Speaker 0:
here to discuss the Eden Tree fixed income approach. In the studio with me today is David Kabo Magu, head of fixed income, and Michael Sheehan, co fund manager. Well, David, firstly, welcome to you. Could you give us a sense of how the fixed income range works and and what makes it

Speaker 1:
unique? Thank you, Rory. Um, the fixed income fund range at Eden Tree consists of three funds. So the Eden Tree response were unsustainable. Short dated bond fund

Speaker 1:
responsible Sustainable Sterling Bond Fund and the Entry Global um, Impact Bond fund. As you can tell from the titles, these are responsible and sustainable funds, and the impact fund as well has its own objectives there. But in so far as how they operate, the short dated bond fund is a very high quality lower duration fund.

Speaker 1:
The Stalin Bond Fund is more strap bond oriented, and so it can invest in guilds all the way to corporate bonds into subordinated debt as well. And the Global Impact Bond fund is a mixture of both those. But I'd say focusing more on the impact, um, aspect and 80% threshold there towards impact instruments must be, um, help

Speaker 1:
And so that's a broad summary of the three funds that we currently run.

Speaker 0:
Michael Davids touched on all three there. But is there anything else you could tell us? Some little intricacies of those strategies? Yeah, So I just following on from David, I suppose, within these these funds and these frameworks and how we manage the portfolios. As David mentioned, the short A bond fund is capital preservation, higher quality, and the Sterling Bond Fund is a strategic income fund.

Speaker 0:
But we've maintained a high quality bias and a shorter duration bias throughout these portfolios, including that of the Global Impact Bond Fund and staying with the Global Impact Bond Fund. When I was reading through the material,

Speaker 0:
there was a comment that's like use of proceeds. Could you go into that in a bit more detail? Yes, Use of

Speaker 1:
proceeds is a description of the bonds that make up the bulk of the fund. And so these are green social sustainable bonds and whereby the bonds have to have a framework by which they're deploying the proceeds. And so, um, for green bonds, for instance, it has to be an environmental impact

Speaker 1:
that, um, the proceeds are going towards, and so that has to be right at the forefront from when they're issued. The bonds themselves have to ring fence the proceeds as well. IE. When they're issued, they can't be used for general corporate purposes. They have to go to those impactful projects. They are also reported upon as well for impact and their track as well in their deployment. And it's a very key distinction there in that, um the impact has to be

Speaker 1:
and also, um, you know, reported upon with time

Speaker 0:
like we've we've jumped straight in and we haven't even discussed the wider picture. So let's zoom out a little bit. What's going on in bond markets? And how are you navigating any volatility at the moment? Yeah, I mean, it's a great question. It's It's been a I'd say a

Speaker 0:
a couple of weeks, Um, but really, that's just a microcosm of what we've seen over the past two or three years. Now it's It's been a difficult environment for for investors and and managers such as ourselves. I think for us we've stuck to our process and we've maintained discipline. As I mentioned earlier, we we seek to look for opportunities at the higher quality end of the spectrum.

Speaker 0:
And we've maintained that short duration by really trying to minimise the risks that investors are facing in these volatile times.

Speaker 0:
Let's have a look about interest rates. We probably hit peak rates in in the UK and in Europe. Maybe not in the US. We could see one more, given that it takes a lot of time for these legs to work through the system. Do you think now is the right time to stop those

Speaker 1:
rates? I think that's a crystal type of question. But, um, I'll try my best to answer it. I mean, in so far as where we are in the cycle. We're definitely at the tail end of that hiking cycle. And bear in mind, the policy rate is one tool that the central bankers are using

Speaker 1:
to tighten monetary policy. QT or quantitative typing is very much still in play. Um, how that leaves us for the moment. I think it's dawning on market participants that higher for longer means rate cuts aren't coming as soon as expected, and so maybe at the start of this year, where, um, more rate cuts would have been enacted by now, Um, that's been pushed further out. And so what that means also is that you're still getting these rates being quite elevated. And

Speaker 1:
you could say, also, the longer end of the curve is pricing much more of that upside inflation risk now than you had, um, earlier in the year when it was pretty much the entire curve, um, moving in sync. And so that really sits very well with our short dated bias We've gained from that last year, Um, quite handsomely versus benchmark and versus our peer group.

