Fund spotlight: Rathbone Ethical Bond Fund

by Dzmitry Lipski from interactive investor |

interactive investor's analysts give an update and view on the Rathbone Ethical Bond Fund.

Traditionally, ethical investing meant buying stocks of companies that are not involved in alcohol, tobacco, armaments or gambling, or investing in businesses that helped the environment or supported positive social causes. 

But lately, the idea has spread to bonds, and a growing segment of the fixed income universe are so-called green, climate or social bonds, which reflect the increasing importance being placed on environmental and social sustainability.

These bonds are used by companies for a specific social or environmental purpose such as initiatives for clean water or renewable energy, community investment and employee welfare. Such bonds provide investors not only with income but also with the satisfaction of knowing that the proceeds of their investment will be used for a positive cause. 

The fund

Rathbone Ethical Bond fund aims to provide a regular, above-average income by investing in a range of sterling-denominated bonds with strict ethical criteria. The fund has been managed by Bryn Jones since November 2004 who was joined by assistant manager Noelle Cazalis in 2016. 

The managers predominantly invest in investment-grade bonds using an approach that considers economic and political trends, company analysis and thematic ideas. Once investment themes have been developed, the team conducts an in-depth credit analysis in order to find bonds which work best within the thematic framework. 

When assessing which companies' bonds to buy, the managers use their 'four Cs plus' process to help them make selections. This includes: Character - management's ability to react to events; Capacity - sources of liquidity and cash-flow analysis; Collateral - assets that are pledged and, lastly, Covenants. The 'plus' is Conviction — to achieve long term, above average performance, investors must think differently to the market.

After applying these techniques, the managers look at the opportunity set from a valuation perspective to identify assets which they believe to be undervalued. 

Following this, Rathbone Greenbank, the company's separate ethical investment unit, then applies an ethical overlay consisting of a negative screen and then a positive screen. Rathbone Greenbank have a veto right on any investment put forward by the credit team.

As a result, the fund will avoid bond issuers involved in armaments, environmentally unsustainable activities, animal testing, tobacco, nuclear power, alcohol, pornography, gambling and predatory lending.

In addition, all positions must have at least one positive environmental, social or corporate governance quality, areas include: management of environmental impacts, human rights, provision of beneficial products/services, corporate community investment or employment opportunities.

What's in it?

The fund will invest in at least 80% investment grade bonds, with the other 20% in high-yield and unrated, however this is usually at a minimum. It is benchmark agnostic and well diversified with over 200 holdings. 

The fund uses long-dated, liquid AAA-rated bonds to effectively manage duration – sensitivity to changes in interest rates. It tends to have a lower duration than the benchmark, which is viewed as favourable in current market conditions. 

The fund does not invest in gilts, as they do not pass the ethical screen – meaning the fund may lag when gilts outperform. Exposure to individual credits is limited based on the credit rating, with 5% maximum for AAA, 4% for AA, 3% for A and 2% for BBB and others.

The sector exposure of the fund is driven by themes leading to banks and insurance bonds making up over two-thirds of the portfolio, with the largest positions include the European Investment Bank (2.4%), Royal London (1.9%), HSBC (LSE:HSBA) (1.8%), Rabobank (1.8%), Lloyds Banking Group (LSE:LLOY) (1.7%) and AXA (EURONEXT:CS) (1.7%). 

The social housing sector accounts for 8.7% of the fund and is where the team find a lot of opportunities, as the companies are usually well managed with strong credit ratings and environmental, social, and governance (ESG) ratings. The fund has exposure to the following housing providers: Chelmer Housing Partnership, Dolphin Living, L&G and A2Dominion.

How does it perform?

The fund has been one of the best performers in the IA Sterling Corporate Bond sector. It also has a higher income target than most of its peers and currently yields 4.4%.

  01/07/2018 - 30/06/2019 01/07/2017 - 30/06/2018 01/07/2016 - 30/06/2017 01/07/2015 - 30/06/2016 01/07/2014 - 30/06/2015
Rathbone Ethical Bond 6.15 2.26 11.99 4.31 6.24
Markit iBoxx GBP Non Gilts Index 5.90 0.61 5.26 8.97 6.53
IA £ Corporate Bond Sector 5.55 0.65 6.79 6.69 4.92

Source: Morningstar Direct as at 30th June 2019.

ii view

Rathbone Ethical Bond Fund features in the ii Super 60 list of high-conviction active and passive funds as a Global Bonds Adventurous recommendation.  Managed by highly experienced managers, the fund provides exposure to high-quality, investment-grade credit with ethical criteria. It has a higher income target than most of its peers while still taking an average level of risk. 

However, the flexible and unconstrained nature of the portfolio means its returns can deviate from the index and peers. In addition to combining a good level of income with ethics, the fund can offer investors the benefits of diversification away from their equities allocation in a well-diversified portfolio. 

If you enjoyed this article, you may also like other funds picked for interactive investor's Super 60 range of high-conviction investment ideas. Click here to find out more.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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