Kathleen Gaffney: Contrarian Bond Investing

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Contrary to most forecasts, award winning portfolio manager Kathleen Gaffney sees a brighter growth outlook in China, the U.S. and much of the world, and is finding unusual bargains in battered areas like energy and commodities. On this week’s WEALTHTRACK, Gaffney explains why she is investing in unpopular places in her Eaton Vance Bond Fund.


Today’s front page of “The Wall Street Journal” sums it up: “A Painful Quarter for Markets.” The third quarter, which just ended was the worst for stocks since 2011’s third quarter during the European debt crisis. In the three months ended yesterday, the S&P 500 lost 6.9% and the Dow Industrials dropped 7.6%. Concerns about a slowdown in global growth, especially in China and faltering corporate earnings contributed to the damage. According to the Journal, analysts are predicting third quarter profits for S&P 500 companies will decline 4.5% versus a year ago. They fell 0.7% in the second quarter. It will be the first time since 2009 that profits fall two quarters in a row. However, a big decline in energy company profits is responsible for most of the anticipated damage. Without the estimated 65% decline in energy operating profits the S&P’s earnings would be up 3.4%.

Another key contributor to the market’s malaise was the Federal Reserve’s decision not to raise interest rates in September. After nearly seven years of its unprecedented zero interest rate policy, or ZIRP as it’s known on Wall Street, the consensus was it was time to get interest rates out of emergency mode and back to some sort of normalcy.

It turns out Federal Reserve Chairwoman Janet Yellen agrees with the consensus. In a stunning speech the week after the Fed’s decision, Ms. Yellen made a lengthy case for a rate hike this year “…it will likely be appropriate to raise the target range for the federal-funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2% objective.”

As veteran Fed watcher, Roberto Perli at Cornerstone Macro noted, after months of not knowing where Chairwoman Yellen stood on rate hikes, we now have clarity on her views at least.

This seemingly endless fixation on when and if the Fed will raise short term rates might seem overdone but the signals and actions of the world’s most influential central bank, of the world’s reserve currency country has huge implications and can steady or roil global markets.

This week’s guest, Kathleen Gaffney, is among those very concerned about recent Fed policy and its financial impact on markets and investors, but she is also more optimistic than most about the world’s growth prospects.

Gaffney is Co-Director of Diversified Fixed Income at Eaton Vance Investment Management. She is also lead portfolio manager of the Eaton Vance Bond Fund, which she launched in early 2013. Until 2012 Gaffney was Co-Portfolio Manager of the Loomis Sayles Bond Fund with legendary investor Dan Fuss where their team was named Morningstar’s Fixed Income Manager of the Year. In this week’s interview, I asked Gaffney why the Federal Reserve’s decision not to raise interest rates in September was a mistake and about the contrarian positions which have hurt her fund’s performance this year.


Kathleen Gaffney: Think Like A Contrarian, In At Least A Small Portion Of Your Portfolio

  • Individual investors have flexibility to buy small positions in targeted ETFs and mutual funds
  • Energy, emerging markets and gold are unpopular sectors now

Great Value

Invest in actively managed, diversified, emerging markets equity ETF or mutual fund

Among Morningstar’s favorites:

  • American Funds New World (NEWFX)
  • Harding Loevner Emerging Markets Advisor (HLEMX)

Video Archive

Kathleen Gaffney’s previous appearances on WEALTHTRACK

Bond Illiquidity

Bond market illiquidity post financial crisis is a concern of many fixed income investors. Eaton Vance Bond Fund’s lead portfolio manager, Kathleen Gaffney explains what it means and how she is handling it.

Kathleen Gaffney

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