ii ACE 40 investments:
Rathbone Ethical Bond Fund

Why we recommend it

The fund has been managed by Bryn Jones since November 2004 who also serves as Rathbone’s head of fixed income. The wider investment team comprises deputy manager Stuart Chilvers, who joined the firm in September 2017, and three junior credit analysts. The fund’s ethical overlay is provided by Rathbone Greenbank Investments, the specialist ethical investment unit of Rathbone Investment Management.

The fund invests in a minimum of 80% investment grade bonds are sterling denominated or hedged back to sterling and aims to outperform the Markit iBoxx GBP Non-Gilt Index. Jones places a large emphasis and much of his time on identifying investment themes across macro, sectors, new issuance, regulation etc. Credit analysis is then conducted on bonds which fit the themes by assessing the company’s character, ability to repay its obligations, its collateral and the covenants attached to the bond. These use a property model to identify bonds which look attractively valued.   

Companies issuing these identified bonds will have to pass the ethical team’s negative screening tests and have approval by a member of the fund’s ethical committee, before being considered for inclusion in the fund universe.

The fund has 100-200 holdings, but the majority of the portfolio has been held in bank and insurance bonds over the past five years owing to much improved fundamentals and opportunities due to liability management exercises.

The fund has comfortably outperformed both peers and the Markit iBoxx GBP Non-Gilt Index over the long term on an absolute and risk adjusted basis.

Opinion

The fund has much less analytical resource than peers, and the team does lack industry experience except from the long tenured and experienced manager in Bryn Jones. This brings significant key person risk but our trust in the strategy rests with Jones’ successful implementation of the process over time.

Investors should also be aware of the significant bias towards bonds from investment grade financial companies, of which a large proportion is subordinated, which is a source of additional risk.

Sustainability criteria

Morningstar Sustainable Attribute: This fund is considered a sustainable investment product based on its prospectus or other regulatory filings. As a General ESG Investment, the fund uses ESG criteria as a central part of the security-selection and portfolio-construction process. These strategies endeavour to promote sustainability and minimize negative impact, without focusing on a specific theme or area of action.