Columbia Threadneedle’s Simon Bond has been cutting duration in his UK Social Bond fund in the belief that Brexit risks have been overstated.
The £89m fund’s duration is now 7.2 years, compared with the UK corporate bond market’s 7.9 years and the “social bond” market’s nine years, according to the manager.
The fund only holds bonds that provide “social alpha”, in other words where capital can produce “positive social externalities”. It encompasses about a third of the UK corporate bond market in value and issuance.
Given the nature of issuers in the social bond space – names such as charities and long-term infrastructure projects – issuance tends to be longer-term in nature than in more traditional fixed income mandates, Mr Bond explained.
“[The duration cut] is a response to Brexit movement and conscious of the fact that if there is a rally in risk markets, the offset is in the gilt market. It is trying to encompass the conservative nature of the fund compared with the peers we are up against. We’re a little bit shorter and trying to add beta at the same time, because the possibility of Brexit is abating and it will have a big effect on bond funds,” Mr Bond added.
“We’re trying to preserve capital. My challenge is turning a universe that is longer than average into one that is shorter than the average. The challenge is [also] to make the fund look, feel, smell and perform like a typical corporate bond fund but using the tools that we have.”
The fund had to use long gilt futures to cut duration, as it cannot hold physical gilts.
Mr Bond also reduced duration by switching from secured bonds from student accommodation provider Unite to its unsecured retail bonds, and “took a little bit off” charity Wellcome Trust’s AAA bonds.
“We used a combination of everything to get duration down and lock in a little bit of profit,” Mr Bond added.
The manager also recently partook in new issuance from the Charities Aid Foundation.
The bond’s value rose more than 6 per cent in the space of four weeks, a “pretty good” result according to Mr Bond. Most of the 2 per cent allocation to the security was bought at issue, and the manager dipped into the secondary market to top-up on exposure.
“It is getting to the stage now where value has gone away. Had it not performed so quickly and so well we would have added more than we have done,” Mr Bond added.
The UK Social Bond fund’s fourth largest exposure is to a Lloyds Banking Group bond, issued specifically for environmental, social and governance (ESG) purposes.
The Lloyds ESG bond makes up 3.1 per cent of the fund – a significant proportion of the portfolio’s financials exposure.
“We don’t have a big exposure to financials. Because when we identify financials with a positive social impact it does not tend to include exposure to the banks, particularly the joint-stock banks,” Mr Bond said.