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FUND SPOTLIGHT: RATHBONE ETHICAL BOND FUND; INTERACTIVE INVESTOR TALK Dzmitry Lipski, discusses ethical investing and looks at the aims of the Rathbone Ethical Bond fund.

Byline: Dzmitry Lipski

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 sterlingdenominated bonds with strict ethical criteria. The managers predominantly invest in investment-grade bonds using an approach that considers economic and political trends, company analysis and thematic ideas.

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.

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 does not invest in gilts, as they do not pass the ethical screen - meaning the fund may lag when gilts outperform.

The sector exposure of the fund is driven by themes leading to banks and insurance bonds making up over two-thirds of the portfolio.

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.

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%.

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.

PS Dzmitry Lipski is an investment analyst at interactive investor. This article is provided for information purposes only and is not intended to be a personal recommendation to adopt any investment strategy.

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Publication:City AM (London, England)
Date:Aug 5, 2019
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