It is a subject on which Stewart Cowley, manager of the Old Mutual Global Strategic Bond fund, has strong views. He traces the roots of the crisis back to the western consumption boom in the latter half of the 20th century.
This was a period when consumer spending and investment in housing increased markedly as a proportion of economic activity, whilst investment in factories and equipment stagnated.
Cowley explains capital diverted into these less productive areas of the economy – supported by ever-increasing debt – and sowed the seeds of the US sub-prime problems, which in turn contributed to the global financial crisis.
Thus consumer debt was transferred to banks and subsequently to governments, many of which had already spent beyond their means.
With consumer demand withering, monetary authorities have turned to the printing presses to stimulate the economy and prevent a collapse. Quantitative easing has created more money but it is not yet moving around the economy.
So far people and banks have still been paying down debt, offsetting its effect.
However, as this ends and the flood of new money begins to circulate, QE will potentially have to cease, removing the prop that has kept bond prices artificially high and yields low.
The question is, when will it happen?
The answer, according to Cowley, is not yet. He believes the US Federal Reserve and the Bank of England will support further consumption-led expansion through more QE, and this will continue to support the government bond market for now.
However, he cautions even bigger problems are being stored up for the future, particularly in the UK.
He argues that stimulating a housing-led recovery – through such measures as George Osborne's Help to Buy scheme – is misguided as it takes much-needed capital from more productive areas of the economy.
He also believes the market could lose confidence in the coalition's commitment to austerity, which may mean gilts are particularly vulnerable.
Performance of indices over 5yrs
Source: FE Analytics
It is perhaps unusual for a fund to be so strongly shaped by macro-economic and political views, but this is an unusual bond fund.
Its aim, rather than to produce a steady income, is primarily to beat both returns on cash and inflation while sheltering capital.
To try and achieve this, Cowley has a wide variety of strategies at his disposal, including the full spectrum of the bond market, currency strategies and derivatives, which can increase risk.
Presently the fund is positioned for sustained inflation. Index-linked UK and US government bonds represent around half of the portfolio.
There is also some exposure to corporate bonds, notably of banks, where Cowley believes the gradual shoring up of balance sheets is a positive development.
In currencies, Cowley is negative on the Japanese yen, has pared back euro exposure and has diversified into overseas currencies including the Chinese yuan and Mexican peso.
He is also poised to short UK gilts and US Treasuries when he believes the moment is right – something conventional bond funds are unable to do.
Timing, however, will be crucial. It is expensive to continually short the gilt market and "pay away" yield. Cowley will have to carefully judge when to shift his portfolio.
While he is confident there will be signs – perhaps a misplaced comment from the Federal Reserve or a lacklustre uptake of a US Treasury bond auction – investors could lose money if he gets it wrong.
However, Cowley does have a good record of reading the economic picture, so for those looking for a moderate risk, "all-weather" fund able to adapt and profit from a changing environment, I believe this represents a strong option.
Performance of fund vs sector since June 2009
Source: FE Analytics
FE Alpha Manager Cowley has headed up the Old Mutual Global Strategic Bond fund since June 2009. According to FE data, it has beaten both its sector average and benchmark over the period.
His fund is available for a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.12 per cent.
