Rathbone Ethical Bond offers a higher yield than rival bond funds, has outperformed the majority of them over the medium term and invests in sustainable assets, meaning it offers a high income that you can feel good about.
Good performance record
High yield
Sustainable investing mandate
Experienced manager and stable team
Credit risk
Rathbone Ethical Bond is a corporate bond fund focused on high-quality, investment-grade credit with socially responsible investment criteria and strict financial criteria applied.
Its ethical credentials are a solid reason to invest, but this fund has also delivered good total returns, showing that investors don’t have to sacrifice performance for sustainability. The fund is the joint top-performing Investment Association (IA) Sterling Corporate Bond fund over one year and the fourth best over five years.
Over one year it has returned 7.5 per cent against 2.7 per cent for the average sterling corporate bond fund. Over five years it has returned 42.4 per cent compared with 26.7 per cent for the average fund in its sector, and over 10 years it has returned 86.4 per cent compared with a sector average of 64.07 per cent.
And Rathbone Ethical Bond generates a high income too. The fund targets a gross interest yield between 5 and 7 per cent and currently yields 4.5 per cent, making it one of the highest yielders in its sector.
The fund is managed by experienced fixed-income manager Bryn Jones, who took the helm in 2004 and has over 20 years’ investment industry experience.
Along with his team, Mr Jones runs the fund along a well-defined process that takes into account the macro environment as well as the financial and ethical health of specific bonds. First the team selects a range of investment themes and trends to back, taking into account political trends and economic environment. They then assess the credit quality of assets by applying a ‘four Cs plus’ test, which analyses the character, capacity, collateral and covenants of bonds. After that the team looks at relative valuations in the bond market and finally applies a negative ethical screen and a positive one.
Companies are screened out if they engage in practices including animal testing, armaments, pornography, alcohol or have a high-carbon impact, and are prioritised if they engage in human rights and green energy among other things. All positions must also have at least one positive environmental, social or corporate governance quality.
Banks and insurance company debt makes up over two-thirds of the portfolio altogether and the largest positions include the European Investment Bank, which makes up 2.9 per cent of assets and Standard Life Aberdeen, which makes up 2.24 per cent of the portfolio.
The fund also has a reasonable ongoing charge of 0.68 per cent. And if interest rates rise imminently in the UK, investors will be better protected in this fund than a bond fund with a longer duration, due to the fact that shorter-duration bonds are less sensitive to rate hikes. The fund currently has a modified duration of 5.93 years and the bulk of its bonds mature in five to 10 years.
However the fund does take credit risk and also tends to underperform when gilts are performing strongly and when markets fall heavily.
FundCalibre says: "The risk profile for this fund is average relative to its sector, but it is not low risk. In the words of Bryn, it is not a diversification from equities or somewhere to hide if things get nasty. The fund tends to do better when markets are rising steadily or falling, and may underperform in strongly performing gilt markets."
Rathbone Ethical Income is a sustainable fund that should appeal to your conscience and your wallet. Buy. KB
Tip style: INCOME
Risk rating: MEDIUM
Timescale: LONG TERM
RATHBONE ETHICAL BOND (GB00B7FQJT36)
PRICE | 98.97p | MEAN RETURN: | 6.52% |
IA SECTOR: | Sterling Corporate Bond | SHARPE RATIO: | 1.36 |
FUND TYPE: | Unit trust | STANDARD DEVIATION: | 4.34% |
FUND SIZE: | £908.19m | ONGOING CHARGE: | 0.68% |
No OF HOLDINGS: | 169 | YIELD: | 4.5% |
SET-UP DATE: | 1 March 2004 | MORE DETAILS: | rutm.com/pa/fund-rathbone-ethical-bond-fund.aspx |
MANAGER START DATE: | 1 November 2004 |
Source: Morningstar, as at 10.10.17
Performance
1-yr total return (%) | 3-yr cumulative total return (%) | 5-yr cumulative total return (%) | 10-yr cumulative total return (%) | |
Rathbone Ethical Bond Inst Inc TR in GB | 7.5 | 19.7 | 42.4 | 86.4 |
IA Sterling Corporate Bond sector average | 2.7 | 14.9 | 26.7 | 64.1 |
Source: FE Analytics, as at 10.10.17
Top 10 holdings (%) as at 31.08.17
European Investment Bank 6.0% | 2.90 |
Standard Life Aberdeen 6.75% | 2.24 |
BPCE SA 5.25% | 2.03 |
RSA Insruance Group 5.125% | 1.85 |
Royal London 6.125% | 1.83 |
Royal London 6.125% | 1.81 |
Phoenix Group 6.625% | 1.75 |
AXA 5.625% | 1.66 |
Investec 4.5% | 1.64 |
Standard Life Aberdeen 5.5% | 1.64 |
Source: Rathbones
Sector split (%) as at 31.08.17
Insurance | 39.53 |
Banks | 26.75 |
Social Housing | 7.5 |
Financial services | 4.53 |
Supranational | 4.46 |
Transport, travel and railways | 3.63 |
Retail | 2.15 |
Real estate | 1.78 |
Mortgage backed securities | 1.43 |
Tourism | 1.36 |
Telecomms | 1.12 |
Renewable energy | 0.72 |
Social Finance | 0.56 |
Media and comms | 0 |
Cash | 4.48 |
Source: Rathbones