6 August 2026 (pre-recorded 27 July 2026)
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[INTRODUCTION]
Darius McDermott (DM): I’m Darius McDermott from FundCalibre and this is the Investing on the go podcast. Today I’m delighted to be joined by Jerry Wharton, who is the fund manager on the Church House Investment Grade Fixed Interest fund. Jerry, how are you?
Jerry Wharton (JW): Very well Darius, thank you. Good afternoon.
[INTERVIEW]
DM: Yes, absolutely. So when we do these podcasts, I like to sort of achieve two things. One is to give our listeners a reminder of what the product is and trying to achieve. And secondarily, obviously to talk a bit about what markets are doing, what’s going on, what bonds, what sectors, and then maybe if we have time at the end, we will touch on rates, and particularly around UK and inflation. So I know, because I’ve known you for a number of years now, that the distinguishing feature of this fund is a focus on capital preservation and income., How do you go about delivering those two sort of things? And what about the quality bias that you tend to have, which helps in more troubled markets?
JW: This fund, what was conceived as run for use within private client portfolios, and that really is key because we are ultimately a private client firm. And we have our own book of private clients. And this fund is used externally by other private client managers, wealth managers use within private client portfolios. So we’re very aware of who the investor base is. And we think we therefore run the fund correctly and accordingly, to achieve the ends of that investor base. And so, we’ve really come to the asset class, from a capital preservation, a less volatile perspective, and that’s because, through our own experiences, we know that when we sit in front of our clients, our private clients, that, they understand volatility from the equity portion, the end of their portfolio, that they don’t understand and they just don’t want, to experience volatility from the fixed income allocation.
So we try very hard to deliver, and therefore, we are well aware that some people, don’t actually invest into this asset class correctly on behalf of their private clients because they seem to be accepting off too much volatility and don’t necessarily have the capital preservation style that we have. So we, you know, we’re not saying other people are doing it necessarily directly, but we think we’re more focused on that aspect of, preserving capital and being that volatile. And that comes, that manifests itself in how the fund is positioned from a mandate perspective. So we are slightly doing things in a different way to others.
We are clearly an investment-grade fund, so we’re further up the food chain from a quality perspective. And we think that’s compatible with, say that the ends we’re trying to achieve, so we don’t invest into high yield and we can’t. We also, have an allocation to AAA, so that the best rated paper that we have to maintain within the fund, which is 25%, and that is a minimum. And we, also, seek to deliver a fair yield that’s available in the asset class without taking on due risk. And that means we’re not trying to buy, much sort of, lower grade bonds or longer dated bonds that be more volatile trying to chase yield. As it is, the fund is paying out just shy of 5%, which is a fair yield for the asset class. And that’s after fees and everything, but that’s a pretty good starting point for any investment within a portfolio. So we really are, coming at the asset class, the fund in the asset class, to be a capital preservation, offering and to provide a fair yield.
But going back to repeat myself, but with less volatility than, certainly a lot of our notional peers, but also the kind of volatility that, an investor will feel comfortable with.
DM: Another area where risk can come into a portfolio is, and I think you mentioned, you touched on shorter duration on a fund being sort of the average maturity on those loans that you make, obviously times the percentage of the position size, but the longer that duration of that fund, the more sensitivity to interest rates and the shorter is the opposite. So you’ve said you’re positioned a bit short, around sort of three and a half years, how do you feel about that at the moment? What’s the opportunity set in that shorter part of the market? And do, would you have a bit more duration if, like some, you feel UK inflation and hence rates are going higher?
JW: Well, we’re very happy where our duration is. We’ve managed duration, we think, well over the years and through the cycles, and it’s paramount because there are a fairly sort of limited numbers of factors into the investment performance within the asset class. One of them is credit selection, one of them is credit quality, but it is also paramount to be positioned correctly on the curve from a rate cycle perspective, and even you gotta go back to recent history going into the end of 2021, early 2022, and most people had too much duration, and they lost a lot of money in 2022. They managed their duration very badly, or maybe they couldn’t position themselves as much as they’d like to or reposition themselves.
We’re not a benchmark fund, and this is key in that we’re not hugging a benchmark, and that must be the only, explanation for why so many people got their duration cool so that they had too much duration going into that environment, and therefore lost their invest a lot of money. So that’s the charitable explanation of why they didn’t do so well. Or the only other, explanation is that they didn’t see an aggressive interest rate cycle coming, and if they didn’t, they possibly shouldn’t be managing a bond fund, but there we go, that’s my opinion on that one.
