Building an impact portfolio: could bond funds be for me?
By Mike Narouei, Content Producer at Boring Money
21 Oct, 2020
We catch up with William de Vries, fund manager for Triodos Investment Management, the investment arm of ethical frontrunner Triodos Bank. William explains impact bond funds, their role in a sustainable investment portfolio, and how they can help to diversify a portfolio of traditionally led investments.
Sponsored by Triodos
Let’s start at the beginning… what is an impact bond fund?
- “Bonds are what you can call fixed income – contrary to equities, there is a predictable cashflow in the future. You know what you are paying, and you know what you’re getting back. It’s fixed, predictable. And a bond fund is a whole group of predictable cashflows. Of course, as with any investment the performance will depend on the yield (interest) paid by the bonds and gilts invested in by the fund, and the changes in the price of these bonds and gilts in the market.
- “There are bond funds that solely aim at getting a high level of yield, or there are bond funds like the ones we manage, which aim to give a reasonable and predictable return but also make a positive impact. That’s what we want. We aim to have a positive impact on people and society and nature, and also to give people at least the same return as any average bond fund.”
What sort of positive impact can you have with a bond fund?
- “We have defined seven transition themes to meet the challenges of our future world, from sustainable agriculture to social inclusion to circular economy. We select bonds only from companies that have a positive impact aligned with one of our seven themes. And we avoid bonds that do not have this quality.
- “For example, we don’t want fossil fuels. We don’t want most financial institutions. We don’t want animal testing or human rights violations. We don’t want companies where there is a huge difference between what the CEO and the average worker are paid. That’s one of the reasons we aren’t including Tesla, for example, despite the sustainable product.
- “But it’s not all about exclusion. We are mostly selecting companies for the positive impact. Take Toyota as an interesting example – and perhaps a controversial one. You don’t tend to expect a car manufacturer to be in a positive impact portfolio. But we think it should be in there, because it is one of the leaders in electric vehicle and battery development, a leader in hybrid electric vehicles, and a leader in hydrogen-powered development. Of course, Tesla is a full electric motor vehicle producer, but they only produce around 300,000 cars – which is nice, but they’re only sold in certain areas and are more of a luxury. Toyota cars are sold everywhere, and they produce 10,000,000 vehicles per year – 30% of which are electric. So, in our calculations Toyota has a more positive impact.”
But does a positive impact come at the cost of returns?
- “Once I heard a guy say, ‘If you’re having that much of a return, you’re probably not having enough impact,’ which is actually not true.
- “There is no difference. Impact portfolios have the same sort of returns as normal portfolios. I’m totally against the idea that investing in impact or investing in green gives you a low return.”
Is an impact bond fund the right fit for me?
- “Overall, it’s a personal choice and before diving into any investment you should do your research. While we can’t offer financial advice, there are important considerations for investors, such as the reasons for investing in the first place. Is it for your retirement, or will you need it sooner? If you do you not need the money immediately you could consider taking more equity in your portfolio and maybe have less or no allocation in a bond fund. If you’re of a certain age and your investment horizon is a bit shorter, you could consider investing some money into a bond fund, which aims to bring you a bit more than a savings account and also gives you a degree of certainty about getting your money back. Although as with all investments, your capital is at risk.
- “With a bond fund, as a lower risk/return product the focus is different. It’s about the return of your money, rather than the return on your money. However, with an impact bond fund you are helping to deliver measurable environmental and/or social impact at the same time. And that’s very important. Bonds offer a predictable cashflow, unlike equities, and so bond funds are often used in investment portfolios to lower the overall volatility of your investments. The aim is to lower the risk.
- “If you invest, there is always a chance you may not get your money back. With bonds and bond funds, this chance is generally lower. It’s more likely you will get your money back and make a decent return. With equities, you could get much bigger returns, but you could also walk away with nothing. So, you should always ask yourself how much volatility you can live with.
- “There’s also the issue of tax. If you’re lucky enough to have large sums of money, you can get to a point when saving more can have negative tax implications. But investments, such as those in a bond fund can sometimes be a little more favourable, but again seeking financial advice is advised.”
I’m convinced but not confident… where should I begin?
- “It’s always best to do your research and consult an independent financial adviser, but a common approach is to diversify your investments, so portfolios have a mix of equity and bonds, which is sometimes a 50/50 split and we see this in our investors’ impact portfolios. For example, in our UK portfolio we now have three impact investment funds. Our equity funds - Triodos Global Equity Fund and Triodos Pioneer Impact fund - are rated on the risk/return spectrum as 5 and 6/7 respectively. Whereas the newest addition to our UK portfolio, the Triodos Sterling Bond Impact Fund is anticipated to be rated 3/7.
- "Additionally, our impact bonds are designed to generate environmental, cultural or social impact, which are helping to tackle today’s global challenges to create a more positive future for all."
Triodos Bank UK recently launched the new Triodos Sterling Impact Bond Fund, to complement and diversify its existing equity led impact investment portfolio on offer from Triodos Investment Management. For more information visit triodos.co.uk/impact-investment.
With all investing, your capital is at risk. The Triodos Impact Investment Funds should be seen as long-term investments (five years or more), as their value can go down as well as up and you may not get back what you put in.
Triodos Bank doesn’t offer financial advice, so if you're unsure which investment is right for you, it’s a good idea to ask an independent financial advisor.