Mark Dampier: It's no use crying over risk, look at the value in bond markets


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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
Arts and Entertainment
Brendan O'Carroll as Agnes Brown in the 2014 Mrs Brown's Boys Christmas special
tvCould Mrs Brown's Boys have taken lead for second year?
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
footballLive! Chelsea vs West Ham kicked off 10 Boxing Day matches, with Arsenal vs QPR closing the action
Arts and Entertainment
Amy Adams and Christoph Waltz in Tim Burton's Big Eyes
film reviewThis is Tim Burton’s most intimate and subtle film for a decade
Arts and Entertainment
Jack O'Connell stars as Louis Zamperini in Angelina Jolie's Unbroken
film review... even if Jack O'Connell is excellent
Arts and Entertainment
Madonna is not in Twitter's good books after describing her album leak as 'artistic rape and terrorism'
music14 more 'Rebel Heart' tracks leaked including Pharrell Williams collaboration
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all