£2bn bond investor: 'For the first time in years we yield more than the FTSE'

Dividend cuts and a green recovery fuelled by cheap debt – how the tables have turned for income investors

At the Conservative Party Conference this week, Boris Johnson promised that every home in Britain would be powered by offshore wind within a decade, as part of his pledge to build Britain back better and greener after the coronavirus.

His low-carbon “levelling up” plan will require billions of pounds of investment. It will come on top of the billions of pounds in emergency loans for businesses hit by the pandemic – the same pandemic that has caused British stock market dividends to fall by half this year and forced a generation of savers to look elsewhere for income.

It is why the managers of the £2bn Rathbone Ethical Bond Fund are hopeful for the future, in spite of the downturn.

Bryn Jones and Noelle Cazalis tell Telegraph Money how recovery spells opportunity and why savers are flooding into corporate bonds, the bestselling investment in August.

How does the fund work?

BJ: We have a positive and a negative screen where we target companies doing good things and steer clear of certain sectors such as pornography, gambling and tobacco.

We think in big themes around how the world is changing so we can help our investors tap into what is growing and avoid what is declining – the move to a low-carbon economy or the downfall of the high street, for example.

Then we put individual firms under the microscope. We look to see if the business has competent managers, whether it has the capacity to pay us back on our investment and what solid assets it has to use as collateral if for some reason it can’t pay.

Then we look at the price. We want cheap stuff. Not stuff that is cheap for a reason, but something that the wider market may have overlooked and we think has the potential to pay us an income as well as increase in value.

Who is the fund for?

NC: When we launched we only really had people looking for an ­ethical investment. But today we have a lot more mainstream investors who are simply looking for a safe income whether it comes from an ethical portfolio or not. We have been paying one of the highest incomes in the corporate bond fund sector for several years now, which has drawn new savers.

You have lagged behind peers since markets crashed. why?

BJ: We are not a “safe-as-houses” Government bond proxy fund. We aim to invest in the highest-yielding corporate bonds, which we think will have the lowest levels of volatility. When markets turn we are not immune to the fall.

What changes have you made in the crisis?

BJ: When markets crashed we raised £100m by selling some bonds. I was around in 2008 and a big problem back then was having enough cash to pay investors leaving the fund. But because of massive cuts to dividends in the stock market and the scale of Government and Bank of England interventions to prop up the economy, we have had a flood of new investor cash coming in.

We have been using that cash to buy up debt issued by banks and building societies, including Nationwide, which are shoring up funds for much-needed loans. We also bought a lot of coronavirus response bonds, issued by supranational firms.

Bryn Jones (left) and Noelle Cazalis (right) Credit: Rathbones

NC: Our investors, for the first time in years, can now get a better income with us than they can on the London stock market – and for less risk.

Isn’t every firm claiming to be ethical these days?

BJ: Yes, the industry term is “greenwashing”.

NC: Rathbone Greenbank, which has pioneered ethical investment research since the 1990s, steers us and has an effective veto on every bond we buy.

Is the Tories’ green levelling up project an opportunity?

BJ: One hundred per cent. State support will make green infrastructure projects and the bonds that fund them more secure.

What were your best and worst investments?

NC: The best was a non-rated bond issued by insurer Phoenix. We knew the team and thought the bond would get a good rating eventually. We were right and the price went up. The worst was a challenger bank, which I can’t name for legal reasons, with big growth hopes – but management wasn’t up to it so we sold at a loss.

Do you have your own money in the fund and how are you paid?

NC: We both do. We get a deferred bonus if we perform well.

What would you have been if not a money manager?

NC: A marine biologist.

BJ: A footballer.