Mark Dampier: Bond fund can make money despite fashion for equities

The Analyst

There has been talk of a "great rotation" among investment commentators and the press. Recent rises in equity markets have been attributed to investors selling bonds to buy shares. Many have speculated that this rotation into equities from bonds hails the end of the bond bull market.

There is no factual basis for this. The latest IMA figures showed £85m flowing out of bond funds; tiny compared with the billions which flowed in over recent years.

It would be naïve to suggest bonds can perform well indefinitely. Yet there are many different types of bond. Talk of the great rotation has centred on sovereign (or government) debt, particularly bonds issued by the US, UK and German governments. These performed well while concerns over the global economy and debt in the eurozone's periphery rumbled on. They do look expensive relative to history, but one could argue that conditions in the West justify current valuations. We remain in a recessionary period and interest rates show no sign of rising. In addition, the Funding for Lending scheme has pushed rates on cash deposits down further at a time when investors remain hungry for income.

It might be fair to say we are nearer the end of the bond bull market than the beginning, but I don't think bonds can be written off yet. I still believe that some funds, such as Old Mutual Global Strategic Bond, managed by Stewart Cowley, have the potential to make money for investors.

Mr Cowley believes the UK is backed into a corner. The Chancellor is unable to spend more to stimulate the economy without a volte-face, nor is he able to implement further austerity without risking an embarrassing return to recession. His only possible salvation is the "quiet devaluation" of the pound so that UK exports become increasingly competitive globally and provide much-needed growth.

In this George Osborne could succeed, but it means the omens for the pound are not good. Sir Mervyn King, the Governor of the Bank of England, voted for more quantitative easing at the most recent meeting of the Bank's Monetary Policy Committee. He was outvoted, but the new Governor from July, Mark Carney, might be more aggressive in supporting it, and has hinted at more unconventional methods to target economic growth. In the currency devaluation race sterling could easily take the lead.

In a world where most major currencies lack appeal, Stewart Cowley is presently adopting an "anything but the pound" strategy. The fund's exposure is therefore across a basket of currencies, which sets it apart from many other bond funds. Euros, US dollars, Chinese renminbi and smaller currencies such as the Swedish krona and Polish zloty are held. This has already benefited the fund given the pound's recent falls.

Currency devaluation might be welcomed by exporters and politicians, but it could increase inflationary pressures as the cost of imported goods rises dramatically. Mr Cowley has 50 per cent of the fund in inflation-linked bonds issued by the US and UK governments. As the name says these are designed to provide a return linked to the rate of inflation and they could benefit if inflation takes off.

Mr Cowley has also been targeting certain government bonds he expects to weaken. This fund gives him the flexibility to profit from falling as well as rising asset prices, and he has been shorting conventional Japanese and French government bonds. He also implemented an opportunistic short position in Italian government bonds in January. In light of the recent inconclusive election in Italy it proved to be a shrewd and profitable move.

As you will have gathered, this is not a conventional bond fund. Mr Cowley uses a variety of strategies, including higher risk derivatives, with the aim of maximising total returns. He has no specific goal of generating income, and with a yield of around 2 per cent it is unlikely to appeal to income seekers. Indeed, this yield is highly variable depending where the fund is invested, which given the broad remit could be anywhere in global fixed interest markets, including higher-risk high yield bonds.

This fund could appeal to investors partly as an insurance policy against a future bond bear market. In the shorter term it could do well if the pound continues to decline; conventional government bonds continue to sell off; or if concerns over inflation rise further. In contrast, this fund will not appeal to investors who do not believe any of the above scenarios are likely. I trust Mr Cowley to position the fund to benefit from prevailing economic conditions, and I recently sold my last conventional investment grade corporate bond fund to take a position in this fund.

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

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
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

    Ashdown Group: Trainee Consultant - Surrey/ South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before