Fixed IncomeJun 1 2015

Fund Review: Threadneedle UK Social Bond

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Launched in December 2013, the £68.7m Threadneedle UK Social Bond fund offers an alternative approach to the usual corporate bond strategy.

It aims to deliver a positive social impact by investing in a diversified portfolio of fixed income securities.

Managed by Simon Bond the fund offers investors exposure to, and provides capital for, social developments and projects with positive outcomes for individuals, communities and society.

Mr Bond notes the investment process uses a ‘social assessment methodology’ developed by Big Issue Invest. He explains this provides the framework “under which the social characteristics and intensity (degree of benefit) of an investment is assessed for consideration alongside the yield and liquidity characteristics”.

Although the manager points out that macroeconomic factors are considered in the portfolio’s construction, where they influence attitudes to duration and credit risk, the fund is primarily a bottom-up vehicle given its focus on social outcomes.

The manager says he initially identifies bonds, which are then categorised and weighted to form an “investable universe”, where the “potential investments are reviewed and the ‘social intensity’ of qualifying bonds are evaluated, with each security ranked as high, medium or low social intensity”.

These investments are then analysed by Columbia Threadneedle’s governance and responsible investment team. Mr Bond then takes the social aspects of these potential holdings into account when building the portfolio.

The fund sits towards the lower end of the risk-reward spectrum at three out of seven, according to its key investor information document for the Z sterling net accumulation share class. Meanwhile, ongoing charges are 0.52 per cent.

Since launch the fund’s Z sterling retail accumulation share class has delivered a return of 10.28 per cent to May 21 2015 compared with the IA Sterling Corporate Bond sector average of 10.06 per cent, according to FE Analytics.

Recent contributors to performance include the Wheatley Housing Association, Scotland’s largest social landlord, which issued a bond following the Scottish referendum.

Mr Bond explains: “It is centred on an area of high deprivation in the UK and has provided a good social outcome for the fund.

“Since launch in November 2014, the price [of the bond has] risen. It was issued at a yield spread of 160 basis points (bps) more than the comparable gilt and wider than equivalent English housing associations, but is now trading at levels much closer to English housing associations, with spreads tighter than at launch.”

In terms of recent changes, the manager notes: “We have lowered duration to protect capital. Also we recently increased our weighting in Transport for London green bond.”

The manager says the security exhibits many of the characteristics of the best-practice green bond guidelines and notes it has been a “consistent and steady performer for the fund and trades some 5bps tighter in spread than at launch”.

Not all holdings have performed as well, with the manager highlighting Peterborough Health, which was downgraded from investment-grade to sub-investment grade. Although he points out: “This did not affect the provision of hospital services and consequently the social impact was not affected. We continue to be a long-term holder of the bonds.”

Looking ahead Mr Bond is optimistic about the social bond arena, noting an increase in bond issuances among social organisations, particularly local authorities.

“We believe that the time is right to bring social investment into the mainstream in the UK,” he adds.

EXPERT VIEW

Jon Beckett, UK research lead, Association of Professional Fund Investors

This fund says it invests in eight social outcome areas, such as affordable housing and education. All very worthy and the screening process created by Big Issue is well organised and transparent. But the uncertainty around investment returns confines such a proposition to the institutional and charity market. In a liquidity event more fledgling areas of investment are often the first to suffer and I struggle to see how mainstream retail investors will fully appreciate the issues. However, this in itself is no reflection on Simon Bond’s ability to run money or the good intentions of the broader project.