Ethical bond fund provides shelter from the ‘financials’ crisis

While 2008 saw one of the toughest years on record for fixed income investors, F&C's Ethical Bond Fund, launched in October 2007, proved a resilient performance over of the last 18 months.

The fund, which sits in the popular IMA UK Corporate Bond sector despite its ethically restricted universe of stocks, is flat since launch compared to a -2.6% return from its benchmark (Iboxx Sterling Non Gilts Index TR) and a median return of -8.17% from other funds in its sector over the same period. Looking at short-term performance, the fund rose 1.36% versus a market average loss of 4.99% over the second half of 2008, amidst the most tumultuous market conditions witnessed for decades.

Far from hindering the fund, manager Rebecca Seabrook believes it was advantageous to have launched during a period of heightened market volatility, as this provided more opportunities to add value, in particular having minimal exposure to the financial sector. She has maintained an initial underweight position to financials since launch and had no exposure to Lehmans, Washington Mutual and AIG. Overweight positions in utilities, telecoms and corporates also served to strengthen returns.

The fund combines F&C's heavyweight fixed interest capabilities with the expertise of it's 15-strong Governance and Sustainable Investment Team, and applies similar, rigorous ethical screening criteria to those adopted by the equity-focused Stewardship range of funds managed by F&C. The F&C Ethical Bond Fund universe of eligible securities is screened on a comprehensive range of both "positive" and "negative" criteria selected by an independent policy committee, actively targeting credits from issuers which contribute to sustainable development.

Seabrook's outlook for 2009 is cautious, based primarily on her expectation that the economic backdrop will continue to deteriorate, and she is positioning the fund defensively for volatility anticipated in the coming months.

"The financial crisis has seen banks being forced to deleverage at an earlier stage of the credit cycle than usual and their focus is now on reducing debt. Until banks strengthen their balance sheets and regain their confidence to lend again, this situation looks set to remain. That said, valuations in the region remain attractive and the opportunity to add significant returns when the markets eventually turn should be huge," said Seabrook.