Hedge fund Lansdowne thinks 'idiotic' bond prices will fall

Lansdowne Partners, one of Europe's biggest and most influential hedge funds, is betting that financial markets are on the brink of a reversal that will see a big fall in "idiotic" bond prices, a slump in technology stocks and a revival in UK equities.

The firm, which manages about $15bn in assets and takes long-term bets on stocks, is predicting a major shake-up in the dominant market trends of the past several years, said a person close to the firm. While markets have long been supported by central bank stimulus, Lansdowne now expects governments to issue more debt to fund spending, which could upset bond prices and some of the best-performing stocks of recent years.

The portfolio overhaul is likely to mean a significant increase in Lansdowne's exposure to UK equities, the person said. For Lansdowne's flagship Developed Markets fund, that would mark something of a return to its roots as a UK-focused fund, before it took on a global mandate in 2012.

"It's pretty clear [Lansdowne] thinks things are different," the person said. "Governments are going to spend a ton of money to boost economic prospects, which will reduce political risks and which will lead to risk-free rates [yields on the safest government bonds] rising." Yields rise as prices fall.

Lansdowne declined to comment.

While Lansdowne changes its bets on individual stocks from time to time, such a wide-ranging rejig of its outlook is rare.

The firm, whose flagship fund run by Peter Davies and Jonathon Regis has made an annualised return of 10 per cent since it launched in 2001, is closely watched by many rival hedge funds. However, Lansdowne is also one of the most publicity-shy in the hedge fund sector and does not disclose its biggest bets even to its investors.

The portfolio shift, which has not previously been reported, comes as fund managers across Europe grapple with the phenomenon of negative-yielding government bonds and faltering economic growth.

While many investors believe subdued inflation rates and European Central Bank bond-buying will keep yields very low for the foreseeable future, others think bond prices look vulnerable.

Bond prices are idiotic. They've reached stupid levels

Person close to Lansdowne

"Bond prices are idiotic. They've reached stupid levels," the person close to Lansdowne said. "You can't justify buying something on a negative yield, given governments have the opportunity to issue more."

Risk-averse investors' hunt for bond-like securities has also driven defensive stocks - companies less vulnerable to economic booms or busts - to very high levels. The gap between defensives and cyclical stocks is now "at least equal in magnitude to that seen in the late '90s tech boom," the person said, adding that defensives are likely to fall.

However, the big drivers of investor behaviour over the past decade - central bank intervention and political risk - could be about to change, triggering an unwind in some of the biggest trades of the past decade.

Political risks could lessen, the person said, for instance in the US-China trade war and Brexit, over the coming quarters.

Lansdowne also expects governments to start issuing more bonds to pay for higher spending. This could not only stimulate economic growth but also push up bond yields.

The firm is now betting that cyclical and cheap so-called value stocks, which have underperformed faster-growing stocks for years, will start to do well. "Value stocks are super, super cheap," the person said.

Lansdowne is also changing tack on technology stocks, which have enjoyed a stellar run over the past decade. Having sold positions in Amazon and Google last year, the fund is now betting that some tech stocks will fall.

Lansdowne is "moving from long to short in technology [as] valuations are super-high," the person said. Shorting means betting on falling prices. "Would you buy Facebook ...now? No," the person added.

Lansdowne has long been considered the gold standard of equity hedge fund investing, although performance has been sub-par in recent years. This year the Developed Markets fund is down 5.3 per cent, whereas the S&P 500 index has gained more than 18 per cent.

The firm also expects to increase its position in UK stocks significantly, if political risks recede. That is a contrarian call, when the FTSE 100 is hovering around the level it was at the end of 2016. However, Lansdowne thinks companies are run in a much better way than 10 or 15 years ago and have stronger balance sheets.

"UK companies are significantly mispriced," the person said. "The UK economy is structurally in a very good position. If you compared UK and US unemployment, it would be difficult to differentiate the two, and yet the narratives are radically different."