Mark Dampier: Strategic bond funds may ease conundrum

The Analyst

A few weeks ago the merest hint from Ben Bernanke, chairman of the US Federal Reserve, that the US might begin to slow its quantitative easing (QE) programmes sparked a bout of selling across financial markets.

He didn't reveal anything we didn't already know, but after a strong run it wasn't going to take too much to unsettle investors and encourage some profit taking.

The recent sell-off has brought a key problem for private investors back to the fore. The last thing the Government wants us to do is hold a significant proportion of our wealth in cash. They would prefer savings to either be invested or spent. This should help prop up financial markets and boost economic growth, or so the theory goes. By holding interest rates artificially low and allowing inflation to remain above the 2 per cent target this is exactly what many are forced to do.

Lower interest rates also allow the Government to borrow cheaply and reduce interest payments on existing debt. While inflation remains above interest rates this is also eroding the value of total debt in real terms. In financial jargon this is referred to as "financial repression".

Bond investors in particular face a conundrum. A yield in excess of 4 per cent on corporate bonds might look attractive, but it comes with the risk of capital loss. With interest rates unlikely to rise until after the next general election in my view, this situation could persist for a while longer. The trouble is when interest rates do eventually rise, bond yields will look less attractive, investors will demand a higher premium for the additional risk and prices will fall. No one knows exactly when the point of no return will be reached, but it is getting closer.

For investors looking to maintain exposure to fixed-interest I believe strategic bond funds are worth considering. These have the flexibility to invest across the fixed-interest spectrum, from traditional government and corporate bonds to higher-risk, high-yield bonds that behave more like shares. They also provide the fund manager the freedom to invest overseas, potentially benefiting from currency movements, and to take evasive action against any sell off in bond markets, by positioning the fund to benefit from rising yields (and falling prices), for example.

There is a caveat though. With flexible funds such as these the return depends far more on the manager's ability to make the right decisions at the right time – an extremely difficult task. One fund manager I have considerable faith in is Ariel Bezalel. He launched the Jupiter Strategic Bond Fund in June 2008. With hindsight the timing proved opportune.

After five years the fund has comfortably outperformed its sector. Mr Bezalel has used the full flexibility of the fund to add value in a variety of market conditions. Investments in the financial sector during 2009 and 2010 highlighted his ability to successfully time the market and achieve attractive returns, although there are no guarantees he will repeat this.

Looking ahead he suggests the US and European economies face contrasting fortunes. The US seems to be experiencing a sustainable recovery while Europe is struggling to produce any growth. The UK seems to be somewhere in the middle. If the US recovery continues it could lead to higher yields (and lower prices) on corporate and high-yield bonds. At some stage the Federal Reserve could be the first major bank to increase interest rates. He is therefore avoiding US corporate bonds and has a "short" position on US government bonds, meaning the fund could benefit if yields rise (and prices fall). He is happy to hold a portion of the portfolio in US dollars believing the currency could strengthen, but this hasn't worked recently. Further diversification is achieved through positions in Australian government bonds and holdings in defensive, high-yielding investment grade debt.

At least in part the answer to the bond conundrum is to move away from pure, investment-grade corporate bond funds into more strategic funds such as this. These more flexible funds could at least preserve some capital or even make some money in a more-challenging environment for bonds.

This could provide a middle ground between the additional volatility of equities and poor returns available on cash deposit.

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

Suggested Topics
Life and Style
love + sex
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle 0 Man United 1: Last minute strike seals precious victory
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
Arts and Entertainment
Seth Rogan is one of America’s most famous pot smokers
filmAmy Pascal resigned after her personal emails were leaked following a cyber-attack sparked by the actor's film The Interview
News
Benjamin Netanyahu and his cartoon bomb – the Israeli PM shows his ‘evidence’
people
Arts and Entertainment
80s trailblazer: comedian Tracey Ullman
tv
News
i100
Life and Style
A statue of the Flemish geographer Gerard Kremer, Geradus Mercator (1512 - 1594) which was unveiled at the Geographical Congree at Anvers. He was the first person to use the word atlas to describe a book of maps.
techThe 16th century cartographer created the atlas
Arts and Entertainment
Stephen Tompkinson is back as DCI Banks
tvReview: Episode one of the new series played it safe, but at least this drama has a winning formula
News
i100
Finacial products from our partners
Property search
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: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Christine McCleave: FP&A Analyst

    £36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Day In a Page

    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
    Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

    What is it like to live with Alzheimer's?

    Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
    The Internet of Things: Meet the British salesman who gave real-world items a virtual life

    Setting in motion the Internet of Things

    British salesman Kevin Ashton gave real-world items a virtual life
    Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

    Election 2015: A dead heat between Mr Bean and Dick Dastardly!

    Lord Ashcroft reveals latest polling – and which character voters associate with each leader
    Audiences queue up for 'true stories told live' as cult competition The Moth goes global

    Cult competition The Moth goes global

    The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
    Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

    Pakistani women come out fighting

    Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
    Leonora Carrington transcended her stolid background to become an avant garde star

    Surreal deal: Leonora Carrington

    The artist transcended her stolid background to become an avant garde star
    LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

    Education: LGBT History Month

    Pupils have been discussing topics from Sappho to same-sex marriage
    11 best gel eyeliners

    Go bold this season: 11 best gel eyeliners

    Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
    Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

    Cricket World Cup runs riot to make the event more hit than miss...

    The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
    Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

    Katarina Johnson-Thompson: Ready to jump at first major title

    After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot