Investing in long-only bond funds at this point in the interest rate cycle is less than brilliant, but apparently what a lot of investors still want to do, according to William Eigen III, manager of the JPMorgan Strategic Income Opportunities Fund (JSOAX).
“Fixed income has become a very complacent asset class because it's gone through 32 years of falling rates. [But] when we get this close to zero, your upside is zero and you're guaranteed to lose money,” Mr. Eigen said Monday in Boston during a presentation at the Investment Management Consultants Association annual conference.
Mr. Eigen manages a strategy he described as absolute return, which places less emphasis on market returns (beta) and more on alpha. He admits to being opportunistic, especially when it comes to short selling or going to cash, and does not apologize for being up less than 1% so far this year. His fund has only been around since 2009, and did have one negative year when it lost less than 1% in 2011.
What has Mr. Eigen most concerned these days is the way investors continue to pour into fixed income, despite the clear guidance from the
Federal Reserve that higher rates are on the horizon.
“Over the last few months, everything related to interest rates has become rapidly more correlated, so you better be careful because when rates start to rise, there will be nowhere to hide,” he said. “Right now, people are panicking into fixed income for reasons I can't discern, and that's where we are.”
He compared the current pattern of bond buying to what he witnessed in 2007, although he emphasized that he does not believed the markets are heading toward another 2008-style meltdown.
“People are piling into fixed income and I don't really know where that is coming from,” he said. “The Fed is clearly telling you that tapering will be done this year and they will be tightening six months later but investors don't seem to want to believe that; they prefer to just react minute by minute.”
He added that the appetite for fixed income is so strong that virtually any bond offering is getting gobbled up by the market.
“It's so easy to get a deal done right now,” he said. “I could put baby powder in a pizza box, tape it up and I'd be five times oversubscribed at auction.”
While that was clearly an exaggeration, Mr. Eigen does believe investors need to think alternative when considering fixed income. And he believes most investors and financial advisers are still stuck in the old ways, clinging to the historical performance of bonds.
“The thing I want people to do in fixed income, most importantly, is look at what they own,” he said. “Be more diversified than I think you are, because it's one of the most dangerous times in history now to just hold beta.”
