William Eigen is sticking to the strategy that has helped him thrive amid the worst bond rout in history: keeping most of his $8.8 billion JPMorgan Strategic Income Opportunities Fund in cash.
(Bloomberg) — William Eigen is sticking to the strategy that has helped him thrive amid the worst bond rout in history: keeping most of his $8.8 billion JPMorgan Strategic Income Opportunities Fund in cash.
As of the end of August, 63% of the portfolio was in cash-like instruments, mainly commercial paper, data from the fund show. The rest, he says, is primarily in short-dated, floating-rate investment-grade debt, a bet that will pay off if yields climb, which they have been doing relentlessly for months.
The fund is up 4.1% this year through Tuesday, at a time when the US bond market as a whole has lost 2.7%. Last year, Eigen eked out a roughly 0.5% gain, compared with a record 13% loss for the Bloomberg US Aggregate Index. To his advantage, his fund can go anywhere, from cash to junk debt, with few constraints. That’s unlike many bond funds, which have mandates limiting how far they can stray from their benchmarks.
Eigen’s view on the economy, informed by the thriving business at an athletic facility he owns in Rhode Island, tells him bond investors are in for more pain. As he sees it, the Federal Reserve may raise interest rates at least once more, and keep them there for as long as 18 months to slow the economy and curb inflation.
As a result, he says, it’s possible that 10-year yields, which on Wednesday hit a 16-year high of almost 4.9%, may reach 6%, a level last seen in 2000.
What bond bulls fail to realize is that “this economy is stronger than they think and can deal with higher rates better than they think,” he said.
Internal Debate
Eigen’s take puts him more in line with JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, who has warned that the Fed may need to do more to combat inflation. It also pits him against another colleague, Bob Michele, chief investment officer for fixed income at J.P. Morgan Asset Management, who has said he expects a bond rally as recession risks mount.
As Eigen sees it, his competitors have been blindsided because they’ve grown too accustomed to declining rates over the past four decades, making it difficult for them to adapt to the reality of a bear market.
“Every week that passes by without a recession is really bad news for fixed-income folks,” he said.
He’s essentially adopted an all-or-nothing strategy. While portfolio managers typically avoid parking clients’ money in cash, it’s a pillar of his approach.
When credit markets are expensive, he chooses cash. When things blow up, he could pile into junk bonds, taking advantage of the panic. In 2015, for example, he bought high-yield bonds when oil slumped, a move that eventually paid off when markets recovered. Since its 2008 inception, the fund has returned 4% annually, compared with about 2.5% for the overall bond market.
Not Time
He monitors hundreds of securities daily, everything from mortgage-backed bonds to convertibles, constantly tweaking his valuation models so he’ll be ready to pounce. For him, the risk-reward calculation doesn’t indicate this is the moment to attack.
To abandon cash, which yields above 5%, he wants to see longer-term yields exceeding their short-term counterparts. That hasn’t been the case since around mid-2022. Also, he says, junk-bond spreads may need to widen toward 700 basis points, from around 420 now.
On top of that, he’s waiting for business to slow at his sports facility as evidence the economy is weakening. He sees little sign that’s happening yet. Instead, costs of everything from boiler maintenance to bathroom cleaning keep rising.
“The inflation fundamentals just are not slowing down,” he said. “Workers have more power now than they have had in the past for sure.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.