Speaker 1:
And we continue to exploit these advantages of reinvestment because you're reinvesting in a positive environment, doubling the distribution yield. And, of course, that's increasing with time, Um, as well, Michael,

Speaker 0:
building on that inflation is still too high. Does that make you quite cautious when you plan outlooks and

Speaker 0:
the crystal ball? Yeah. I mean, absolutely. It's, uh, we if we think back a few years ago, when we've had these these volatile periods of weak economic growth and and softer data coming through, we've seen central banks come to the rescue. We've seen QE with inflation stubborn and and struggling to abate and it's difficult to see a scenario where we do see central banks easing and and monetary policy becoming easier for for market participants. And

Speaker 0:
so therefore, therefore, we think that investors need to be selective and and again, it's all about discipline. There will be opportunities in the market, and it's just maintaining that discipline and and choosing the right opportunity. And that's always an interesting part of this whole market. What's going on in the credit space at the moment? Um,

Speaker 1:
in the credit space, I'd say it's been a little benign on the risk appetite or the risk environment itself. And so, over the last 9 to 12 months, you've seen credit space actually tighten,

Speaker 1:
which to us doesn't sit too well for an economy that's just about to see higher defaults. Anecdotally, you're seeing defaults come through, whether it's distressed sales. But you've not really seen any major bankruptcies just yet, and so credit has been doing well in that kind of set up. You, of course, get that higher carry as well in, um, credit versus guilts. And so I wouldn't necessarily be too comfortable about the outlook given the risk of rising spreads. Hence our position

Speaker 1:
in the higher quality end of the spectrum, but it's one that you know, coming into sort of a period of potential economic weakness. We're very cognizant on and really focusing on that higher quality segment, I suppose, worth stressing as well. Leverage, of course, given where interest rates are is going to be a very important feature

Speaker 1:
for the next year, as well as the refinancing environment in which you find ourselves. And you could say high yield might struggle in that setting. And the over levered um segments of the market as well might just struggle to get their bonds refinanced.

Speaker 0:
So Michael bring it back to sustainable investing. Have you seen any trends recently that you're quite excited about? Absolutely. We've seen a resurgence in the issuance of labelled securities this year, the the first six months of the year we saw a record issuance for green bonds, and

Speaker 0:
and actually we're We're encouraged by the additional scrutiny that sustainability linked bonds are facing. Now. Investors are really trying to get behind what is behind the label, not not just simply taking a labelled bond at face value.

Speaker 0:
Michael touched on it there, but in the literature as well. It says the issue are as important as the issue. Is that a real key component to

Speaker 1:
the whole approach. It's a very key component to our global impact bond framework and for the response by sustainable framework. And the reason being is if you focus on the use of proceeds that I described earlier, um, you might find yourself

Speaker 1:
maybe biassing to some practises that are not so responsible. And so by screening the issuer themselves and making sure they are responsible first before going into the use of proceeds Bond, you make sure that you're not working against yourself, so to speak, in gaining a very nice positive outcome on one hand,

Speaker 1:
but still being to the detriment of, um, certain key criteria that you have. That may be exclusionary, and I think if you look at, let's say, oil and gas as a sector, um, it's still very much reliant on exploration of oil and gas, and so it's quite hard for us to justify investing in any transition type instrument from that sector, even though the proceeds might go to very impactful projects. Um, the company itself, the underlying issue of who you are

Speaker 1:
facing is still having a detrimental impact on the environment. And so hence why we've always focused on the issue. And that is a key determinant in determining who makes it into our portfolios.

Speaker 0:
And have you found this year particularly tricky, with the popularity of ESG going down slightly especially compared to say, a couple of years ago has been a tough environment. Yes and no. What we found with speaking with clients is the main priority is the economy and inflation. So

Speaker 0:
possibly, you know, at the forefront of their minds that that is the main priority. But that's similar to ourselves. We we're managing money in a responsible and sustainable manner. But it is important for us that the most important to deliver strong returns for our clients the with the clients that we speak to. There's still an enthusiasm for ESG and it and it really is just about seeing a credible solution. And there's a lot of

Speaker 0:
arguably green washing in the market now, and they just want to see a credible company with solutions and products.

