ETHICAL BOND FUND
Type: Unit trust
Aim: Income by investing in ethical investment-grade bonds
Minimum investment: Lump sum £1,000, monthly £100
Investment split: 100% in ethical investment-grade bonds
Yield: 6.2% gross a year
Isa link: Yes
Pep transfers: Yes
Charges: Initial 4%, annual 1.25%
Commission: Initial 3%, renewal 0.5%
Tel: 020 7399 0399
The panel: Peter Robinson, Director, Social Investment Advisers,
Greg McCrave, Principal, The Ethical Investment Consultancy,
Alan Kirkham, Managing Director, Investing Ethically,
Peter Liebich, Director, The Ethical Investment Co-Operative.
Morag Robinson, Associate, Global & Ethical Investment Advice Scotland.
Suitability to market 8.3
Investment strategy 8.3
Past performance 7.8
Company's reputation 5.4
Product literature 6.8
The Rathbone ethical bond fund is a unit trust that invests in corporate bonds issued by companies that have a positive attitude towards ethical concerns.
Looking at the market suitability of the fund Robinson says: “It is a welcome addition to the universe of ethical and socially responsible funds on the market. Its low risk profile makes it very attractive.” Kirkham says: “There are only a few ethical bonds around. This is the only one we know of that takes an ethical, rather than an engagement, stance.”
Robertson says: “It fits in well between the two ethical bond unit trusts currently available - Norwich Union sustainable futures, which is higher risk with a higher yield, and Aegon socially responsible investment income unit trust, which is lower risk with a lower target yield.” McCrave says: “There are only two other funds offering similar features, so this product is a welcome addition from a provider with expertise and experience in the ethical marketplace.”
Identifying the type of client the product is suitable for Leibich says: “The fund is ideal for the investor wishing to invest ethically and to achieve an above average level of income with low risk to capital. Although there are many corporate bond funds available, for the ethical investor the choice is very limited. Alternatively, the risk averse investor who is unwilling to invest in equities could buy accumulation units and have income reinvested each quarter to provide a low risk growth investment.”
Kirkham suggest low risk, high income investors and clients with definite ethical positions. He points out that it has a complete ban on animal testing. McCrave says: “People who care about the source of income they are seeking, as well as the return itself. Those wanting ethical acceptability and financial potential. The product offers welcome diversity for ethical investors seeking income.”
Discussing the marketing opportunities Robertson sees it as increasing the choice for ethical clients, taking the choice from two bond funds to three. Kirkham points to its ethical screen and use of investment grade bonds. Leibich feels it could be marketed to existing clients and via a mail shot to prospective clients.
Highlighting the main useful features and strong points of the product Robinson says: “The experience of the fund managers, low risk nature of the fund, high income objective and a specialist ethical team with experience.” McCrave says: “The strong points are the ethical experience of the management team. And the relatively strict criteria of the fund which requires that the companies invested do not just contravene the negative criteria. They have to demonstrate positive social and environmental policies.”
Analysing the fund's investment strategy Leibich says: “The fund manager will have a universe of bond issuers that meet the ethical criteria. A portfolio will be selected which generates the highest level of income achievable, bearing in mind the prospects for interest rates and the economy. The investment strategy seems sound and well thought through, taking into account the macroeconomic view, asset allocation and the careful selection of individual securities.” Kirkham says: “I think its important to have a fund that is going to invest in only AA and A-rated bonds, given the high default rate among the lower bonds. There is no indication this will slacken for the next year or so, and there is a need for an extra secure fund.”
Robertson says: “It allows investors requiring a reasonable level of income from a low-risk fund, but who also want to satisfy their ethical aims at the same time. However, the low-risk profile of the bond means that the companies in the fund will tend to be large companies like banks. Some of which will not satisfy some of our darker green ethical investors.”
Considering the fund's disadvantages Kirkham says: “It is a single fund, therefore one cannot use it to switch asset classes as in the Norwich Union fund.” McCrave says: “The annual management charge is above average in the UK corporate bond sector, which reflects the specialist nature of the fund. Taking this charge from the capital could also lead to the potential for capital erosion. Because of the ethical criteria, the fund is likely to overweight in banking and utilities and so its performance will be heavily linked to these sectors.”
Robertson says: “The relatively high annual management charge coming out of capital instead of income. It allows the fund manager to show a higher yield for marketing purposes. Clients will need to be aware that there is a high risk of capital erosion, especially if interest rates do not move in a favourable direction.”
Assessing the company's reputation Leibich says: “Rathbones was established in 1742 and the ethical investment team has been managing ethical portfolios since 1992. Managers Luke Hickmore and Julian Chillingworth have a lot of experience between them. ” Kirkham says: “Very high, its SRI portfolio team from which this fund emerges has the best of reputations.” Robertson says: “It has an excellent reputation for a small player. It has had a number of strong funds with most achieving a four star or greater grading from Standard & Poor's. It's also one of the few stockbrokers to have its own ethical research team.”
Turning to past performance Robertson says: “Most of its funds have been in the first quartile over one, three and five years. Its discretionary portfolio service has also performed well for clients.” Robinson thinks its past performance is average. McCrave says: “It is difficult to judge as all previous ethical experience has been with private clients.”
Highlighting the main competition the fund could face Leibich, Robertson and McCrave go for Aegon SRI and Norwich Union sustainable futures corporate bond fund. Robinson cites the NPI global care with-profits bond and Merchant Investors ethical cautious managed fund.
Moving on to the charges, Leibich thinks they are reasonable. Robertson says they are slightly more expensive than Norwich Union, but cheaper than Aegon. Robinson feels the charges are not too bad, but a little on the high side.
Robertson feels the commission is generous compared with the two rival products she has mentioned, but on a par with most other bond funds. Robinson thinks it is about right. McCrave welcomes the renewal commission.
Looking at the product literature Leibich says: “It is attractive and professional looking. It consists of a brochure containing fund details, as well as information on the investment strategy, plus positive and negative ethical screening criteria. Key features and application forms are included in the brochure. There are also separate single A4 flyers, one of which covers the ethical screening criteria in more detail, and the other offering general fund information.” Kirkham says: “It's a bit dry and uninspiring. It comes out of a VCT type stable rather than a retail market team.”
McCrave says: “It is reasonable. More detail on the ethical criteria would have been welcome. I would like to see ethical fund managers take the bull by the horns and give specific examples of companies they would exclude and why.” Robertson says: “It won't set the heather alight. I could see most clients falling asleep over it. Norwich Union brochures look much more agreeable.”
Summing up Kirkham says: “We welcome this fund. It's good to see a firm choosing to stay with the darker green ethical market rather than rushing into the softer engagement arena. This is particularly important until we have some sort of objective testing of engagement claims.”