The manager of Rathbones’ $2.4 billion Ethical Bond Fund is beating her benchmark – and 95% of her peers. Here’s how she makes green investing work.

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Noelle Cazalis

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Green and ethical investing is rapidly becoming a hot topic – but while this might be a relatively new trend for equity investors, it has been a staple in the fixed-income universe for many years. Ethical bonds have been a golden goose for many companies and governments looking to stabilize their balance sheets throughout the coronavirus crisis.

The European Central Bank, under the supervision of its president, Christine Lagarde, has led from the front with green bond buying programs and the issuance of social bonds – known as SURE bonds. This year, even emerging-market countries such as Egypt have issued a green bond. 

But for some investors this isn’t a new phenomenon, it is simply the next chapter. This is certainly true for Noelle Cazalis, a fund manager of Rathbones’ £1.8 billion ($2.4 billion) Ethical Bond Fund, launched in 2002, by veteran fixed-income investor Bryn Jones.

Alongside Jones, Cazalis has consistently beat her benchmark – the iBoxx Sterling Non-Gilts Overall Total Return Index – returning 6.43% over the last five years, versus the index’s 5.56%. Her fund’s returns compare to an average of  1.77% for her competitors, which places her in the 95th percentile, according to data from Bloomberg.

“We’ve outperformed the sector with a lower level of volatility. We are one of the funds that has – over five-years – the highest Sharpe ratio in the sector,” Cazalis said.

The fund, which invests solely in ethical corporate investment-grade credit, differentiates itself with a “flipped” investment process compared to its peer, according to Cazalis.

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“The ethical screening has to come at the end,” she said, “because we want every investment in the fund to stack up from an investment standpoint, not just because it’s nice and green and it’s doing some good… I think that’s key in the way we manage the fund.”

This doesn’t diminish the ethical quality of the fund’s investments, but it does create a strong investment pitch for the team to apply its process of exclusion, eliminating bonds that don’t meet Rathbones’ standards.

What makes the cut? 

As you would expect, the fund doesn’t invest in any company that may have “exposure to animal testing, tobacco, alcohol, pornography, high-impact activity,” Cazalis said, and once you have that, “you get your investment universe.”

But Cazalis goes further. “We don’t stop at the exclusion level at Rathbones, a company needs to have no negatives, based on our criteria, but also at least one positive. So we do that a kind of extra step and that is the positive screening,” she explained.

With this process of detailed exclusion, Cazalis can invest in bonds, even if they are not labelled as green or ethical. “For us, because we have exclusion in our fund, we don’t really need a company to issue a green bond,” she said. “It doesn’t mean because it’s labeled, it can go into our fund and it doesn’t mean because it’s not a green bond that it doesn’t have really green characteristics.”

One example is the fund’s investment in Greater Gabbard, where it finances the pipe …read more

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Source:: Business Insider


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