The Rathbone Ethical Bond Fund is a compelling buying opportunity in an anti-environmental, social and governance (ESG) world, according to fund pickers, who hailed its different approach and impressive returns.
As such, Eduardo Sánchez, associate research director of fixed income, alternatives and multi-asset at Square Mile, said the fund “deserves” a buy recommendation, even as investors have pulled away from sustainable mandates.
Since the second quarter of 2023, ‘responsible investment’ funds have shed money each quarter as an anti-ESG backlash has emerged, according to recent data from the Investment Association.
Yet the Rathbone Ethical Bond Fund is up 14.4% over the past three years, beating the average fund in the IA Sterling Corporate bond sector by five percentage points, as demonstrated by the chart below.
Performance of fund vs sector over 3yrs
Source: FE Analytics
“This is one of the few sterling corporate bond funds that holds a long-term track record of running money responsibly whilst outperforming the market consistently,” Sánchez said.
The experience of manager Bryn Jones is a key benefit. He has guided the fund for more than 20 years, outperforming in a “broad variety of market conditions”.
Over the past two decades, the fund is up 120.4%, compared with an 85.9% total return for the average fund in the IA Sterling Corporate bond sector.
It invests with a three-stage process. First is the overall economic environment, which allows the managers to hone in on the industries they want to own.
Next come the ‘Four Cs Plus’: character (management competency); capacity (debt levels); collateral (assets backing loans); covenants (terms of the loan); and lastly conviction (the plus, which is the managers’ own views).
Lastly, potential investments are looked at by the ethical research division at Greenbank to assess social and environmental criteria.
From this, one emphasis of the fund has been to use financial subordinated debt, which will be paid off last if the company goes bankrupt. While risky, this also means investors are benefiting from “higher than average income” and the team constantly adjusts the portfolio's exposure to handle this, he noted.
The Square Mile team has rated the fund with a ‘Responsible A’ rating in their Academy of Funds, although Sanchez noted there are a plethora of ESG options for investors in the corporate bond space, including the Liontrust Sustainable Future Corporate Bond fund.
Earlier this month the fund was also added to the AJ Bell Recommended funds list, with Paul Angell, head of investment research at the firm, noting: “The fund is a highly credible sterling corporate bond offering, with a long-established approach to ethical investing, that the team finds appealing. It has an impressive return profile with just a modest uptick in volatility.”
He highlighted the screening process at Greenbank, with omissions including the “usual suspects” such as defence, high carbon impact and tobacco. Meanwhile, the positive screen demands that companies have well-developed practices across the range of environmental impacts and human rights issues.
“Approximately a third of the investment universe passes these screens, a third fails, and a third is yet to be assessed,” Angell said. This gives the fund a different composition to many competitors, with almost 75%-80% of the portfolio invested in financials, which has been a “good trade in recent years”.
Additionally, the fund has benefited from “good tactical positioning”, such as being underweight duration versus the index in 2022, meaning it was impacted less by the rising interest rate environment than longer-duration funds.
To make room for it in their best buy list, AJ Bell dropped the CT Responsible Sterling Corporate bond fund due to underwhelming returns over time by comparison.
The Rathbone Ethical Bond Fund is also included on interactive investor’s (ii) ACE 40 list of recommended sustainable funds.
Analysts at the investment platform said, “Jones places a large emphasis and much of his time on identifying investment themes across macro, sectors, new issuance, regulation, et cetera,” before the ESG screening, where a member of the firm’s ethical committee must approve the investment.
This extensive process has contributed to good security selection and the fund “comfortably outperforming its peers on an absolute and risk-adjusted basis”.
However, while the team at ii are positive overall on the fund, they removed it from the wider Super 60 list in 2024 on key person risk and to avoid overlap.
“The fund has much less analytical resources than peers, and the team does lack industry experience except for the long-tenured and experienced manager in Bryn Jones,” they noted.