But going back to what you’re saying, are we comfortable where we are? We’re going back into more recent history as of last Thursday, when, because of the worries that, certainly the gilt market and certainly bond investors have with a new prime minister, who has apparently lately had a great conversion to, actually being enthralled with bond markets, but has explicitly stated beforehand that he doesn’t give a … so, he doesn’t care about the bond markets. Apparently this time he does, but I, apparently, that’s not the case, anyone who actually knows him. He is not too worried about challenging, selling the gilt market. I think he’s completely wrong if he takes that view and he can find justice, trust crossing and found out in, recent history that he can get some pretty, difficult reactions.
Anyway, last week when he was coming out with new policies, the gilt market’s all over the place, and the 30-year gilt went out to a drop to then produce a yield of rising to 5.78%, that we haven’t seen since May. And in fact, we haven’t seen since I was in the gilt market, which back in 1998, which is quite a long time, okay? And, these are dramatic moves. So, if you keep trying to put these things into context, when you see the kind of yield moves that we have, in, say, the 30-year gilt, you’re looking at 10% downside, you know, so you’re losing capital in a dramatic way.
By remaining short at the moment, we’re happy because we don’t know what these, spending plans are gonna be. We don’t know what the funding plans are gonna be. We know that there is a, unless the economy grows, there’s no great source of funding apart from to borrow more money. And you might sort of shift the deck chairs around, probably the wrong analogy, but, to say that you’re taking money from the international overseas aid development and using it to cut VAT on electricity bills, whatever, it doesn’t actually make any difference.
You have now a chancellor who, resigned explicitly, and he was probably the least bad choice, to be fair, Intriguing to have another chance to call, he resigned explicitly from being defense section because there wasn’t enough money, heading into that, into that area. So he’s got, potential plans, I’m sure, up his sleeve to try and make that money appear for the defense budget., But the thing is that investors are analysing every single move that they’re making, and you can’t ban news all, most bond investors, and say if you come out with a new war loan, a new war bond, it’s still government boring, so it gets stuck into the overall mix. He said he’s gonna stay at his, stick to the fiscal rules that they’ve been sticking to.
We’ll wait and see. But, either way, you know, there’s volatility, we saw a lot of volatility last week in, at the long run of the gilt market. There’s probably more to come. So it’s a very long way of saying, Darius, that we’re happy where we are. We’re not about to, move out duration at the moment. If we see, a dramatic slowdown, and at the moment, I was worried about inflation, but if it doesn’t appear, we then slow down the economy, so we then can see that the bank, potentially cutting rates, then we’ll add duration. But at the moment, that’s not happening.
DM: Well, Jerry, one thing we know when we come to you for a podcast is we’re definitely going to get some opinions. So, thank you very much for that. I wonder, maybe it is too early to tell, but you’ve touched on defence. Are there any sectors, not just because of politics, but because of other maybe obvious headwinds, are there any sectors or issuers that you’re currently seeing really good value in? And are there any areas, generic areas, which you want to avoid?
JW: Well, there’s some good quality credits still coming to market now, with not particularly long-dated issues, and they’re offering tremendous fallen yields because, the UK does have the highest, government bond yields in the G7, which is where we are. I will point out they’ve moved in pretty much lockstep with, other moves in, G7 yields, but they are generically higher. And we have got some problems down the long end that I just outlined. But when you get, a decent issue of coming to market, I mean, we bought a recent, Heathrow funding bond. This is a A bond, new issue bond to market, paying 100 basis points of extra yield to governments. So that price is paying you about 5.75%. That’s a good quality name. It’s a very sort of, high quality credit. And there are many examples that I could outline along the same lines by dealings against too much. But, we’re seeing steady issuance in sterling. You don’t need to go out, to repeat myself, power on the curve to get decent yields. So we’re in a bit of a sweet spot, we think, if people are looking for exposure to the asset class, because these all-in yields are very powerful. And some people go, well, okay, it, you know, you should sort of go further out and, buy some longer days issues.
But sticking to sterling, and you asked me what I would be avoiding — a very simple answer because it had a disastrous week last week and it’s at a disastrous week, disastrous time. The debt is being issued by, the hyperscalers, by the big US tech names into sterling, is, at the moment, something to avoid.
