Missing piece of SRI puzzle found at Threadneedle

Last week I had the pleasure of meeting Simon Bond, the aptly named Threadneedle Corporate Bond fund manager.  Simon is at the helm of a new fund where the objective is to manage a fixed interest securities (corporate bond) fund that bring both social benefits and competitive returns.

The Threadneedle UK Social Bond fund, launched in December, has been set up in partnership with Big Issue Invest* who research the ‘social intensity’ (ie usefulness) of assets,  whilst the Threadneedle teams primarily get on with assessing conventional investment aspects like liquidity and yield.

The aim of the fund is to maximise returns from a subset of the 1000+  fixed interest securities universe, a select 3-400 of which are potentially eligible for this portfolio.

This universe is broadly comparable with that of many ethical funds, but what is more interesting is the story around its likely expansion.   With local authorities increasingly strapped for cash,  a growing need for infrastructure improvements (eg rail) and health and social care services increasingly being run by charities there is little doubt this pool will grow.

Similar to – but different from ‘Ethical Funds’

As well as the Social Bond’s investment universe being similar in size to that of many ethical funds there are other attributes in common.  Most importantly, the fund is a ‘true’ investment.  It aims to maximise returns.  The fund is neither a campaigning group nor a philanthropic investment.  This means that longer term performance should be comparable with that of ‘mainstream’ indices and competitors.

The fund is however different from ethical funds in a number of ways.  Firstly, the fund focuses on ‘social issues’  (‘people issues’) – rather than sustainability, the environment or indeed traditional ‘values based’ ethics.  So, whereas other SRI options typically consider social issues ‘in the mix’, for this fund social issues pretty much  are ‘the mix’.

Secondly, by virtue of their relationship with the Big Issue, the fund specifically considers the social impact of any potential investment, holding only assets that are beneficial or genuinely useful to a geographically diverse cross section of the UK population.

Threadneedle’s ‘social assessment methodology’ and ‘social intensity assessment’ is also different from the management of most screened ethical funds.   In this respect the Social Bond shares the motivation of many themed SRI options (such as Sustainability themed funds)  where their aim is to make sound investments that aid the transition towards more sustainable lifestyles (for example by improving energy and resource efficiency).

Also in common with SRI themed funds, this fund has a number of areas of focus, where it aims to invest.

This fund focuses on the following eight areas;

• Employment and Training, Education, Learning and Skills, Community Services, Health, Social Care, Financial Inclusion, Utilities and the Environment.

Similar to – but different from Impact Investments:

The level of attention paid to ‘impacts’ makes the fund sound similar to the growing area of ‘Impact Investments’, (indeed, this fund may appeal to the same people as impact investments do), but this is firmly not what most people would currently recognise as an ‘impact investment’.

Although considering social impacts is core to the investment decision making process, measuring outputs is not part of the Threadneedle strategy.  Also, like many ethical funds, this fund makes nuanced decisions to arrive at ‘pragmatic’ compromises that may not suit all ethically minded investors.  In doing so, this fund is however opening itself up to more ‘mass market’ investors as this route allows additional diversification of investment and increases its’ potential universe.

Also, unlike most ‘Impact Investments’ this fund has navigated its way through the regulatory and retail distribution minefields.

The Threadneedle Social Bond is a regulated (currently Nurs) fund.  It is available through a number of major platforms and is priced for the retail market.

Is it ‘SRI’ or ‘ethical’?

The aims and the approach of this fund are firmly in line with many SRI and ethical options.  The fund managers clearly do consider more than simply investment returns and have chosen to focus on an issue that has been at the heart of the ethical investment movement for many years. Indeed some may recollect that opposition to Apartheid, the major social issue of its day, was a core reason for the creation of the UK’s first ethical funds in 1984.

Yet this fund is different from what has gone before.   It does not explicitly consider a full range of values based ‘ethical’ issues (a prerequisite for being an ‘ethical fund’) and risk management is not a core objective (as is common in institutional SRI options).  It does however fall firmly under the SRI umbrella when the popular definition of SRI is used, namely ‘SRI options are those which consider ethical, social and /or environmental issues in detail…’.

Working out how this fund will fit within SRI segmentation models such as the Fund EcoMarket tool may however take time as this is a new strand to this market – indeed the fund may require the creation of its own new ‘segment’.

A missing piece of SRI the puzzle

Putting ‘social intensity’ at the heart of its strategy means the Threadneedle Social Bond is a new and welcome development.  The fund manager’s experience and enthusiasm to encourage new issues is also likely to yield both societal and investor benefits.

The partnership with Big Issue Invest adds credibility that will be appreciated by well informed investors – and a degree of protection for advisers.

Together , its various attributes place this fund far higher up the changeometer than regular funds – and even perhaps even higher than some ethical funds.

By being regulated, priced for retail, accessible and invested with a keen eye on diversity and liquidity it appears to open up additional opportunities for advisers and their clients…

And so to possible clients

So who should advisers talk to about this?

Based on what I have seen so far, here are some thoughts :

• The fund invests in regular corporate bonds which are both financially sound (typically A Rated) and deliver social benefits.   Clients for whom corporate bond funds are appropriate are therefore an adviser’s primary potential investor group.
• Drilling further down, investors who are keen on ‘people issues’ – (as opposed to pure ethics, the environment or animal issues) as well as those with an interest in infrastructure and service industry projects are likely core sub-groups of this cohort.
• The fund is not likely to be appropriate for people who want to support a specific project or make a philanthropic investment.   This is an actively managed fund which is likely to hold over 100 securities and offer mainstream returns.

Looking ahead

The fact this fund is innovative and in many ways unique is both its strongest attribute and its biggest challenge.  For investors for whom bond funds are appropriate and who are keen to help effect positive change this will no doubt be regarded as a welcome development from a big hitter.  For those looking for a regular investment with a positive ‘twist’ it is also likely to attractive.

Providing the Threadneedle message is received loud and clear and all goes to plan competitors will almost certainly follow as this fund feels very timely and very ‘now’.

This launch may even turn out to be the piece of puzzle that makes investment relevant to ordinary people and help improve the reputation of our industry.

I  am happy to welcome the launch of the Social Bond as a fund that brings additional diversity and fresh thinking to the growing SRI market.

See below for additional reading:

• Further information from Threadneedle
• Threadneedle video
• sriServices & Fund EcoMarket SRI Styles directory

*The Threadneedle Governance and Responsible Investment Team (a 3 strong in house team headed by Iain Richards) research the social intensity (ie degree of usefulness) of assets using the methodology developed by Big Issue Invest.  Financial aspects, including liquidity and yield, are covered using their conventional processes by the Threadneedle investment and analytical teams.  The resultant portfolio is reviewed, analysed and challenged by the Social Advisory Committee, set up by Big Issue Invest.