Mark Dampier: It's no use crying over risk, look at the value in bond markets
Friday 17 January 2014
In 1990 interest rates were at 15 per cent. You didn't need to be brain of Britain to know that rates at that level were not going to last. It should be easy, therefore, to look at interest rates today – standing at 0.5 per cent – and see this must be the bottom of the interest rate cycle, with little chance of them remaining at record lows in the medium to long term.
Unfortunately, while history often rhymes it doesn't always repeat exactly. Interest rates have been at 0.5 per cent for five years, confounding just about every expert I can think of. It also meant the bears of the bond markets were calling time too soon. As early as 2009 I saw one article exclaiming the bond rally was over. It had hardly started. Even the great Bill Gross, manager of one of the world's largest bond funds, made a fool of himself suggesting gilts were "sitting on a bed of nitroglycerin" and would blow up at any time. If I recall correctly, 10-year gilt yields were around 4 per cent then and subsequently fell below 1.5 per cent.
Hindsight is a wonderful thing. Yet after five years I believe we are nearing the end of record low interest rates. I don't see them rising before the next general election, but I am a cynic when it comes to electoral cycles.
For investors, the real question is whether there is any value left in bonds. Paul Read and Paul Causer of Invesco Perpetual, two of the best bond fund managers around, suggested in 2009 that there were lots of risks but also lots of value in bond markets. They took the risk and delivered on performance, but now feel Armageddon has been averted and the European banking system is in better shape. The rewards available for taking extra risk are no longer as great.
It therefore makes sense for investors seeking fixed-interest exposure to choose a flexible fund such as Invesco Perpetual Tactical Bond. This allows the managers to combine strategies designed to protect capital and generate income, varying their positioning depending on their views and where they see opportunities.
Presently, they see little value in government bonds, despite 10-year gilt yields having moved from 1.5 per cent to 3 per cent. Working out how painful any sell-off could be is challenging, though, as they believe central banks will keep interest rates low in the short term. Government bond exposure is confined to shorter dated bonds where they believe a better return is available than on cash, but they can be sold easily when opportunities arise.
In a recent meeting Paul Causer said to me "bond markets are as strong as their weakest link and the weak link is the [high yield] part of the market which has seen lots of issuance, much not of a great quality". Heavily indebted companies, weak corporate structures, and low cash flows are a recipe for disaster. They see the market as reaching a peak, but don't expect sharp falls initially.
What is interesting is for the first time in a while there is no big theme running through the portfolio. They are generally positioned cautiously with 43 per cent in short-dated bonds and cash, to keep volatility down. They will also continue to take profits from positions on any further strength, waiting for opportunities to invest in high quality bonds. There is also 40 per cent invested in bank bonds, including 20 per cent in higher risk bank bonds; and some exposure to the US dollar.
Looking ahead they believe it will be a difficult year in which to make any real capital return, but they believe the economic background is good, so do not expect disaster to come from here. They plan to focus on higher quality bonds and defending the value of investors' capital while they wait for higher return opportunities to arise.
Messrs Read and Causer always tell it as they see it, and over the years I have come to trust their judgement. They can be early in their calls, but always make up for it over the long term. If they see little opportunity perhaps this is the time to move into funds which have greater flexibility to protect capital and wait patiently for future opportunities. Invesco Perpetual Tactical Bond is one of these funds and this is the reason I hold it in my own portfolio.
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 hl.co.uk/independent
- 1 Husband creates spreadsheet detailing wife's 'excuses' for turning down sex
- 2 UK pirates will get four warning letters a year
- 3 Saneie Masilela, 9, marries Helen Shabangu, 53 years his senior, for the second time
- 4 Time runs out for Christian Iraq: Isis deadline passes with mass flight
- 5 Why I'm on the brink of burning my Israeli passport
Malaysia Airlines flight MH17 crash: 'Nine Britons, 23 Americans and 80 children' feared dead after Boeing passenger jet is 'shot down' near Ukraine-Russia border
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The truth about conspiracy theories is that some require considering
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: victims’ bodies bundled in black bags and loaded onto trains
Malaysia Airlines MH17 crash: Obama - 'We’re going to make sure that truth gets out'
- < Previous
- Next >
iJobs Money & Business
£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...
£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
£70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...
Day In a Page
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar