Return of inflation is inevitable
Markets are underestimating a coming rout in bond prices, and missing early signs of the return of inflation, according to the US mutual fund manager who has raised more money than any other in the past year. Investors have put billions of dollars behind Michael Aronstein and his bets that central banks will wait too long to end their crisis-era monetary expansion, triggering inflation spikes and a long bear market in bonds that might already be more than a year old. "They never fail to make that error," he says, "because they’re structured as bureaucracies and they have to wait until they have enough evidence to convince everybody in the room. "The only period that may be comparable to this is after the discovery of the New World, when all the Europeans looted all the gold and silver, new money out of the sky, a la the Bernanke Doctrine. You had, basically, a century of inflation in Europe. The tulip bubble didn’t come out of nowhere; that wasn’t just people’s appetite for flowers." Mr Aronstein’s Mainstay Marketfield fund, distributed by New York Life Investments, has been the talk of the industry. In 12 months, the fund has quadrupled in size to $18bn, giving him more firepower than many more famous hedge fund managers. Inflows had totalled $12.4bn by the end of November, according to data from Morningstar, more than any other actively managed mutual fund. Only a trio of index trackers from Vanguard attracted more cash last year. In part this is a legacy of how Mr Aronstein insulated investors from the worst of the financial crisis, losing 13 per cent in 2008 versus 37 per cent for the S&P 500, without foregoing any of the upside when markets rebounded over the next four years. The fund is also riding a wave of interest in so-called alternative mutual funds, which mimic hedge funds in giving their managers wide latitude to invest as they see fit, including by taking negative bets as well as positive ones – something that is instrumental in surviving a bear market. The Mainstay Marketfield fund can take positions in equities, bonds, commodities, exchange traded funds and derivatives. Financial advisers and asset management groups are pushing alternative mutual funds as a way for investors to diversify their portfolios away from traditional equity and bond funds, since equities are volatile and bonds could tumble in price as rates rise. Assets in US alternative funds jumped to $247.6bn at the end of November from $157.6bn at the end of 2012, Morningstar calculates. Mr Aronstein is not betting it will last. "We’ll start hearing complaints about how poorly we’re doing," he says, pointing out that 2013 was a year when simply following the US S&P 500 generated a total return of 32 per cent. The Mainstay Marketfield fund returned just under 17 per cent, held back by its geographical diversity and short positions. "It was a very simple year. And, as you can see, I’m drawn more to complexity than simplicity," he says. While his fund is relatively new – it was set up in 2007 – Mr Aronstein is a late bloomer when it comes to star fund managers. He began his career in 1979 at Merrill Lynch, where he was an investment strategist, and has worked at a string of boutique firms over the years. He has blotted out the modernity of Marketfield’s Midtown Manhattan headquarters by furnishing his office with a leather couch, dark bookshelves and antique porcelain trays, and his macroeconomically driven investment philosophy is unabashedly influenced by history. "All grand excesses have the same form, with different content," he says. "Japan was no different, in concept, than the ‘Nifty 50’ in 1972. We’ve got bonds now," Mr Aronstein says. He and his team pore over price data from hundreds upon hundreds of commodities and manufactured goods, and he highlights proteins – shrimp, beef, chicken – and US lumber among the areas where price spikes are already developing. It is outwards from these pressure points, he says, that the world will finally move from asset price inflation to real consumer price rises. And as that happens, bonds will tumble and investors will reassess the safety of emerging markets that till now have been fuelled by unprecedentedly cheap money. There are profits to be made buying the companies with pricing power and betting against those without, he says, and from concentrating investment in developed economies and staying cautious beyond. This year there are many billions more dollars hoping Mr Aronstein is right.