Bond Maven Bruno Crastes Bets Against the Crowd--and on Europe

By Christopher Whittall Features Dow Jones Newswires

As bonds were plummeting at the height of the eurozone's 2011 debt crisis, Bruno Crastes's brand-new fund suffered steep losses and fleeing investors.

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Mr. Crastes gathered his executives in H2O Asset Management's new boardroom. "Let's invest," the chief executive told them, suggesting they plow money into research. When visiting clients, he had another message: Now is the time to take on risk.

It worked. Markets calmed down, and the low-profile Frenchman's returns from bonds and currencies have since matched those of some of the world's best-performing managers.

Today, he and other investors potentially face another pivotal moment--whether accelerating growth and inflation are a threat to the 35-year bull market in bonds.

Mr. Crastes is set to fall back on his old playbook, basing trades on his analysis of investor behavior and his willingness to stomach losses to win in the longer term.

"How can you get richer if you don't accept to get poorer?" he said in an interview from the fund's central London offices.

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Mr. Crastes has sold U.S. and U.K. government bonds, which he thinks will be hit by higher inflation, and bought debt elsewhere in Europe, where he sees more subdued consumer-price rises. In funds that allow it, he has also bought stocks that tend to fare better in inflationary environments. H2O had GBP10.3 billion ($13.18 billion) under management at the end of March.

"We think that investors are not prepared at all for more inflation," and even a small rise in consumer prices "will have dear consequences," Mr. Crastes said.

The 51-year-old analyzes what he believes are investors' biases and constraints to look for mispricing in the market. Many other large bond investors rely more on forecasting markets, by parsing data on the global economy, central bank decisions and politics.

Mr. Crastes takes views on such fundamentals, but he also tries to predict how other investors will react and then looks for opportunities where he thinks they have it wrong.

"I like understanding people and I think people are full of biases," he said, leaning forward with a wide grin.

He currently believes investors have a low tolerance for risk and, ahead of several key European elections, are unnecessarily scared of another eurozone crisis.

In February, Mr. Crastes watched a sharp rise in the cost of the futures contracts investors use to bet against Italian government debt. He went against the tide and bought Italian, Portuguese and Greek bonds, securities that had been hit by election jitters.

"We think that the European project [goes far] beyond the French elections," he said, talking of the presidential vote that begins Sunday, in which far-right candidate Marine Le Pen has threatened to pull France out of the euro.

H2O's flagship Multibonds euro fund notched an average annual return of 24% after fees in the five years that ended in 2016, according to Morningstar Inc., outstripping comparable bond funds by over 19 percentage points.

Mr. Crastes's investments primarily focus on widely traded global bonds and currencies. Still, H2O does make bets elsewhere, again displaying risk appetite.

A review of fund filings shows H2O holds bonds in companies either owned or funded by Sapinda Group, a firm run by German businessman Lars Windhorst. Mr. Windhorst has been seeking to sell assets after big losses at some of those companies, and Sapinda bonds have plummeted in value.

An H2O spokeswoman declined to comment on the investment. Mr. Windhorst declined to comment.

Colleagues and clients describe Mr. Crastes as an engaging, intensely-driven man, but playful. He wore a Donald Duck costume to The Ivy, an upmarket London restaurant, for H2O's 2016 office Christmas party--a reference to Donald Trump's election victory, which helped shake up bond markets.

H2O's offices are full of personal touches. The boardroom has four glass-fronted fridges crammed with vintage French wines. An animal lover, Mr. Crastes has a miniature leather Chesterfield sofa in his corner office for his Yorkshire terrier, Elsa.

He and a team that followed him from previous jobs have been through rocky patches. At Crédit Agricole Asset Management, they suffered heavy losses around the time of the 2008 financial crisis. Mr. Crastes had built up the firm's London business from $4 billion to $100 billion in assets under management. Assets shrank to $60 billion as clients pulled out.

Despite those losses, Natixis Asset Management, then headed by Mr. Crastes's former boss, Pascal Voisin, agreed in 2010 to seed him in return for a 50.01% stake in H2O. Within a year, crisis had engulfed European bond markets and clients pulled $500 million out of the newly formed fund.

As some left, Mr. Crastes looked for more.

In July 2011, Andrew Spence, who manages 7.2 billion Australian dollars (about $5.43 billion) as chief investment officer for the pension plan of Australia's Qantas Airways Ltd, asked to meet.

With bond markets wobbling, Mr. Crastes got on a plane for the 50-hour round trip from London to Sydney and what would be a three-hour meeting. For Mr. Spence, this was someone who wasn't afraid to take risks. He invested A$300 million ($226 million) and, as European bond markets began to tank, allowed Mr. Crastes to invest in riskier securities.

"There were times when it was uncomfortable, given the extreme market volatility," Mr. Spence said, but "that's how you make money."

Mr. Voisin, who is now working on a biotech startup, describes Mr. Crastes as a "real, active portfolio manager."

"You have to be able to bear the short-term volatility associated with that," he said.

Margot Patrick contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

April 22, 2017 08:15 ET (12:15 GMT)