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?
We seek to provide income and capital growth over any seven-year period. Pre-defined ethical criteria are met by applying client-led ethical screening, excluding specified unacceptable activities.
The Fund predominately consists of Sterling denominated investment grade corporate bonds. It is concentrated, high conviction and active - adding value from stock selection. Top-down and bottom-up analysis blend to deliver performance through the economic cycle.
The investment process targets six sources of alpha: Curve/Duration from macro positioning; Asset Allocation/Ratings Selection from top-down credit strategy; Sector/Security from ESG integrated bottom-up stock selection. It provides an effective and disciplined approach to idea generation, implementation and review. The process focuses on identifying profitable investment ideas and provides a forum for constructive engagement across the team.
I manage the fund along with my colleague Euan McNeil - we have over 45 years' experience between us. Support is provided through the AAM Global Fixed Income platform consisting of 143 investment professionals. This involves over 50 analysts in specialist areas, including a dedicated pool of 32 credit analysts organised by specialist industry focus and credit quality. The credit research team assesses and monitors the profile of companies, including analysis of ESG risks at company and sector level, utilising our proprietary ESG categorisation framework.
We work closely with our Global Responsible Investment team comprising 14 members. The RI team focus on ESG screening and research, engagement and stewardship, and policy maintenance. A strong relationship exists between our Responsible Investment team, investment managers and research analysts, which enables material non-financial information to be incorporated into investment processes.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
The Fund was somewhat insulated from the early stages of the extreme weakness by a combination of its relatively defensive positioning and the ethical screen.
Central banks moved swiftly to quell the worst of any lasting economic damage and provide continuing support to economies and markets, which helped to underpin investment grade bonds. We became more constructive on corporate bonds due to this technical support and constrained government bond yields. Following the marked shift wider in spreads, we added credit risk to take advantage of the more attractive valuations. We sought to own the expected long-term survivors of the crisis, primarily through new issue opportunities. Corporate bonds then continued to perform strongly following positive news on the vaccine roll-out.
As a result of the pandemic, there are several sectors we believe will see long-term, fundamental changes to demand for services. For example, in the retail market the structural shift to online retailing has been accelerated by the pandemic. Furthermore, the long-term demand for office space will likely deteriorate as businesses move to a hybrid model of time in the office combined with working from home. As such, we took the active decision to reduce the Fund's exposure to these sectors.
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.
The Fund has been steadily adding to its exposure in the ESG-labelled bond sector. We believe that these bonds are an excellent, natural investment for our Ethical Corporate Bond Fund. ESG-labelled bonds is the collective name given to green, social, sustainable, and sustainability-linked debt. These are bonds issued to fund projects that have positive environmental, climate, and social benefits. The bond proceeds are earmarked for certain projects, but they are backed by the issuer's entire balance sheet.
The market has grown rapidly in recent years, as companies tap into the burgeoning demand from investors for products with positive ESG attributes. The Fund currently has just over 12% exposure to ESG-related bonds from a diverse range of companies. Examples of recent additions of ESG-labelled bonds in the Fund (at 28 Feb 2021) include Assura, the UK healthcare property group, and Pearson, the education products provider. We expect the exposure to ESG-labelled bonds to continue to grow as more and more companies look to issue bonds in this area of the market, broadening out the opportunity set for the Fund.