found and then it will build again. The situation in Ireland is another one of those episodes. However, Greece will default at some point and the jury is still out on Ireland. Spain and Italy are much more of a worry and if markets turn on them, there could be a real problem.”

Cowley is also avoiding dollar exposure where possible and says: “Without a sense of reform, the owners of wealth will continue to desert the US. President Obama is in a logjam and is not doing anything about spending. The only people left who can act are the Federal Reserve, who can print money. This will come home to roost. The only thing stopping real weakness in the dollar is the weakness of the eurozone.”

The fund has also got an allocation to the commodity currencies – the South African rand, the Canadian dollar and the Australian dollar. This is Cowley’s way of investing in emerging market growth.

“The Chinese are trying to control their economy and stop the flow of money into the West. All QE is doing is sending money in that direction. In general, we are slightly wary of emerging markets. They are being driven by liquidity and we would sound a note of caution.”

He says sterling sits in a half-light and it would be wrong to bet against it. The Government is doing lots of things that are appealing to markets at the moment but when the cuts hit, it could have real consequences. He believes inflation will fall away, economic growth will moderate and there is likely to be an extension of QE in the second quarter of next year.

Cowley has been extremely active in his corporate bond exposure. In the strategic bond fund, corporate bond holdings have moved from 50 per cent this time last year to 10 per cent in January. They went back up to 35 per cent and are now back down at 20 per cent.

Cowley believes it is this flexibility that has brought investors to the strategic bond sector and his fund in particular. He says investors increasingly want someone to negotiate the complexity of the bond markets on their behalf. He says they want to know that if “the great reversal” comes, their bond manager will be doing something about it.

Born: Billingham, Cleveland
Lives: Putney, London
Education: Manchester Univ-ersity and Oxford University
Career: Meant to be an acad-emic but accidentally applied to a Wall Street company after a drunken bet with a member of his jazz quartet and got on a trainee programme in 1987. From there, transferred to fund management and was lucky to arrive when it was taking off.
2009-present: head of fixed income, Old Mutual Asset Managers; 2000-09: head of fixed income, Newton Investment Management; 1995-98: joint chief investment officer and head of fixed interest, Hill Samuel Asset Management; 1993-95: head of global fixed interest, Invesco Asset Management
Likes: The Goodies
Dislikes: Has difficulty being in the same room as cheese
Drives: A shameful Jaguar XF
Book: Nausea by Jean Paul Sartre
Film: Inherit The Wind
Album: Sunburst Finish by Be-Bop Deluxe
Career ambition: Not to be ambitious – it’s the best way to achievement
Life ambition: To understand the end of Trading Places
If I wasn’t doing this, I would be…Standing in the pit orchestra of a West End show playing the double bass wondering what it might have been like if I had joined the City at the right time


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