Rathbone offers ethical income

For income-seekers, having a diversified portfolio is crucial to ensuring the sustainability of the payout. But, for retail investors, it can be hard to pull together the information needed to achieve this goal. Moreover, the process can be nigh on impossible for those who want to invest ethically.

That's why we reckon the Rathbone Ethical Bond fund is an attractive investment for those socially responsible income-seekers who want limited risk. The fund buys corporate debt, predominantly investment grade, and aims to offer a return above the average for corporate bonds. Currently, manager Bryn Jones aims for to generate a yield of 5-6 per cent, via quarterly payouts. He has 12 years of experience in fixed income, so the fund seems in safe hands.

Besides, the fund has the backing of Rathbone's specialist ethical team, Greenbank Investments. Mr Jones decides the investment plan and selects which bonds to buy before sending his ideas to the ethical team for an evaluation of their social responsibility. The standard ethical approach of screening out companies in the wrong industries – such as tobacco, arms, animal testing and gambling – are all applied. And each bond chosen must tick at least one positive ethical criteria. That could be strong environmental governance, evident human rights practices or lots of money spent in communities.

And, after the belt-tightening of the financial crisis, ethical investing is back in vogue. The latest figures from the Investment Management Association, a trade body, show that retail sales of ethical funds totalled £98m in the second quarter, the highest figure since 2007.

What's more, the standard spiel that ethical automatically means compromised returns doesn't hold with the Rathbone fund. Mr Jones’s portfolio has outperformed the Sterling Corporate Bond Sector in the past year by some margin, with a total return of 22 per cent compared with the benchmark average of 14 per cent. This return includes both income and capital gains from picking bonds that Mr Jones reckoned were undervalued.

That said, the fact that Mr Jones cannot invest in the whole of the corporate bond market could be seen as a drawback, particularly at periods of increased systemic risk. Indeed, during the financial crisis, the volatility of the fund's value was greater than its benchmark.

But the strong performance this year has been driven by sticking to its basic investment plan, which is summed up in the 'four Cs' approach – character (quality of management), capacity (to repay the debt), collateral (the assets of the company) and covenants.