Mark Dampier: A good insurance policy for times such as these

The Analyst

Facebook's initial valuation seemed expensive to many investors. The $104bn (£66.78bn) the company was worth when it floated last month meant each of its 900 million active users was valued at nearly $120 of annual advertising revenue each.

However, this is nothing compared to the extent to which the sovereign bond markets of the UK, US, Germany and Japan are overvalued, according to Stewart Cowley, manager of the Old Mutual Global Strategic Bond fund.

It is somewhat different to other bond funds. Mr Cowley manages it with capital preservation at the forefront of his mind.

That is not to say he doesn't want to make money, but there are times when capital preservation is important. The current economic environment is just such a time.

This does means that it is not a fund for investors seeking a high income. It currently yields around 1.5 per cent.

While Mr Cowley believes sovereign bonds are absurdly overvalued he is loath to bet against them without a hedge in place. This is because he believes the market is effectively rigged. Governments are buying their own bonds and panicked investors are fleeing the banking systems of southern Mediterranean countries. He therefore holds US treasuries and UK gilts whilst simultaneously shorting German bunds.

If German bunds underperform their UK and US equivalents the trade will create a positive return for the fund; if they outperform the return will be negative. This in itself generates modest returns, yet if German bunds weaken significantly, the trade could be highly profitable assuming UK and US bonds do not fall by the same degree.

As for European monetary union, Mr Cowley believes it is reaching an end game. New rules on maximum deficits and the amount of debt countries can have as a percentage of GDP are being drawn up. Nations are losing their discretion to act – they will have to comply or leave the union.

At present, 85 per cent of the fund is exposed to sterling, though he regrets not having held more in US dollars. The fund can invest up to 100 per cent in overseas currencies, but while he thinks sterling will have a crisis he thinks it is a year or so away yet.

The outlook for corporate bonds is more positive. Mr Cowley is comfortable companies generally have plenty of cash on their balance sheets, while yields offer sufficient compensation for the risks. He believes the Bank of England will continue to underestimate inflation so it doesn't have to raise interest rates. He points to urbanisation and increasing wealth in emerging nations as likely to have inflationary effects. Many investors seem to be ignoring the potential for stubbornly high inflation, but he has built protection into the portfolio via index-linked gilts.

In this environment, you want a fund that does everything possible to protect capital while having the potential to capture the upside when the time is right.

In my view, this fund looks like a good insurance policy.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent

Sport
Alexis Sanchez has completed a £35m move to Arsenal, the club have confirmed
sportGunners complete £35m signing of Barcelona forward
Voices
Poor teachers should be fearful of not getting pay rises or losing their job if they fail to perform, Steve Fairclough, headteacher of Abbotsholme School, suggested
voicesChris Sloggett explains why it has become an impossible career path
Sport
world cup 2014
Sport
Popes current and former won't be watching the football together
PROMOTED VIDEO
Sport
News
Wayne’s estate faces a claim for alleged copyright breaches
newsJohn Wayne's heirs duke it out with university over use of the late film star's nickname
Arts and Entertainment
Celebrated children’s author Allan Ahlberg, best known for Each Peach Pear Plum
books
News
peopleIndian actress known as the 'Grand Old Lady of Bollywood' was 102
News
business
News
Mick Jagger performing at Glastonbury
people
Sport
Germany's Andre Greipel crosses the finish line to win the sixth stage of the Tour de France cycling race over 194 kilometers (120.5 miles) with start in Arras and finish in Reims, France
tour de franceGerman champion achieves sixth Tour stage win in Reims
Extras
indybest
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
News
people
Arts and Entertainment
Chocolat author Joanne Harris has spoken about the financial struggles most authors face
books
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Business Analyst Consultant (Financial Services)

    £60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

    Systems Administrator - Linux / Unix / Windows / TCP/IP / SAN

    £60000 per annum: Harrington Starr: A leading provider in investment managemen...

    AVS, JVS Openlink Endur Developer

    £600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...

    Technical Support Analyst (C++, Windows, Linux, Perl, Graduate)

    £30000 per annum: Harrington Starr: A global leader in trading platforms and e...

    Day In a Page

    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
    Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

    Hollywood targets Asian audiences

    The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
    Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

    Grindr founder Joel Simkhai: 'I've found love on my dating app'

    Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
    Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

    Is it time to ditch autocorrect?

    Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
    10 best girls' summer dresses

    Frock chick: 10 best girls' summer dresses

    Get them ready for the holidays with these cool and pretty options 
    Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

    Westminster’s dark secret

    Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
    A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

    A History of the First World War in 100 Moments

    Dulce et decorum est: a life cut short for a poet whose work achieved immortality
    Google tells popular music website to censor album cover art in 'sexually explicit content' ban

    Naked censorship?

    The strange case of Google, the music website and the nudity take-down requests
    Howzat! 8 best cricket bats

    Howzat! 8 best cricket bats

    As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
    Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

    David Luiz falls from leader figure to symbol of national humiliation

    Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil