Many investors take the view that gilts will be a poor source of protection in client portfolios in the current market conditions because the fixed income available from such assets is likely to be worth less as inflation rises.
In addition, the Bank of England is reported to be expecting to raise interest rates three times in the next three years.
A higher base rate is generally viewed as bad for bonds because it pushes up the interest rate available on cash deposits, making the yield available on many bonds less competitive.
But Mr Coombs said he is investing in gilts when the yield on those assets rises above 1.5 per cent.
He said he expects bond yields to keep going up.
If that is the case, he acknowledged, then the price of the bonds he has bought already will fall and he will lose money.
This is because new bonds that come to market will have higher interest rates to reflect what is coming to market, making the yield on the bonds Mr Coombs already owns relatively less attractive, and forcing the price down.
Mr Coombs said he would lose money on those investments, but that if bond yields are rising it should be a sign of a healthy global economy and/or higher inflation, which he said he thinks would be good for equity markets.
He said: "We feel the losses this will incur should be relatively small and that will be more than offset by rising values in our equity investments. On the flip side, if there is turmoil in UK equity markets, gilts should rally, making us money.
"Market risks come in very different forms and there is no one all-encompassing type of protection.
"For example, gold can be a great diversifier against deflation, but not against rising interest rates in the US.
"Therefore it is imperative that we have a range of assets providing protection against the highest probable future risks.
"We recently bought a put option on the S&P 500 index, which will make money if the market falls below a certain level. If the US market continues to rise – as we expect – then this investment will lose value.
"But the cost of this option is small and it is a sunk cost. We have paid our premium, which is just a fraction of a percentage of the fund, to protect ourselves against disaster.
"If the market falls it would hurt many of our other investments, so we are not cheerleaders for a market correction. In fact, we are optimistic about the economic situation for most of the world and the outlook for corporate profits.
"We feel there is plenty of steam left in this business cycle's boiler. But we aren't psychic; we have no idea what will happen tomorrow.
"Given the extremely strong performance of equities over the past few years, we feel it is prudent to be insured."
Phil Chandler, a multi-asset fund manager at Schroders, said: “One question is where investors could find diversification.
"Two or three years ago, government bonds were attractive, as deflation seemed the main risk. Today, we believe value stocks and commodities have better potential as hedges for an inflationary environment."
Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said he has been avoiding government bonds for some time and buying assets that perform better when inflation is rising, such as Chinese equities and commodity assets.
david.thorpe@ft.com
