TwentyFour Asset Management is launching a sustainable bond fund in response to client demand.
Partner and portfolio manager at TwentyFour Chris Bowie said investors in the existing Absolute Return Credit fund had requested a sustainable bond fund and offered to seed it.
An ESG steering group was created, of which Bowie is a member, and following 18 months of meetings to discuss TwentyFour's overall approach to ESG across the fund range and the viability of a sustainable bond fund, the firm decided to launch the Sustainable Short-Term Income Bond fund, and is currently seeking approval from the Luxembourg regulator.
Bowie has managed the £1.8bn TwentyFour Absolute Return Credit fund, which targets a positive absolute return in any market environment over three years with a low level of volatility and was the winner in the Judges' Fixed Income category at this year's Fund Manager of the Year Awards, as well as the £838m TwentyFour Corporate Bond fund, since their respective launches in 2015.
"The new fund will have ESG integration but will also apply negative screening," Bowie explained.
"Funds using negative screens commonly cannot buy alcohol, arms, anything to do with animal testing or carbon intensive energies.
"While we will have the same with our negative screen, our quant work shows negative screening alone can give worse outcomes for investors.
"You need to have a positive screen on top of the negative screen to improve things for investors again. Nobody else uses the same process.
"The positive screen is what makes it different. There are a couple of ESG bond funds, but there is not a lot of choice and they can be quite volatile."
Using the dataset Asset4 from Refinitiv, TwentyFour has created a proprietary quantitative process that uses both negative and positive screening to identify potential holdings.
Of a universe of approximately 5,000 bonds, the managers will look at 150 and hold around 100 in the new open-ended fund. The TwentyFour Absolute Return Credit fund currently has 93 holdings.
Companies are first scored on their ESG credentials and are then given a controversy score, resulting in a combined score.
These scores (which can be overridden by the managers) can then be compared against the firm's peer group. There is a minimum score for the stock to be considered for the fund.
While the quantitative analysis shows companies with a higher score have the potential to offer better returns, they can also push volatility higher.
As such, the new fund will have a 3% volatility limit, as with the TwentyFour Absolute Return Credit fund.
The Sustainable Short-term Income Bond fund will target cash plus 250 basis points after fees.
Seed investors will be able to invest with an annual management charge of 25 bps until the fund reaches £100m in assets under management, at which point the AMC will rise to 40 bps.