(Bloomberg) -- William Eigen honed his skills as a value investor in college, buying and selling American muscle cars. He'd spot bargain vehicles in newspaper ads and show up with a fistful of cash, hoping to negotiate still lower prices from desperate sellers.
His approach to the bond market is similar. He'll stockpile money and then pounce when he sees a deal. Eigen also gleans intel on the economy from customers at the two commercial garages in central Massachusetts that he partly owns, where he can sometimes be found fixing autos.
Today he sees trouble brewing in the bond market and is positioning his JPMorgan Strategic Income Opportunities Fund accordingly. About half of the $12 billion mutual fund is in cash.
“This is a hostile market for traditional fixed-income,” Eigen said in an interview at his Boston office. “You won't need a big move in rates to get some nasty returns.”
Eigen, 49, runs an unconstrained bond fund, meaning he can buy or bet against almost anything in the fixed-income universe. Such funds were built for a climate of rising interest rates, and this year, as rates have climbed because of inflationary signs and soaring government deficits, they are beating their more conventional counterparts.
Strategic Income is the second-largest fund among 86 in Morningstar Inc.'s non-traditional bond category. Its flexible mandate ties Eigen to no benchmark, though unofficially he has one: “Don't lose money.”
His Bets
As for his current bets, Eigen expects rates to keep rising. His flagship has an effective duration -- a measure of sensitivity to rate changes -- of less than 0.1 years, compared with about 6 years for the Bloomberg Barclays US Aggregate Bond Index, the benchmark for many fixed-income competitors.
While he doesn't like much on the long side, he's shorting Germany's negative yielding 5-year note.
“Please explain to me why I would pay the German government to hold my money,” Eigen said, leaning in and gesturing with his hands to underscore his point.
Thomas Balcom, a financial adviser in Lauderdale-by-the-Sea, Florida, who has invested in Eigen's fund since 2016, admires Eigen's bluntness. “He'll always tell you what he thinks,” Balcom said.
Eigen, who grew up in a working-class household and learned auto repair as a teenager, helped pay his way at the University of Rhode Island by flipping high-performance cars. He borrowed $1,000 from his dad and uncle Joe to purchase the first one, a 1971 Mustang Mach 1, selling it two weeks later for $3,100.
Car Garages
He still buys and works on cars, either at home or in one of his garages, and his collection has grown to a half-dozen vehicles. If he's around when one of the auto shops is busy, he'll pitch in and fix a customer's brakes.
“I like getting my hands dirty,” Eigen said. “It's therapeutic.”
The garages served as an economic early warning in 2008 before the collapse of Lehman Brothers Holdings Inc. Eigen noticed customers were putting off maintenance and truck drivers were complaining of lighter loads. He moved into mostly cash, enabling his fund's European precursor to evade the worst of the global financial crisis.
At other times he's pounced when he's seen a deal. In early 2016, the fund had 70 percent of its money in a combination of junk bonds and low-rated credit.
Currently he's positive on the economy, at least for the next 12 to 18 months.
“I like what I see,” he said. “And that is not good for fixed income.”
As a result, he had 47 percent of the fund parked in cash as of Feb. 28, with smaller allocations to speculative debt, non-agency mortgage backed securities and bank loans.
Single-Day Liquidity
With a broad chest and bulging biceps, Eigen looks a bit like one of his cars. He works out for two hours starting at 5 a.m. every weekday at a blue-collar gym where he benches 500 pounds.
Though he no longer needs the profits, he still drives a bargain in the market for Detroit iron. In 2014, Eigen purchased a mango-colored 2006 Dodge Charger Daytona for $13,000 -- after the owner had poured $70,000 into it.
“He needed single-day liquidity and I had the cash,” Eigen said.
Despite a solid long-term record, Strategic Income has had its stumbles. In 2015, Eigen piled into high-yield bonds as they fell, leading to a 2.2 percent loss. The move paid off the next year, when junk rallied and the fund returned 9.2 percent.
Fund Withdrawals
Not all of his shareholders stuck around, however. Net redemptions from 2015 through 2017 totaled $12.8 billion, Morningstar estimates.
“The big tactical moves he makes can be very difficult to pull off,” said Tayfun Icten, a Morningstar analyst.
The U.S. fund has returned 5.2 percent a year on average since inception, compared with 4.2 percent for the aggregate index, and it has done so with less volatility. Over the past three years, it's outperformed two-thirds of Morningstar's non-traditional bond category.
Most fixed-income choices are overpriced today, Eigen said, and investors in traditional bond funds will suffer as rates increase. That's why he's waiting for better deals to appear and ready with a wad of cash.
“The central banks have created an illusion that this is an asset class where you can always make money,” he said. “That is a huge mistake.”
To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Josh Friedman, Dan Reichl
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