William de Vries is the fund manager for the Triodos Sterling Bond Impact Fund at Triodos Investment Management. William leads the team responsible for bonds and fixed income funds and has substantial industry knowledge and experience. We’ve spoken to William regularly since the launch of the Triodos Sterling Bond Impact Fund in September 2020, in our recent discussion we asked about how the fund is growing, the future for green bonds within the fund and unpacked its performance.
1. Since we last met to talk about the fund in April 2020, what new additions have been included?
We started the year with 19 positions (investments) in the fund and by the year’s end there will be 29 with lots of aspiration for many more in 2022. Three in particular really stand out as bringing interesting and impactful dynamics to the fund. Green bonds in Transport for London and Anglia Water, and an investment to support the financing of social inclusion projects from the Council for Europe Development Bank. This means we now have three green bonds in total in the fund, which is fantastic. In addition, to give an idea of growth, in April, the fund inflows were at £8 million and now (December 2021) it's £11.8 million.
2. We chose not to invest in the UK Government’s first Green Bond, but will we consider others?
That’s correct, it simply didn’t meet our minimum (29 standards) criteria. But we were encouraged that the UK Government has shown its willingness to promote green bonds and welcome looking at more from them in the future as each one will be assessed on a case-by-case basis. It’s really important that more governments support the transition to greater sustainability, and we expect that more green bonds will follow in 2022.
3. The fund has slightly dipped below its benchmark at times throughout the latter part of this year, is this a sign of the impact of the pandemic or is it down to other factors?
The dip is because of the volatility of the UK bond market, which surprised us, as we expected that UK interest rates would rise in October, but they didn’t. Bond funds (sterling) experienced this across the board, and within this universe our fund is doing well. The fund yield is currently 1.1% (December 2021) whereas the benchmark yield is 1.2%. Although this is somewhat lower, we maintain a duration position very close to the benchmark. It is important to note that this investment yield is linked to an investment horizon of about five years. Another important thing to note for our investors is that this fund has a high-quality credit rating compared to other funds in the market. Our average credit quality is AA, whereas the benchmark (Bloomberg Sterling Aggregate Bond) is A, and we invest in corporates that have a sound positive impact and can demonstrate good past performance.
4. What will the impact of inflation be on the fund in early 2022?
Rising inflation is one of the biggest challenges we face in relation to managing a fixed income bond fund. This is because it can (if it remains high over a sustained period) affect the real return an investor gets back when a bond matures.
At first, we queried whether the UK's rising inflation was transitory or not, but despite the recent rise, we’re optimistic that it will level out across the rest of 2022. In addition, we don’t expect the Bank of England or other central banks to raise interest rates aggressively as this could hamper economic growth in the next years.
Triodos Sterling Bond Impact Fund
Refers to the earnings generated/realised on an investment over a particular period of time. It is usually expressed as a percentage.
A ‘position’ in this context refers to an individual investment that a fund manager manages in the portfolio.
Can be corporations, investment trusts or governments.
Bond credit quality/rating
A bond receives a rating to indicate its credit quality. This is determined by the bond issuer's financial ability to pay interest on time. Depending on who the bond is rated by these range from a best-in-class AAA to a C or D. These ratings are therefore also linked to the levels of risk associated with the bonds, so AAA, AA and A are classed as low risk and CCC, CC and C highest risk and D is in default.
Not permanent. Inflation is often described in this way if it's fleeting and won’t continue for a substantial period.
Duration is a way of measuring how sensitive a bond would be to any changes in underlying interest rates. For example, a bond with high duration would likely see a higher-than-average move in its price if interest rates changed.