I mean, the movements last week, in those sectors were very, profound, and they lost people a lot of money. So if I go back middle of February, the first move was from Google, and they issued into sterling. They hadn’t issued in sterling before and, they issued I think it was a seven and a half billion, multi-tranche bond. So unusually, normally if you’re a new issue into, a new currency, you can only issue one bond at a time and you establish your whole curve of bonds in that way. So your series of bonds, they issued the whole bun at once because they knew there was so much demand. And, it produces some in interesting investor anomalies because, there’s huge demand, things that massively subscribe. I think there was six different issues, so say there was a three-year, five-year, 10-year, 20-year, 30-year, and then never behold, they successfully issued a 100-year bond, so a century bond.
Now, this is an interesting side of investor behaviour because, sadly, none of us will be around, neither you, Darius, or in indeed any of our listeners will be around, in a hundred years time. So, the risk of award if buying 100-year bond is puzzling, but it was seven times they had subscribe. They issued, one and a quarter bidding of it. And this goes out in, 21, 26. And, it was a fairly decent spread at the time, so it was, I think it’s one and a quarter percent over the gilt benchmark. So it pays, a coupon of six and a quarter percent, I think it is. When it’s down 13% already, it came off 10% almost immediately, because the combination of, yields going the wrong way, and spreads, widening out, so that the extra yield pickup you get becoming bigger and bigger because the bond is going down in value, is a pretty post combination. And, you can wait 100 years and get your money back at a higher at 100 at redemption, but that’s quite a long time to correct your initial investment mistake.
And, these century bonds, they’re fascinating because it takes almost a new batch of investors to come along to embrace them because they obviously hasn’t seen what’s happened, in the past. And, we’ve got many different various, examples of century bonds that have come out, and there’s nothing necessarily wrong with the credit, but it’s when they were issued. So the Republic of Austria came out in, when was it? Anyway, back in the, I think it’s 2010, something like that. Anyway, post-financial crisis, 100-year Euro bonds, when yields were very low because central banks cut rates to, shore up the system, issued at 100, it’s trading at 28, and it pays you a grand coupon of less than 1%. So it’s a total invested disaster for the Republic of Austria or even for Google, you know, it’s a borrower’s dream. You know, you borrow money for 100 years, 6.40%, not bad. You know, if you’re Republic of Austria, you borrow money at 100 years at. I think it’s three eighths of a percent coupon or something like that. I’ll confirm that, but, it’s an investment disaster.
So there are two answers to your question. One is, you avoid the stuff that is just, incompatible with your investors, but also at the moment, hyperscaler debt is, having a very tough time. And, this is, the last one issued actually into dominance was last week., Was it just week four, which was Amazon? They issued $25 billion, into, the market, and that was only, oversubscribed by 1.6 times, which is a very low coverage ratio. So you can see that at the moment, these issuers are running into what we call indigestion, so the market isn’t necessarily gonna take down what they’re trying to sell.
DM: So maybe we’d be getting an AI bond hyperscaler bubble rather than equity.
JW: Well, that’s another conversation., I mean, say, the credit markets are worried about what’s the level of what’s being issued. And sadly, you know, these companies, which have been asset-like, very profitable companies with enormous free cash flows, are turning themselves into, companies with enormous liabilities. They’re blowing all their free cashflow in something that are going cashflow negative, and that’s not necessarily a good thing.
DM: No. So I said we would sort of save our sort of view on rates. I know that overlaps with new government and potential policy spending, which as we record today, we’re fairly light on detail. But what we do know is there is still some form of conflict in the Middle East. There is still some form of conflict in Russia and Ukraine, both of which have had an impact on energy prices and inflation that’s come thereafter. You can’t be a bond manager in isolation having a view. So let’s just, rather than going multi-geography, let’s just stick to the UK. What’s your view on a 12-month view on UK inflation and where maybe next summer we might be on UK rates?
JW: Well, what we see this year, because of, as you say, the conflicts between US and Iran, there’s some quite dramatic moves in, where rates have been forecast by money markets. So, when first, you know, after the end of February when the conflict was unfolding, you saw money markets move very dramatically to discount four rate hikes by the end of this year, which we felt was a bit excessive. But, you know, that was, as crude spikes and as, other, commodity complexes spiked, then people were obviously rightly very worried about the inflation effects of that. We then saw the market sort of standing back expectations. And, we’ve seen all these false starts at different, you know, truces and ceasefires, and we’ve got that again.
And at the moment, we seen a bit of a rallied day in, what said we’ve seen a drop off in Crude, haven’t seen the spikes over 100 last week, because, apparently Trump is gonna give time for diplomatic resolution to the total chaos that he’s created. So, at the moment, we are seeing a forecast in rates, at the moment of possibly just one, interest rate hike this year. We have the Bank of England meeting on Thursday this week, and they’re likely to stay at a key base at 3.75, because at the moment, you know, we are seeing, we, the last inflation numbers we saw did fall back to less than as expected, which is good.
