‘We earn a premium for investing in British bonds’

Inflation ticked down this week but it remains above the official target and interest rates are still expected to rise. Bond investors must be wary. Not all bonds are made equal, and some fare far better than others when interest rates rise. Investors can pick funds that invest only in specific types of bond, but run the risk of getting the call wrong.

“Strategic” bond funds are one potential solution. Managers can choose from a wide range of types, from government bonds to riskier high-yield corporate ones.

Telegraph Money spoke to Eoin Walsh, one of the six managers of the TwentyFour Dynamic Bond fund, about how Nationwide Building Society allowed him to double his money and why Britain represents good value for bond investors. The fund is on our Telegraph 25 list of top portfolios. telegraph.co.uk/ go/25funds

Our primary objective is to produce an attractive level of income that is stable and repeatable.

We’re not forced to have exposure to any particular types of bond, so we invest where we think the best value is. Last year we were mostly invested in riskier corporate, high-yield and emerging market bonds.

This year there is greater volatility and we have been investing more of the fund in lower-risk bonds, particularly those with low duration [low-duration bonds are less sensitive to central bank interest rates, so do not fall as far in value when interest rates rise]. We will end up owning a lot more government bonds, at between 30pc and 40pc of the portfolio.

We hedge against movements in currency exchange rates [using complex derivatives, a form of insurance]. We can also hedge against specific risks, such as a political event.

One area we have continued to hold a significant exposure to is Britain.

CV: Eoin Walsh

Eoin Walsh is a founding partner of TwentyFour and has been a manager of the Dynamic Bond fund since the beginning. He is also a manager on a number of the firm’s other bond funds. Before that, he ran £56bn of assets at Citigroup. Since the referendum there has been a “Brexit premium” that has never really gone away: Sterling corporate bonds offer 1-1.2 percentage points more yield than European equivalents, even if it’s the same kind of risk.

We look at names where even a poor Brexit won’t be a big event. Take Nationwide Building Society: it might have a reduced quarter of earnings, but it won’t be an event that affects its bonds. Picking up the Brexit premium, for those kinds of companies, makes a lot of sense.

Bond fund manager Eoin Walsh finds firms for which Brexit won’t be a major event, he tells James Connington

The only area in developed markets we found where we could hold slightly longer duration [more interest rate sensitive] government bonds was Australia, as no interest rate rises are expected in 2018. When we think the income is there to be harvested, we will add risk and do that. But we can lower the yield when we want to protect against volatility.

The current 4.5pc yield could go lower, as we’re going to be holding more government bonds, although they should begin to offer higher yields. The best was a unique type of bond offered by Nationwide. It paid 10.25pc, and including capital appreciation the total return has approached 100pc. The worst were a number of infrastructure companies in the developing world. They became over-indebted and lost the market’s confidence. We were slow to exit.

A base salary, then a bonus based on the company’s profitability. There’s no performance fee on the fund.

Yes. Around 70pc of my total wealth is in a variety of TwentyFour funds. Coventry Building Society has a capital ratio – a measure of a bank’s cash relative to its risky assets – of 34pc, compared with the UK market average of around 12pc to 14pc.

It is probably one of the safest financial institutions in the world, and from a quality point of view you will struggle to find a bank, insurer or bond in the world safer than it.

But you still get a decent interest rate for holding the bonds, of around 3.5pc. They also now have very short duration, so will not be significantly affected if the Bank of England increases Bank Rate.

If you’re looking for something that pays a decent income, and that isn’t exposed to risk from interest rates, it’s very difficult to look past it