Sustainable Bonds in the Q1 Sell-Off

How do sustainable bond funds hold up against their peers during a bear market? We've crunched the numbers to find out

Annalisa Esposito 23 April, 2020 | 1:55PM
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A raft of funds dipped sharply in the first quarter of the year amid turmoil in global markets caused by concerns about the economic fallout of the coronavirus outbreak. But what about sustainable bond funds? For many, this was the first time their resilience was tested in unfavourable bear market conditions.

We have analysed the performance of 75 sustainable bond funds in the first three months of the year relative to their Morningstar Category Average, which includes both sustainable and non-sustainable funds. 

Top Performing Sustainable Bond Funds

Funds in the high yield sector dominate the list of top performers, along with funds that have a flexible remit or focus on emerging markets.  

With a recession likely, many investors fear a growing number of companies could struggle to repay the interest on their debt as business conditions become tougher and sales decline. Against that backdrop, the price of bonds can plummet. But that hasn’t affected the performance of Candriam SRI Bond Global High Yield, which leads the pack.

The fund was up 2.2% in the first quarter of the year, some 8.92 percentage points ahead of its Morningstar Category. It suggests that even when investing in the riskier high yield space, choosing the debt of more sustainable companies could mean a lower risk of default and more resilient profits. 

Its top holdings include bonds issued by telecoms giants Vodafone, Orange and Nexstar, which yield 3.1%, 4%, and 5.62% respectively. Another large position is Iqvia, which provides healthcare clients with data to find better solutions for patients; its bond yields 3.25%. 

Candriam's Euro High Yield Bond fund, rated Silver by Morningstar, also features in the in the table, and also has a number of telecoms names among its top holdings including Spanish Telefonica Europe, Telecom Italia and Vodafone. Morningstar analyst Mara Dobrescu rates the fund's "experienced manager" and "thorough approach". 

Fund Q1 Return (%) vs Category Ave (%) Morningstar Category
Candriam SRI Bd Glbl Hi Yield  2.19 8.92 Global High Yield Bond - EUR Hdgd
LGT Sust Bds Fd EM Def'sive  1.04 8.41 Global Emerging Markets Bond
Candriam Bonds Glbl Hi Yield 2.67 7.18 Global High Yield Bond - EUR Hdgd
Fidelity Sustainble Strat Bond 2.29 6.11 Global Flexible Bond
JPM Glbl Bond Opp Sust'ble 0.99 5.26 Global Flexible Bond - USD Hedged
LGT Sustainable Bond Global  1.03 5.23 Global Flexible Bond
BNY Mellon Sust Glbl Dynamic -0.50 5.11 Global Flexible Bond - EUR Hedged
Candriam Bonds Euro Hi Yield 2.77 5.07 EUR High Yield Bond
Macquarie Sust'ble EM LC Bds 0.53 4.94 Global Em Mkts Bond - Local Ccy
Candriam SRI Bond Em Mkts 0.99 4.62 Global Emerging Markets Bond

With an emerging markets focus, the LGT Sustainable Bond Fund Emerging Market Defensive fund ranks second. Its portfolio is largely split between corporate bonds (38%) and government bonds (25.4%), with investments spanning Chile, Mexico and Poland among other countries. The fund has delivered an annualised return of 5.4% over five years. 

Four flexible bonds funds feature in the top performers list. These funds are often a popular choice with investors as their portfolios can shift to the across different areas of fixed income, depending on where the manager thinks the best opportunities are. 

One such fund is four-star rated Fidelity Sustainable Strategic Bond, which was up 2.3% in the first quarter, 6.1 percentage points ahead of its Morningstar Category average. The fund adopts a best-in-class approach and scouts for companies with sustainable characteristics, which include but are not limited to effective governance and superior management of environmental and social issues. Its top holdings include 10-year Japanese government bonds futures, gold and interest rate swaps, which have proved perfect shields in the current downturn.  

Worst Performing Sustainable Bond Funds

At the other end of the spectrum, at least 10 sustainable bond funds underperformed their Morningstar Category Average, the worst by 5.68 percentage points.

Three-star rated EdenTree Amity Sterling Bond tops the list of underperformers, some 5.7 percentage points behind its Morningstar Category Average, Diversified Bonds. The fund invests mainly in UK corporate bonds and UK gilts, as well as more niche types of fixed interest securities. It aims it to find high quality bonds to provide an attractive level of income regardless of the UK economic backdrop; its 12-month yield is similar to that of the FTSE at around 4%.

Fund Q1 Return (%) vs Category Ave (%) Morningstar Category
       
EdenTree Amity Sterling Bond 3.39 -5.68 GBP Diversified Bond
Hermes Multi-Strategy Credit 5.32 -5.30 Global Flexible Bond
Hermes Gbl High Yield Credit 4.67 -3.72 Global High Yield Bond - EUR Hdgd
Liontrust SF Corporate Bond 5.19 -3.37 GBP Corporate Bond
LGT S'ble Short Duration Corp 0.76 -3.04 Global Bond - USD Hedged
Muzinich Sustainable Credit 0.74 -2.83 EUR Flexible Bond
Threadneedle UK Social Bond 2.24 -2.79 GBP Diversified Bond
Allianz Euro Credit SRI 2.65 -2.66 EUR Corporate Bond
Allianz Green Bond 0.88 -2.15 Global Bond - EUR Hedged

This article has been updated to remove the Candriam Bonds Emerging Markets fund, which does not have a sustainable remit

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Annalisa Esposito  is a data journalist for Morningstar.co.uk