Why would you describe this fund as a 'one to watch' and how could the strategy work in investors' portfolios?
The Close Sustainable Bond Portfolio Fund has demonstrated a consistent ability to outperform the sector on a risk-adjusted basis. Its nimbleness and its valuation-driven process - which is underpinned by detailed credit analysis - allows the fund to take concentrated positions in 50-70 high conviction holdings. The fund also adopts a rigorous and strict approach to sustainable investing, which ensures it only invests in companies with positive Environmental, Social and Governance (ESG) attributes as of today.
With regard to how the strategy could work in investors' portfolios, the fund is designed as a straightforward and low risk bond fund. The yield objective is to at least match that of the sector, while the shorter-than-average duration ensures lower volatility than most peers. All of these factors have contributed to strong, risk-adjusted performance over time.
The fund also carries a high quality bias, with a current average credit rating of ‘A-‘. Finally, we believe the fund is competitively priced, with the current OCF of 0.45% being lower than the sector average and representing good value for money.
Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
To ensure capital is allocated to ethical sectors and issuers with positive ESG attributes -as well as bonds with attractive valuations - the following investment process is followed.
- Unethical sectors are screened out: issuers with > 10% revenue exposure to Alcohol; Animal testing for cosmetic purposes; Adult entertainment; Oil & Gas producers; Gas utilities; Tobacco; Weapons; Gambling; Nuclear power; and Oil & Gas equipment / services - as well as those which do not meet the Manager's ethical standards - are excluded from the investable universe.
- Issuers with weak ESG ratings are screened out: using a third party ESG rating provider, we exclude companies with ESG ratings of BB or below, as well as those which are unrated. The fund will therefore only invest in issuers with ESG ratings of AAA-BBB. Any holding downgraded to BB or below will be sold within 90 days.
- Filter bonds by yield, maturity, currency, and credit ratings: bonds from issuers which pass the Ethical and ESG screens are then filtered by yield, maturity, currency and credit rating. The fund focuses on GBP and Investment Grade bonds.
- Valuation and liquidity analysis: analysis then focuses on bonds with the most attractive valuation and the strongest liquidity.
- Fundamental research & team selection: based on bottom-up fundamental research and relative value analysis, the team selects 50-70 bonds to be included in the portfolio.
The Fund Manager is supported by a team of credit and macro analysts, and the wider investment team, which consists of equity analysts, other Fund Managers, and a comprehensive performance and risk analysis team.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
While attractive investment opportunities are relatively scarce given current valuations, we continue to see value in a number of key areas.
We focus on sustainable companies (as outlined above), and we feel that such issuers have the potential to outperform over the long-term as they often allocate capital more efficiently.
We also see opportunities in subordinated financials (i.e. banks and insurance companies), where we can invest in issuers with strong business models and robust balance sheets, but down the capital structure. The fund also invests in corporate hybrids - the range of debt instruments that lie between senior unsecured debt and equity in a company's capital structure - which provides the opportunity to invest down the capital structure, but in defensive businesses.
Finally, we monitor issuers which do not currently carry a formal credit rating, providing us with the opportunity to take advantage of structurally low demand (within the confines of the IA Sterling Corporate Bond Sector parameters) and build conviction through detailed internal credit research. Should such companies subsequently acquire a formal credit rating, it can provide a strong boost to performance - although this is not necessarily the driving motivation behind any such investment.