Rathbone Ethical Bond – added to the Foundation Fundlist

We think this is a strong option for UK bond exposure, especially for those wishing to take a socially responsible approach.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Rob Morgan

Options for investors wishing to take a socially responsible approach are growing rapidly, though an area where there is generally less choice is bond funds. Lending to a business is generally less risky than being part owner through shares, so bonds can play an important role in a portfolio. They can help temper the ups and downs of shares, as well as providing a decent, regular income for those who require it.

One established fund option in this area is Rathbone Ethical Bond Fund, managed since 2004 by Bryn Jones.  He aims to build a portfolio of good quality investment grade bonds (avoiding the riskiest ‘high yield’ bonds) while applying a broad range of both positive and negative  environmental, social and governance(ESG) screening criteria that could appeal to those with ethical concerns.

The investment process centres on the team’s ‘four C’s plus’ model, which filters ideas to be considered further. The four Cs are: Character, which assesses management integrity and the likelihood of bonds being repaid; Capacity, the availability of cash‐flows and assets to repay obligations; Collateral, examining assets offered as security; and Covenants, the terms that affect the lending agreement and any restrictions on the bond. The plus signifies Conviction, which sums up the view that long term above average performance means thinking differently to the market through a contrarian stance or a sceptical evaluation of orthodox thinking.

The resulting list of potential investments is researched by Rathbone Greenbank (a specialist ethical investment unit of Rathbone Investment Management) who applies a mixture of negative and positive criteria to reduce the number of available investments. Companies and institutions not passing the negative screening criteria are automatically excluded. These are: alcohol production, animal testing, armaments, environmentally unsustainable or high-impact activities, gambling, nuclear power, pornography and tobacco. Companies are also screened for demonstrating progressive or well-developed practices or policies in corporate community investment, employment, human rights, management of environmental impacts and the provision of beneficial products and services.

Large parts of the bond market are made up of government bonds, which some ethically-minded investors would rather avoid, and it is worth noting that this fund does not use UK gilts or US Treasuries. Instead ‘supranational’ bonds such as those of the European Investment Bank take their place.

As well as screening out companies based on their areas of activity, research is also conducted on a thematic basis through such topics as climate change, clean energy, human rights, community investment and employee welfare. While the bulk of the portfolio is invested in the bonds of multinational companies considered to meet the various ethical criteria, there are a number of charity and green bonds included in areas such as social housing, sustainable transport, renewable power and environmental initiatives.

The fund’s longer term performance has been strong, particularly when judged on a risk adjusted basis, although past performance is not a guide to the future. Mr Jones partly attributes the strong returns to the responsible nature of the companies the fund lends to, which helps cement their longevity and ability to repay their bonds.

Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics.

As a consequence of strong performance the fund has attracted more investors, and has therefore grown larger and potentially less agile over the past few years, something we will monitor. It should also be noted that because certain sectors are excluded on ethical grounds, such as energy, mining and tobacco, the fund has tended to have heavy weightings in financials, through both insurers and banks selected on a ‘best in class’ basis. At times this concentration in one sector could add to the risk of the fund in comparison to its peers.

Nonetheless, we think this is a strong option for UK bond exposure for investors looking for a decent yield, especially those wishing to take an ethical or sustainable investment approach. Presently, this is an annual 4% (variable, not guaranteed) and payments from the fund are quarterly if ‘income’ units are selected. We are pleased to add the fund to our Foundation Fundlist , our list of preferred funds across the major sectors for new investment.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. Rob Morgan

    What could the US Presidential race mean for investors?

    Date: 8th Nov 2019 09:19am

    A US presidential victory for Joe Biden may thaw relations between the US and China o...

  2. Rob Morgan

    Open-ended property funds - update

    Date: 8th Nov 2019 09:19am

    Some suspended property funds are set to re-open, however others could remain closed ...

  3. Rob Morgan

    Socially responsible investments cement longer term outperformance

    Date: 8th Nov 2019 09:19am

    It’s often assumed that socially responsible investing means sacrificing performance,...

Most read articles

  1. Rathbone Ethical Bond – added to the Foundation Fundlist

    Socially responsible investments cement longer term outperformance

    Date: 8th Nov 2019 09:19am

    It’s often assumed that socially responsible investing means sacrificing performance,...

  2. Rathbone Ethical Bond – added to the Foundation Fundlist

    Fast fashion – socially responsible funds show their true colours

    Date: 8th Nov 2019 09:19am

    Fast fashion is predicated on being cheap and disposable, bringing into question whet...

  3. Rathbone Ethical Bond – added to the Foundation Fundlist

    Investing in the green revolution

    Date: 8th Nov 2019 09:19am

    The move to green energy is happening but one of the difficulties in assessing the pa...

Investment involves risk. You may get back less than invested.