But you gotta look at the sort of, the implications of crude bouncing around, further than just the straightforward price of crude. You gotta look at the spot price, which would be much higher than, say the immediate price for what people are paying for crude rather than, further outdated contracts, and that’s been much higher than what gets created. But also without getting too technical, but you gotta look at things like crude spreads, which is the difference between, the crude price and the derivatives of crude, which is what we all put in our, the tanks of our cars, and we still haven’t. Well, if we haven’t gone electric, not trade I haven’t. But, and this is what feeds directly through to the consumer. The price of the pump is a function of the crude spread, and that has ballooned. There’s no twice about it. It’s come back a bit, I’m sure today. But these are all inflationary pushes. And so the Bank of England is in a pretty difficult place, as are all the other central banks, but certainly, the Federal Reserve and the ECB, because you’re seeing potential inflationary pressures, and certainly for us, you’re seeing fairly weak growth. We are growing, but we do have inflation still way above target, and that puts the bank in a bind because, they can’t cuss in the face of inflationary pressures, even if they want to, and they can’t necessarily hike in the face of weak rates. So, you know, they’re in a bind.
So the forecast is probably they’ll do nothing, at this meeting. I’m pretty sure they’ll probably end up doing nothing by the end of the year unless inflation cranks up. So to be, optimistic, he’s wanted a 12-year forecast. A forecast for rates are high into nothing. I will, say it before ending. But, it’s highly likely, we’re sort of near or near about where we are in 12 months time. We might have seen a 25 beat hike, which could be a proportionally measure. But we do have our own set of problems.
If you cross the water, if I can briefly. So, well, actually, if I go to Europe first, ECB, they really don’t want to have to hike again. They’ve done a proportionally hike, and they had a hawkish view last week. But, they are looking at the gas price, very closely, because it has risen far more than the crude has this time around. But if you look at it in the context of the moves to gas prices that we saw in 22, which was also a Ukrainian conflict beginning, they would, I mean, magnitudes of the moves we’ve seen this time say that they’re in a much better place than they were, but it’s still, they’re very reliance on gas for generation across Europe. So it’s a major indicator for them to watch.
The Federal Reserve, they meet on what. Well, we get results on Wednesday. We have a new, governor, obviously, sorry, chairman., And, he probably wants, or has been told, so there are rates by his master. His nickname is the Sock Puppet, but I don’t think he’s as big as Sock Puppet as people are making up. And, there’s a 38% chance of them hiking rates, this week, but I think it’s probably unlikely they will, but, they’ll probably do it anyway. So, we’re in a very uncertain race environment. The US is better off because they have better levels of growth than others, but they’re still subject to the same inflationary pressures as everyone else.
DM: Yeah. So maybe just a very brief then answer, just to finish off. Why do you think sterling investment grade is attractive for potential new investors today?
JW: Well, my answer add on it in terms of our fund.
DM: That’s absolutely fine. Yes, you can speak to your fund. That’s not a problem.
JW: I have the fund point of obviously and the numbers that matter, is that this is all, high quality investment grade, risk, investment grade bonds. So, with a very sort of strong credit policy behind the whole funds, there’s no rubbish within there. And the numbers that matter are across the funds. We have, a duration as you, as you mentioned, of just about three and a half [years]. We’re paying out, there’s a yield to redemption, and this is with a short life, as you mentioned, of around 5.50%. But the income yield that’s been paid out is 4.9%.
And, what’s also key is that, the average price of what we own, because of how rates have moved, we can go back to what you might term old-fashioned bond investing where you can buy bonds way below 100, but they’re gonna be redeemed at 100 in quite short spaces of time. And so the average price of what we own is 97.50. So you can see with a very short life across the whole fund, we’ve got 2.50 points of upside, as well as the yield that the fund is paying out. So that is your return profile. So that’s why you, invest in sterling bonds. So you don’t need to go into little rubbish. You being the best quality, and that’s still the return profile you’ll buy.
DM: Jerry, thank you very much. I think that’s a lovely, succinct way to end our chat.
Staci West: This fund focuses on high-quality credits and is not managed to a particular benchmark. The aim is to provide a steady, low-volatility, quarterly income stream for investors and we believe is a strong candidate to make up part of the core of an investors’ portfolio. To learn more about the IFSL Church House Investment Grade Fixed Interest fund please visit fundcalibre.com and don’t forget to subscribe to the Investing on the go podcast.
