Q&A: Columbia Threadneedle on its UK social bond fund

Room151 catches up with Simon Bond, senior portfolio manager at Columbia Threadneedle Investments, about its UK Social Bond Fund.

 

R151: In a nutshell what does the social bond fund invest in?

Simon Bond: It invests in corporate bonds that have a positive social outcome. This is defined by Big Issue Invest, our partners who have come up with eight areas they think are beneficial for society.

Those areas are: housing and property; transport, communications and infrastructure; utilities and the environment; financial inclusion; health and social care; education, learning and skills; community services and; employment and training.

We invest to predominantly benefit the UK but we do have investments abroad – such as the Intra-American Development Bank bond targeted at employment, youth and education, as well as one in sub-Saharan Africa to promote immunisation policies.

The other aspect of the fund is to target geographical areas of deprivation in the UK that are deemed to be deprived. We are trying to push money to those areas that need it the most. Demographically, we are trying to reach the young, through things like employment and the old, mainly through social housing.

However, the fund does not give a suboptimal return. We believe that if you take a financial risk and you should get a commensurate reward. It is not philanthropic or charitable. We aim to generate ‘social alpha’ – trying to optimise the social outcome without sacrificing the return.

R151: How do you measure the social impact of your investment positions?

SB: We have a team of social analysts in our responsible investments team that monitor and report on every credit we take exposure to. We also have a team of analysts looking at investment risk.

Our advisory committee monitors the investments formally once a quarter. That committee has two members of Columbia Threadneedle, an independent chairman and three members of Big Issue Invest. The role of the committee is to review, advise and challenge everything we do.

Social analysis is a layered approach. We are trying to build up the case to achieve  either a high, medium or low rating for social income.

For example, Manchester University issued a bond some time ago specifically to build new infrastructure – teaching facilities, a cancer research centre plus some student housing.

We are looking to follow the money through to the end result. Manchester is an area of high deprivation so gets that benefit.

The use of proceeds is providing new infrastructure and is also providing jobs in academia and construction which has a multiplier effect locally. It also met our criteria by targeting young people. But of course the main benefit was education.

We originally gave the bond a medium rating, but subsequently the university launched its own social initiative including an internal website with facts and figures to monitor the impact. On that basis we took the rating to high and bought more of their bonds.

R151: With many of your holdings it’s clear what the social angle is but you also hold paper from sectors such as private health (BUPA) and air travel (Manchester Airport) where the social or environmental impact is less clear cut. What are your social criteria for investment?

SB: BUPA is justified on the basis that it is providing health insurance. It also follows a mutual model – we don’t have exposure to banks with a focus on shareholders. It doesn’t provide the kind of intensity that some of our investments in hospitals do but BUPA can prove it is doing good things.

We invested in the Manchester Airports Group, which runs Manchester, Stansted and East Midlands airports. We looked at Heathrow and Gatwick but steered clear because of the controversial elements such as runway expansion, which could cause disruption to the local community.

The East Midlands and Manchester airports are providing a boost to the local economy providing high quality jobs. They also have the capacity to expand without affecting local communities.

R151: Do you find the social nature of the fund lends itself to high credit quality or vice versa?

SB: The fund is solid investment grade. We generally aim to keep investments within A- to A+ range on average, although we have one or two BB high return investments.

When we envisaged this, we thought in terms of fiduciary duty of local authorities and we didn’t want to sacrifice that return. We recognised that type of investor might be interested in providing a social impact but weren’t prepared to sacrifice return. Overall you should get the appropriate reward for the risk you are taking.

R151: Is it easy to find positions that offer the risk/return profiles you look for and which also meet your social parameters? Or in other words, what sort of capacity is there in the fund?

SB: The capacity is substantial – the fund is currently only at £90m. Looking at the total market, I analysed 1,048 investments, of which around a third conform to those areas of social income. That third is our social universe. There is no real constraint over the horizon.

R151: You have some local authority treasury money in the fund. Would you also be interested in local authority bonds, as a buyer, if they were available? And what would you want to see?

SB: We hold Community Finance Bonds from the GLA whose proceeds towards funding Crossrail. We have been very active in this area.

We very much encourage local authorities big enough to access the bond market, and would invest in the Municipal Bonds Agency which could help smaller local authorities access the market.

When I talk to local authorities it is not just about selling the fund; it’s also about their ability to access the bonds market. We want to encourage the reestablishment of the local authority bond sector.

R151: What’s your view of credit risk in the housing association sector from the big players to the small?

SB: We capped the social housing element at 25%. It was an obvious area to invest in but we didn’t want a purely social housing fund.

Two budgets ago the government changed the rules and moved the goalposts – announcing an annual reduction in rent of 1% for tenants over the next four years.

We have had to put our financial hat on and ask what the effect was. We had to reduce our exposure to social housing generally to protect the capital in the fund.

The value of social housing is no more than future discounted rental stream. We have just taken social housing down to a neutral – not underweight – it still has substantial social benefits.

We are also concerned that the financial squeeze is having an effect on social benefits and will reduce the ability of housing associations to take on social facilities such as community centres from local authorities.

R151: What’s your view of default and duration risk in general in the corporate credit sector?

SB: Defaults have been coming down since the financial crisis. This is investment grade fund and mostly the defaults are happening in higher risk areas.

However, it does have an effect on the whole market and we monitor that closely. We appreciate that this year’s deteriorating economic figures mean that the pressure to raise interest rates could slow.

However, it is as yet unclear whether the economy will recover after the Brexit referendum. If the world economy continues to be sluggish then we could see more quantitative easing including the buyback of corporate bonds. We are treading a path between those two elements.

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