Speaker 0:
Staying with green washing. It's people are comfortable now with what it is, but how do you make sure that that doesn't philtre in into your

Speaker 1:
process. I think the process that we have is fairly robust, having developed it over the years. I mean, entry has been in this space for 30 years. So by no means, um, are we new to this sort of screening process or incorporating these risks from a material standpoint? Um, but coming back to that point, I mentioned earlier about screening the issue. That's a very

Speaker 1:
a key tool in enabling us to avoid things like green washing. So if you're ensuring the issue is responsible, it's very likely you're not going to get surprises down the line even though you had invested in a green bond, Um, for instance. But you know, we're constantly monitoring the companies that we invest in. We're constantly engaging with them. We're looking at controversy scores. We are, you know, gauging direction of travel. And so where we feel

Speaker 1:
we're not satisfied with how the company is progressing on these particular ESG risks and by all means, a change in time. We can engage with the company and even divest for that matter. And so it's a very important live discussion and live consideration for us. But it starts back to how you look at the particular um issue and, you know, looking at it holistically, we find it better and helps you avoid green

Speaker 0:
Ocean. So, uh, and and breaking down the port.

Speaker 0:
So what's the the split between green, social, sustainable and non labelled? How does that work in the portfolio? Yeah, so the the the majority of the portfolio is green bonds. It's it's a you know, it represents how the market the wider market for labelled bonds is. And then there is a smaller proportion of social bonds, sustainability, bonds and and what we deem as non labelled impact bonds, which is a small part of the market, where with our proprietary impact assessment,

Speaker 0:
we look at the impact credentials of the bond, and even if it does not adopt the use of proceed framework, we see it as a viable impact product. And there was a phrase in there that I want to ask you about what you hear. What's beyond business as usual. Beyond business as usual and particularly within the within green bonds is is really how our framework, our impact framework, is applied to securities. We're not looking for companies that are simply issuing green bonds for the sake of issuing green bonds because they

Speaker 0:
save on their interest costs we're looking for. If you look at the three traditional um, pillars of impact investing, which are intentionality, contribution and measurement, it's those first two intentionality. Are they really setting out to develop a product or a solution that that can really change? You know, the environment or society and the contribution, Really, we one of the factors there we look at, how underserved of the community, Where is that product going? Is it going to the people that really need it? And and this is

Speaker 0:
within our impact assessment. David Engagement is a big area, especially in this world. It comes with a lot of responsibility. But how do you engage as bondholders?

Speaker 1:
I suppose, as a house where asset class agnostic and that's to mean whether we own the shares or whether we own the bonds. It doesn't matter to us. We are still investors. We engage with the companies, and so in screening and in looking at issues that's always been at the forefront, um, we work alongside a very experienced, responsible investment team. Um, they help us engage,

Speaker 1:
and we sit alongside those engagements as well. But in this engagement that we are conducting, we are constantly reviewing these material ESG risks and making sure the company management is on top of them and embedding them as best as they can. And so to us, whether it's the equity or the shares. In fact, a very strong criticism usually is that because bonds aren't able to vote, they don't tend to get involved in engagement. We actually have been engaging for quite some time

Speaker 1:
and, um, impactful engagement as well. I mean, a very good example of engagement examples that we have is the water sector in the UK. Um, start engaging with them well before the media campaign kicked off, and so sort of first to that, um, challenge. But, um, there's been very good, constructive discussions that we've had there both with the companies and the regulator as well, in helping shape how

Speaker 1:
they look at river pollution, how they are addressing it within their strategies, what sort of infrastructure investment they have. And so that's a very I think, a live example where predominantly bond investors are the public investors in some of these entities and where we have actually exercised our engagement power to drive a positive

Speaker 0:
outcome. And David, let's finish here for people watching this video. Why you?

Speaker 1:
I mean, today we focused on the fixed income fund range, the short dated Sterling and Global Impact bond funds. But, you know, we've been in space for three decades, Um, have launched responsible strategies for a number of years, and we are specialists in this space. That is to say, we have been at it for some time. Our processes are quite robust, and there's integrity in the products themselves. And so for us, you know, looking ahead, um, whilst the scrutiny is coming either from regulation or in

Speaker 1:
investors themselves as ESG goes mainstream, it's very important that, you know, you're with a trusted partner that has been doing this for very long time. I mean, as a firm as well. We are owned by the benefit group, which distributes all its profits to good causes. And so there's a very positive, um, impact at the end of the investment as well. So investing with us is ultimately, um, giving back in some way, shape or form

Speaker 0:
as well. That's an important place to live. David. Michael, thank you very much. Thank you.

Speaker 0:
Right