Threadneedle UK Social Bond – added to the Foundation Fundlist

This fund represents a significant innovation in ethical fixed interest investing.

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

  1. Rob Morgan

There is a reasonably wide, and growing, range of ethical funds investing in shares. Yet one significant area where options have been lacking is in bonds. It’s therefore been challenging for ethically-minded investors to build a diversified portfolio and counter the volatility of stock markets. Furthermore, most of the ethical bond funds available were of the traditional ‘exclusion’ type, screening out various sectors and individual companies on negative criteria. There is typically little indication of the positive impact that investments are supporting.

Threadneedle UK Social Bond Fund, launched in December 2013, is different and represents a significant innovation in the area. A partnership between Columbia Threadneedle and Big Issue Invest, it seeks to back companies and organisations in supporting socially beneficial activities in eight areas: affordable housing, education, employment and training, health and social care, financial inclusion, community services, transport and communication infrastructure, utilities and the environment.

The fund’s manager, the aptly-named Simon Bond, is a passionate advocate of social investing. He explains that by their nature bonds can offer the opportunity for finely targeted social investment. That’s because various organisations besides companies can issue bonds, including charities, housing associations, mutual associations and government agencies, and these can be for specific projects as well as general borrowing. For example, social housing bonds can help tackle poverty and inequality, and bonds issued by universities can help broaden educational opportunities.

The fund is relatively concentrated for a bond portfolio with around 100 holdings. This increases risk as each holding has a greater impact on performance than with a more diversified fund – several hundred is more typical for investments in the Sterling Corporate Bond sector. The range of holdings may, however, increase as the number of opportunities of this type broadens as the manager anticipates.

There is currently less interest rate risk (also known as ‘duration’) than many of its sector peers due to the average maturity of the constituent investments being relatively low. This has helped protect capital recently in a difficult environment for fixed income. It also tends to have higher average credit quality, placing it at the lower risk end of the peer group and meaning a comparatively modest yield. Yet other characteristics could add to risk. Notably, some of the holdings represent small bond issues and there may be occasions some other reasons when it is difficult for the manager to buy and sell these more esoteric investments.

Among the largest positions is Transport For London, a 2.125% 2025 bond. Healthcare is also well represented with a Wellcome Trust bond paying 4.75% held alongside a number of other names such as Bupa and a smaller position in Motability Operations, which enables disabled people to lease cars and wheelchairs. There are also some broader holdings including in companies focused on providing basic infrastructure such as clean drinking water, sewers, sanitation and transport.

Our view

The objective of targeting particular social outcomes while aiming to generate attractive and consistent returns similar to UK corporate bonds make this fund very different. There are some additional risks in investing in a more concentrated, esoteric bond fund, notably the greater reliance on a smaller number of holdings and, potentially, less ability to readily buy and sell portfolio constituents, particularly in the event of adverse market conditions. Overall, we believe this is a well thought out investment proposition and the high social impact style should resonate with ethically minded investors. We are pleased to welcome it to the Foundation Fundlist, our list of preferred investments across the major sectors.

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

    Fundsmith Equity – fund update

    Fund Research - 8th Nov 2018 16:36pm

    Our latest view of this popular global equity fund.

  2. Rob Morgan

    How investment trusts can boost your portfolio

    Fund Research - 8th Nov 2018 16:36pm

    Investment trusts can sometimes offer significant advantages over funds and bring som...

  3. Rob Morgan

    Foundation Fundlist review – US equity funds

    Fund Research - 8th Nov 2018 16:36pm

    Last year, we overhauled the US equity funds on our list of preferred funds for new i...

Most read articles

  1. Threadneedle UK Social Bond – added to the Foundation Fundlist

    Fundsmith Equity – fund update

    Fund Research - 8th Nov 2018 16:36pm

    Our latest view of this popular global equity fund.

  2. Threadneedle UK Social Bond – added to the Foundation Fundlist

    How investment trusts can boost your portfolio

    Fund Research - 8th Nov 2018 16:36pm

    Investment trusts can sometimes offer significant advantages over funds and bring som...

  3. Threadneedle UK Social Bond – added to the Foundation Fundlist

    Foundation Fundlist review – US equity funds

    Fund Research - 8th Nov 2018 16:36pm

    Last year, we overhauled the US equity funds on our list of preferred funds for new i...

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