Fund manager Bryn Jones describes himself as a ‘glorified money lender’ – but ‘without access to a baseball bat when people don’t pay up’.
All tongue in cheek, of course, but in layman’s terms, it pretty much explains how he makes money for investors from the investment fund he runs – Rathbone Ethical Bond.
‘What we do as bond fund managers is lend money to large companies and governments around the world,’ he explains. ‘In return, they pay us interest each year until their bonds mature.
‘Hopefully, if we’ve picked good quality bonds, especially on the corporate side, then we get our money back. We’re happy and so are our fund investors.
‘The trick – and it’s a key one – is to avoid bonds from companies that might be heading for trouble, such as Thames Water.’
He adds: ‘The objective of our fund is simple: to provide our investors with a little bit more than they would get from cash – and to offer something which acts as a form of insurance policy in their investment portfolio when stock markets fall.’
It’s a diversification proposition that has attracted money from wealth managers, financial adviser networks and private investors. The fund has assets of £2 billion and has holdings in 217 bonds across 24 companies.
Although wary of inflationary pressures that could be triggered by a mix of Labour’s Budget assault on UK businesses and Donald Trump’s threat to impose tariffs on imports into the US, Jones believes bond markets currently provide ‘plenty of opportunity’.
He says bond yields of between five and six per cent are currently ‘attractive’ – especially if interest rates come down steadily as expected, driving up bond prices.
‘Of course, if inflation were to head towards seven per cent over the next few years,’ he adds, ‘investors would be wiser buying gold or short-dated index-linked government bonds.’
The portfolio comprises a plethora of bonds offered by big company brands – the likes of Aviva, HSBC and Santander. Its biggest holding, however, is in UK gilts – or more specifically ‘green gilts’. A specialist division at Rathbones – Greenbank – ensures that all bonds held in the fund meet stiff social and environmental criteria.
‘We can only buy UK government bonds where the proceeds are used to improve the environment or the country’s infrastructure,’ says Jones. ‘We can’t buy gilts used to finance nuclear power stations or buy weapons.’
In train with its ethical investment approach, Rathbone Ethical Bond is an investor in the World Bank Amazon Reforestation-Linked Outcome Bond, which provides funding to help reforest the Brazilian Amazon rainforest.
It also has holdings in bonds helping fund development of wind and solar farms. Among them is a stake in a bond issued by community interest company Burnham and Weston to finance a local solar farm. ‘These bonds do not form large parts of the fund’s portfolio,’ says Jones, ‘but they provide good returns.’
In terms of investment gains, Rathbone Ethical Bond has delivered an overall return of 9.5 per cent over the past year and 38 per cent over the past ten years. It has outperformed the average return from its sterling bond peer group over the past one, three, five and ten years.
Like all bond funds, it had a wobble in the autumn of 2022 when bond prices fell sharply in response to unfunded tax cuts announced by then Chancellor Kwasi Kwarteng. Annual charges are reasonable at 0.67 per cent.
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