Threadneedle UK Social Bond – fund update

This fund’s low volatility and high social impact style could resonate with socially responsible investors wanting a lower risk investment option.

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  1. Rob Morgan

Threadneedle Social Bond Fund, a partnership between Columbia Threadneedle and Big Issue Invest, targets a positive social impact in its investments. It seeks to support activities in areas such as affordable housing, education, social care, financial inclusion, community services, transport and the environment.

Like any bond fund, it invests in the debt of companies and institutions rather than in shares. Bonds are generally lower risk than shares but unlike cash, capital is not secure. Investors should expect a modest return, primarily in the form of income, so this fund could help socially responsible investors build a more diversified portfolio and offset the volatility of stock markets.

Many ‘ethical’ bond funds available primarily operate through more traditional ‘exclusions’, screening out various sectors and individual companies using negative criteria. However, with this fund, there is a focus on positive solutions to social issues.

The fund’s manager, 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.

Since launch in 2013, the fund has brought investment to some of the UK's most deprived sectors and regions and supported the likes of Charities Aid Foundation in enhancing their work with donors and charities. It has also aided Cardiff University in funding an innovation campus and Manchester University in supporting the development of a new Cancer Research Centre.

Portfolio update

The manager increased the level of cash in the fund during the recent period of market stress. This was in anticipation of a potential deterioration in the ‘liquidity’ (the ease of trading) in bond markets, as well as an expectation of further attractive new issues coming to market. With a generally high-quality portfolio, the fund was relatively stable during the heightened market volatility In March. The most affected assets in the portfolio were Retail Charity Bonds, which represented around 3%, and Simon Bond chose to add to positions on price weakness.

The market has been quick to adapt to the current health crisis through the issuance of bonds whose proceeds specifically target responses to Covid-19. Mr Bond bought a number of these new issues, including a social bond focused on combatting the outbreak from the International Finance Corporation, part of the World Bank. It will help developing countries strengthen health systems and disease surveillance, bolster public health interventions and work with the private sector to reduce the impact on economies.

The fund can invest 20% of assets in international bonds, and among the other new issues purchased was a Covid-19 focused social bond from the African Development Bank. Meanwhile, in the UK the team participated in a new bond from Cadent Gas, which will finance the upgrade of infrastructure, reducing methane leakage and helping enable the transition to greener fuels.

The fund continues to run less interest rate sensitivity than its peers, which coupled with higher than average credit quality, places it at the lower risk end of the peer group and results in a comparatively modest yield (currently 2.3%, variable and not guaranteed).

Our view

We like the fact that the manager is a passionate and genuine advocate of social investing. The fund’s low volatility and measurable impact style could resonate with socially responsible investors wanting a lower risk investment option. However, as with any socially responsible fund, before investing it’s important to ensure the ethos and values of the manager mirror your own. For instance, the fund invests in the debt of utility or transport companies, some of which might be screened out by other managers based on carbon emissions. You can find out more about the fund's approach on the Columbia Threadneedle website here.

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.

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