Over half of sustainable bond funds have made a return since the global sell-off brought on by the COVID-19 pandemic, with most beating their sector average, according to data.
FE Analytics data found that 10 out of 18 sustainable bond funds made a positive return over the three months to 30 April, 2020, within the Australian Core Strategies (ACS) universe.
The range of positive returns for the 10 funds was from 4.09% to 0.11% and the remaining eight reported between losses of 0.49% to 3.36%. The top five best-performing funds overall were all global bond funds.
This compared to average losses by funds in the global bond sector over the same period of 1.9% and losses of 0.14% by the Australian bond sector.
A report by Bank of America stressed that environmental, social, and governance (ESG) investing in fixed income was key for the future.
“Investing in accordance with ESG criteria may help avoid issuers who are vulnerable to downgrades and refinancing risk, leading to improved returns,” it said.
“ESG factors will affect future corporate strategy and financing/refinancing risk – companies with hard targets and strategies for addressing ESG concerns should find themselves best placed over time, in our view.
“Those without a plan for mitigating their own impact on climate change, workforce diversity, or other ESG-oriented factors may find themselves facing increased refinancing risk over the longer term.”
It noted that global issuance of green, social, and sustainability bonds could reach US$400 billion ($621.7 billion) in 2020.
Top funds
Pendal Sustainable International Fixed Interest fund was the top performer (4.09%), followed by Challenger Guaranteed Income 400 cents pa (1.39%), Blackrock ESG Global Bond Index E (1.09%), Blackrock ESG International Bond Index D (1.02%), Vanguard Ethically Conscious Global Aggregate Bond Index Hedged ETF (1.02%), and Vanguard Ethically Conscious Global Aggregate Index Hedged AUD (0.79%).
All the global sustainable bond funds except two, Perpetual Ethical SRI Credit A at a loss of 2.05% and MFS Global Opportunistic Fixed Income Trust at a loss of 2.72%, beat the general global bond sector loss of 1.91%.
The Challenger fund was also the top-performing sustainable bond fund at 19.3% over three years to 30 April, 2020.
Top-performing global sustainable bond funds versus global bond sector over three months to 30 April 2020
Source: FE Analytics
Australian sustainable bond funds followed in terms of bond returns with the top also being the Pendal Sustainable Australian Fixed Interest fund at 0.69%. This fund was also the second-best performing sustainable bond fund at 17.55% over three years to 30 April, 2020.
All the Australian sustainable bond funds, except Altius Sustainable Bond fund which reported a loss of 0.98%, beat the general Australian bond sector average loss of 0.14%.
Australian sustainable bond funds versus Australian bond sector over three months to 30 April 2020
Source: FE Analytics
According to Pendal Sustainable International Fixed Interest fund’s factsheet, the fund does not invest in firms with material business involvement in production of tobacco or alcohol, manufacture or provision of gaming facilities, manufacture of weapons or armaments, manufacture or distribution of pornography, directly mine uranium for the purpose of weapons manufacturing, and extraction of thermal coal and oil sands production.
It said it considered “material business involvement” in an activity if 10% or more of its total revenue derived from that activity.
“The fund outperformed its benchmark over the month (March) delivering a strong return of 1.44% (pre-fee) vs the benchmark return of -1.72%. This is particularly pleasing given it’s occurred during a large equity market drawdown and when the benchmark produced negative returns,” the factsheet said.
“Over the month, the duration and macro strategies were the most successful while the cross-market and yield curve strategies also performed well. The FX strategy was the only strategy that detracted.”
It noted that 10-year US bond yields had a rollercoaster ride in March and by the end of the month had been pushed back to 65bps, while German bunds close the month with higher yields than the start to -50bps, and Japanese bonds ended the month at 0bps with a range of -15bps to 5bps during the month.
“Maybe the Japanese model, once thought of as strange and isolated, is going to become a global standard,” Pendal said.
Pendal noted that over the next few months, bond yields would continue to be well supported as anchored short rates, massive central bank buying and economies in hibernation saw bonds in demand.
“There will be massive supply but central banks will be soaking it all up. Modern Monetary Theory may not be technically here but many of its principles are now policy,” it said.
On the domestic side, Pendal’s Sustainable Australian Fixed Interest fund factsheet said the fund slightly underperformed the Bloomberg AusBond Composite Bond Index by 0.11% in March.
“Active duration contributed positively during the month. Duration was the largest contributor as long duration positions in three years were held through the month as quantitative easing became apparent. The portfolio also took the opportunity to add a small duration long in 10 years during the mid-month selloff. A small positive contribution also came from yield curve steepeners mid-month,” it said.
“The physical portfolio underperformed the benchmark in March. The government sector positioning performed well as the underweight semi governments added value as their spreads to bond widened. The non-government sustainably screened portion of the portfolio detracted from performance with industrials, infrastructure and utilities sectors driving the underperformance.”
Pendal noted it continued to de-risk the portfolio due to COVID-19 related uncertainty and this included buying protection (short credit risk) on the Australian iTraxx, selling financials, and increasing cash weight.
