Dedicated ethical bond funds may be a niche area of the Investment Association’s fund universe but a number of interesting managers can be found operating in the space.
The returns on offer may also provide some argument for consideration alongside conventional bond fund products.
A bespoke IA Ethical Bond fund sector put together by FE Trustnet, consisting of 13 funds, has returned 10.51 per cent over 2017 to date compared with a 9.13 per cent rise for the average IA Sterling Corporate Bond fund.
The bespoke sector is up by 38.3 per cent over five years, compared with a 36.15 per cent gain for the average fund in the generalist sector.
Performance of sectors over 5yrs
Source: FE Analytics
Below FE Trustnet takes a closer look at the top performing funds over different time frames, their strategies and how they compare with their non-constrained peers.
Over several time frames, the Epworth Affirmative Fixed Interest fund is the top-performing ethical bond offering in the IA universe. The £20.4m, five FE Crown-rated fund is managed by specialist ethical charity investment manager Epworth Investment Management.
It avoids companies whose business is wholly or mainly involved in alcohol, armaments, gambling, high interest lending, pornography, tar sands & thermal coal, and tobacco.
Where it does invest, the fund is committed to improving ethical performance of companies on issues including children’s issues, climate change, corporate governance, environmental performance, human rights, medical & food safety and the supply chain.
As of 31 March, the balanced fund held 75.9 per cent in gilts and 21.5 per cent in corporate bonds.
Located in the IA Unclassified sector, the fund has returned 29.97 per cent over three years and 97.36 per cent over 10 years. It has also delivered an 11.04 per cent return during the past six months.
Aside from the specialist charity fund there are several other options.
The £433.5m Liontrust Sustainable Future Corporate Bond fund is another top performer over three years.
Managed by Kenny Watson, Aitken Ross and Stuart Steve, the fund was previously known as the Alliance Trust Sustainable Future Corporate Bond fund.
Over three years the fund is up by 23.05 per cent compared with a 19.26 per cent return for the average IA Sterling Corporate Bond sector fund, where it is located. The top performing fund in the sector is Schroder Long Dated Corporate Bond with a 40.24 per cent return.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
According to the fund’s factsheet, it aims to provide a higher long-term return than that provided by UK government bonds.
The firm noted that while there is some potential for the value of the fund to grow, over the long term most of the returns are likely to be in the form of income, with the long term defined as five years or more. It has an annualised income net of expenses of 3.62 per cent.
The three crown-rated fund was launched in 2001 and has an ongoing charge figure (OCF) of 0.6 per cent.
Over five years, however, one of the top performing bond funds is the Rathbone Ethical Bond fund, which has returned 54.04 per cent compared with a 36.15 per cent for the average IA Sterling Corporate Bond sector, where the fund resides.
The top performing fund in the sector over five years is the Schroder Long Dated Corporate Bond fund with a 61.9 per cent return.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Trustnet
There are fewer ethical bond funds with a 10-year track record, but the Rathbone Ethical Bond fund again stands out, delivering an 83.1 per cent return over the time period. The average sector fund has returned 66.27 per cent over the same period, while the best performer Pimco GIS UK Long Term Corporate Bond is up by 136.91 per cent.
The three crown-rated Rathbone Ethical Bond fund is overseen by lead manager Bryn Jones, who has managed the fund since 2004. Jones is joined on the fund by deputy manager Noelle Cazalis.
The £654.3m fund aims to deliver a regular above average in come through investment in range of bonds and other instruments that meet strict ethical and financial criteria.
“The manager runs the benchmark-agnostic fund with a strongly-defined view that accounts for economic and political trends, company analysis and thematic ideas,” the fund’s factsheet noted. “The investment grade fund targets a high yield with a strong ethical overlay.”
The fund has 167 holdings, with the largest sector position in the insurance sector (41.11 per cent) and banks (26.56 per cent).
It has a historic yield of 4.4 per cent and an OCF of 0.68 per cent.