Bond Manager - Mr.

Cowley
Stewart Cowley manages $1.5 billion in the Old Mutual ODMTY +0.54% Global Strategic Bond Fund. One place he generally avoids investing that money: bonds. Mr. Cowley doesn't hold conventional U.S. Treasury bonds. He doesn't hold traditional U.K. gilts. He doesn't hold Japanese government bonds. "I'm the bond manager who doesn't like bonds," he says, sitting in the modern London headquarters of Old Mutual Global Investors, a unit of Old Mutual PLC, which is a venerable City institution with roots going back to 19th-century Cape Town, South Africa. Managing a bond fund these days is a peculiar business. Global central banks have aggressively supported government bonds, driving up many would say distortingtheir prices. Market observers generally agree that support will eventually ebb, bringing prices back down and bond yields up, but no one can be certain when. What is an investor to do? Stewart Cowley, a bond manager with Old Mutual Global Investor, near his London office. Daniella Zalcman for The Wall Street Journal Many fixed-income managers have shortened their "duration" a measure of how sensitive a bond portfolio is to changes in interest ratesto mitigate damage from potential rate increases, and have trimmed their holdings of safe-harbor bonds. Mr. Cowley has gone into hyperdrive with a highly unorthodox strategy: He has taken large negative positions on major government bonds by "shorting" (or betting against) contracts tied to the bonds' future performance. His duration is minus-four years, meaning his fund will rise on average 4% for every one-percentage-point rise in the average interest rate for the bonds in his fund. It is the only duration below zero of any U.K. fund tracked by Morningstar. While he hasn't bought conventional U.S. Treasurys or British gilts, he has bought inflation-protected debt from those countries. Behind Mr. Cowley's bearishness is a conviction that central banks' sizable stimulus programs, known as quantitative easing, are bound to end. Markets, he thinks, are addicted to the easy-money policies and are in for a rude awakening when economic fundamentals reassert themselves. That thesis is shared, to some degree, by many in the marketwitness the vigorous debates about scaling back quantitative easing in the U.S. Few, if any, players embrace it like Mr. Cowley does. Mr. Cowley, who is 52 years old, has long cut against the grain. He was a research physicist with a side gig as a jazz bassist before turning to finance. Today, he writes a regular column for the New Statesman, the weekly magazine of Britain's intellectual left. He is a regular critic of the U.S. Federal Reserve, Bank of England and European Central Bank. "You have to be clever enough to read the signs that quantitative easing is going to end eventually," Mr. Cowley says. "Just like in comedy, the key is to get the timing right." Rowing against the central-bank current is hard. Mr. Cowley got a shock in September when Fed Chairman Ben Bernankecompared pityingly to the fund manager's pet hamster, Clementine, in a past columnkept up the pace of the Fed's bond buying, for now at least. Nevertheless, in a bruising year for debt markets, an unconventional approach seems to be working. Mr. Cowley's Global Strategic Bond Fund has fallen 1.4% this year but still fared better than most

competitors. The J.P. Morgan Global Aggregate Bond Index is down 2.1% in 2013, while many funds have been battered by fears of a Fed withdrawal. Investors in Mr. Cowley's bond-fund-without-the-big-bonds are essentially betting on him and his unusual method. (Britain's market regulator says it is OK for a bond fund to be short bonds, so long as the manager follows the objectives listed in the fund's prospectus.) The fund has "been designed in his image," says Robert Burdett, who manages 1.7 billion ($2.7 billion) at F&C Asset Management in London and has for years known Mr. Cowley and invested with him. "He focuses on a select number of themes and communicates his ideas very clearly."

Mr. Cowley left academia for the City in 1987. Hearing tales of riches from an economist (who was also his band's drummer), he headed for the careers department at Oxford University and signed up for a job as a broker. "I view myself as an outsider, because I'm not trained in economics or accountancy," he says. He shies away from calling himself a contrarian. He looks every inch the money manager in his smart suit. Mr. Cowley has had his share of stumbles, even back when he liked bonds: He suffered losses during the bond selloff in 1994-95, and he admits he hadn't envisioned the credit-market wipeout in late 2008. The Global Strategic Bond Fund missed some of the big gains in risky euro-zone sovereign debt earlier this year and lagged behind its peers. Still, the negative-duration strategy is bold enough to catch clients' eyes. "We actively went out and sought negative duration, and there's not much choice out there," says Gavin Curran, who manages 65 million of retail investors' money at Doherty Pension & Investment Consultancy, with roughly 5% in Mr. Cowley's fund. "Most are prepared to go to low duration, but going negative is a big call." (Duration reflects sensitivity to rate increases by measuring how quickly a bondholder's investment will be repaida shorter duration implies prices will be less volatile as interest rates change. An investor who expects rates to rise would shorten his or her duration.)

Mr. Curran said he reconsidered his investment in Mr. Cowley's fund after the Fed's decision not to pare back its bond-buying but ultimately decided to keep it. "The downward spiral in yields couldn't run much further, and QE is going to end at some point," he says. Mr. Cowley does hold some bonds, largely corporate debt and German bunds, which he is content to own for the time being, reasoning that Europe's anemic growth will require the ECB to keep up its stimulus the longest. But, by and large, his fund consists of negative bets on major government bonds. He parks cash in short term bills earning measly returns. Mr. Cowley cut his duration to almost zero just over a year ago, after ECB President Mario Draghi's pledge to do "whatever it takes" to save the euro. Gradually, it edged into negative territory. "I decided we shouldn't be running a high-duration fund because central banks are manipulating markets," making calls about the direction of interest rates a risky bet, he says. Over the summer, some of Mr. Cowley's debt holdings got battered by the Fed's indications that it would soon slow its bond buying, erasing gains he had made earlier in the year. The experience helped persuade him to beef up his bearish position. "Employment levels and housing activity where they are today are consistent with long-term yields [on 10-year U.S. Treasury bonds] of 5 to 5.5%. Today, they're two and three-quarters," he says. "We are on a trajectory to higher yields. We will get there quickly or in a controlled way, but we will get there."