Fuss Protege Gaffney's Bond Fund Loses 10% as Value Bets Go Awry

  • Eaton Vance bond manager hurt by slump in energy, currencies
  • She vows to stick with her strategy despite decline in 2015

Kathleen Gaffney made a big bet last fall on what looked like bargains -- everything from oil and metal companies to emerging-market bonds.

So far it’s been a disaster. Gaffney’s $1.2 billion Eaton Vance Bond Fund lost 10 percent this year through Oct. 16, making it the worst-performing U.S. bond fund with at least $1 billion, according to data compiled by Bloomberg. Gaffney, who started the fund in January 2013 after 15 years as co-manager with Loomis Sayles bond star Dan Fuss, had gotten off to a great start, beating 99 percent of peers in her first 18 months, including her old boss.

Gaffney is among a long list of money managers, including Carl Icahn, Greenlight Capital’s David Einhorn and Franklin Templeton’s Michael Hasenstab, who have bought beaten-down commodity or emerging-market investments over the past year, only to watch those assets get cheaper still. Since June 2014, oil prices have plunged 56 percent and emerging-market bonds are off 19 percent.

Gaffney isn’t second-guessing herself.

Kathleen Gaffney
Kathleen Gaffney
Photographer: Ruby Arguilla-Tull/Bloomberg

“I still think our view is the right one,” Gaffney said in an Oct. 12 interview at her Boston office. “You find value by investing in places the market doesn’t like.”

Icahn, the billionaire activist, added to his firm’s holdings of Chesapeake Energy Corp. in the first quarter, only to have the shares decline 43 percent since March 31. Einhorn, who’s been building up his stake in Consol Energy Inc. since the third quarter of 2014, has seen the stock plunge 69 percent in 2015, making it the worst performer in the Standard & Poor’s 500 Index.

Hasenstab, whose $58 billion Templeton Global Bond Fund trails 86 percent of rivals this year as emerging-market currencies tumble against the dollar, said he sees value in the Mexican peso, the Malaysian ringgit and the Indonesian rupiah.


‘Multi-Decade Opportunity’

“This is not a once-in-a decade, this is a multi-decade opportunity to be buying very cheap assets,” he said in an interview posted this month on YouTube.

Gaffney, 53, left Loomis Sayles three years ago for the chance to run her own fund. Fuss, 82, still manages the $19.8 billion Loomis Sayles Bond Fund. He has a stellar long-term record but, after betting on the Canadian and New Zealand dollars, has also struggled in 2015, trailing 96 percent of peers.

Like her former mentor, Gaffney can buy a range of assets, including stocks, convertible securities, and bonds denominated in foreign currencies. Her fund had 11 percent of its holdings in energy, 7.7 percent in metals and mining and 14 percent in emerging-market bonds as of Sept. 30.

A year ago, Gaffney was a magnet for investor cash after her fund surged 18 percent in the 18 months ended July 31, 2014.

Gaffney traces her 2015 losses to perceptions about China. Fears that the world’s second-largest economy could be headed for a tailspin have spooked investors, she said, triggering a collapse in commodities and the value of emerging-market currencies linked to Chinese growth.

‘Flighty’ Capital

“Capital is very flighty,” she said. “The experience of 2008 is still on everyone’s mind.”

One of her biggest holdings, a Brazilian government bond that matures in 2021, lost 33 percent this year, dragged down mostly by the real’s nosedive against the U.S. dollar. A 2042 bond issued by energy driller Rowan Cos. is down 22 percent. Shares of Caterpillar Inc., which sells equipment to the mining and energy industries, are off 24 percent.

Investors have turned course, pulling a net $451 million this year through Sept. 30, according to data compiled by Bloomberg. The fund’s assets peaked at almost $2 billion at the end of February.

Gaffney said China is slowing, not collapsing, and the government is taking steps to create a more flexible economy that will depend more on consumers and less on exports. As it becomes clearer that China and the global economy are solid, Gaffney said, the securities she owns should rebound.

China’s gross domestic product rose 6.9 percent in the three months through September, beating economists’ estimates for 6.8 percent.

Not everyone shares Gaffney’s optimism. Pacific Investment Management Co., which oversaw $1.47 trillion as of Sept. 30, is sticking with its downbeat outlook for emerging-market currencies. The recent rally in the currencies only bolsters the bearish case, money manager Luke Spajic said in an Oct. 12 interview.

Lower Forecast

Private equity firm KKR & Co. said there are few reasons to get excited about commodities and emerging-market assets. “Many hard commodity prices are likely to suffer another leg down,” macro strategists Henry McVey and Frances Lim wrote in a note posted this month on the firm’s website.

The International Monetary Fund on Oct. 6 cut its 2015 forecast for global growth to 3.1 percent, citing an emerging-market slowdown in reducing its outlook for the second time in three months.

As a value investor, Gaffney often takes a position too early and has to wait for prices to bottom, she said in the interview.

“You make money by figuring out where the market is headed next,” she said.

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