First 50 Funds Interview: Rathbone's Noelle Cazalis

30 May 2018
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Moneywise’s Helen Knapman gets the lowdown on a new entrant to the First 50 Funds list for beginner investors – Rathbone Ethical Bond Fund – from its assistant manager Noelle Cazalis

What is the fund?

It’s a corporate bond fund, which mainly invests in bonds issued by companies in sterling. It’s also an ethical fund, so we have a list of inclusion and exclusion criteria and our independent research team will use this to analyse the companies we want to buy bonds from.

One of our key investment objectives as a fund is to pay a high yield, and the income on the fund is one of the highest in the sector.

Can you explain about its environmental mandate?

Every investment needs to have no negative environmental factors and at least one positive factor. Negatives include the tobacco, oil and alcohol industries, while positives could be social impact in the charity sector.

It’s a myth that ethical funds don’t generate as strong returns as non-ethical funds. We’ve outperformed other funds over one year, three years, five years and 10 years.

What do you look for when picking bonds to invest in?

The first thing is a theme – this could be macroeconomic, sector-based or political. A few years ago, for example, oil prices were high, and we thought this would benefit train companies [as car drivers would turn to rail travel].

We look at companies with a strong credit metric, and what’s important for us is cashflow generation, for the company to be able to pay its income – the interest it pays on the bond. We look for at least one of the ‘four Cs’:

  • Character: management and strategy
  • Capacity: cashflow and ability to pay
  • Collateral: whether a bond is secured and whether we have a claim on some of the company’s assets if it defaults
  • Covenants: whether there are protections in place for bondholders

What have you recently been buying and selling?

Recently we’ve been a little bit more cautious, as we think interest rates will continue to march higher, which has negative implications for bond prices.

So we’ve been buying floating-rate bonds, where the interest rate rises as the coupon increases, and buying some high-quality AAA bonds from supranational institutions such as the European Investment Bank (EIB).

Another area is the charity bond market, which is good for our ethical angle and gives us good diversification. I think we’re the only institutional investor in the charity space. We’ve been buying from the Charity Aid Foundation and from Thera Trust, which buys properties and fits them for people with learning disabilities.

As for selling, we’ve sold higher-risk names in insurance and companies geared to consumer finance, such as a Clydesdale Bank Tier 2 bond, as we’re worried about pressure on consumers to service debts.

How often do you buy and sell bonds?

Our turnover is about 30%. We don’t have a set holding period; some bonds we hold until maturity, others we don’t.

The first reason we would get rid of a bond is if we have concerns about the company’s ability to service the debt. Another one would be valuation – for example, if we think the investment has played out and has become expensive.

The other reason is when a bond gets really short-dated, with one or two years until maturity, as then its yield can drop, which affects the income we pay investors.

What’s been the best and worst investment decision?

One of the best was probably Phoenix Life Insurance. It had some trouble with bondholders in 2008, but in 2012 it came back to the market. It didn’t get a credit rating, but we decided to trust the management and, since then, it has been paying a dividend and it’s had a credit rating upgrade.

The worst was solar panel company Solar World. It was suffering from competition from China, but we held on to it because we thought it could improve. However, it was unable to meet its interest payments, so the bond price continued to go down and we exited after a few months. That taught us to interrogate the underlying cashflow and to stick with our conviction and sell.

What are the challenges and opportunities for the fixed-income sector?

The main challenge is the interest rate environment and what central banks are doing. The US Federal Reserve is hiking rates right now and we think it will continue with more hikes this year. The risk is that it hikes too quickly, which will impact consumers, businesses and the economy.

We continue to find opportunities in the insurance space as we feel values are attractive and these companies continue to have high credit ratings.

Why should consumers consider fixed income?

If you’re looking for income it’s easier to predict the income on a bond, which has a fixed coupon, than to predict a dividend yield. It’s also a much less risky asset class than equities, as you have less volatility.

What’s your top tip for a beginner investor?

Keep looking at the bigger picture, at the underlying investments and how they interact with each other. It’s also important to understand how much you can afford to lose and think about whether you should change your asset allocation in that respect.

Sector breakdown
Five-year discrete performance of Rathbone Ethical Bond Fund
Year20132014201520162017
Rathbone Ethical Bond R Acc in GB3.7810.250.936.419.85
Benchmark (ii)0.8712.200.4910.654.32
(ii) Index: IBOXX UK Sterling Non Gilts All Maturities TR in GB. Source: FE, 22 May 2018

 

Top 10 holdings

Rathbone Ethical Bond Fund:

Key stats

Launched: May 2002
Fund size: £1139.9 million
OCF: 1.3% (i)
Yield: 3.8%
(i)28 February 2018
Source: Rathbones Unit Trust Management, 21 May 2018

The team behind the fund

Bryn Jones is the head of fixed income for Rathbones, and is lead manager on the Rathbone Ethical Bond Fund. He joined Rathbones in November 2004 from Merrill Lynch. Bryn graduated from Birmingham University with a Bachelor of Arts degree in Geography in 1995.

Noelle Cazalis is the assistant fund manager within the fixed income team, assisting Bryn on the Rathbone Ethical Bond Fund. Noelle joined Rathbones in July 2011 as a credit analyst. She has two master’s degrees from the University of Montesquieu in France, and an investment management certificate, and is also a chartered financial analyst.

 

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