Strategy profile
January 2014
UK Social Bond Strategy
Key Features
Key facts*
Diversified bond portfolio
targets particular social
outcomes and aims to
generate attractive riskadjusted returns in line
with UK corporate bonds.
Lead portfolio manager: Simon Bond
Partnership between
Big Issue Invest, a leader
and innovator in backing
social businesses, and
Threadneedle, an established
asset manager with a strong
reputation across both bonds
and social investment.
Dynamic and innovative
Social Assessment
Methodology guides
investment decisions.
Mainstream investment
strategy with daily liquidity
that can appeal to a broad
institutional and retail
investor base.
Strategy objective: The strategy aims to maximise total returns by actively investing in the fixed income securities
of organisations that are deemed to be supporting and funding socially beneficial activities and development,
primarily in the UK. A universe of socially responsible issuers is developed from the constituents of the Merrill Lynch
£ Non-Gilt Index, together with a select number of non-benchmark bonds. The strategy will then look to outperform
the total return of this appropriately weighted universe of bonds. Based on historical returns the performance of the
socially responsible universe has had a strong correlation with the returns on the Merrill Lynch £ Non-Gilt Index.
Investment universe: Focus is predominantly on investment grade securities, with a minimum of 80% in
domestically-focused bonds. The strategy can also invest in unrated bonds and smaller issues especially when
they have high social value
Social Advisory Committee: The Committee has six members comprising three representatives from Big Issue Invest,
two representatives from Threadneedle and an independent member. Its role is to advise, review and challenge the
strategy’s investments from a social performance perspective
Average credit rating: Typically single-A rated bonds
Duration: Maximum duration of + / - 2 years relative to benchmark
Liquidity: The strategy provides investors with daily liquidity
Number of holdings: We hold a diversified range of securities in the portfolio
Investment philosophy
We believe that:
nnThere is a significant investment opportunity for bonds to generate both attractive risk-adjusted financial returns and
positive social outcomes
nnBonds with attractive yield, liquidity and social characteristics can deliver a diversified portfolio with daily liquidity
nnOur partnership with Big Issue Invest validates and enhances the social outcome of the portfolio
*All information as at 31 December 2013. Where references are made to portfolio guidelines and features, these may be subject to change over time and prevailing
market conditions. Actual investment parameters will be agreed and set out in the prospectus or formal investment management agreement.
Page 1 of 4
UK Social Bond Strategy
Investment team
The UK Social Bond strategy is managed by Simon Bond, portfolio manager within Threadneedle’s
Investment Grade Credit team. Within the team, members come from diverse investment backgrounds,
have extensive experience and bring complementary strengths to managing our range of credit portfolios.
Threadneedle’s Governance and Responsible Investment (GRI) team, headed by Iain Richards, has an
established environmental, social and governance (ESG) approach that forms an integrated part of the
overall investment approach used to manage the strategy.
Big Issue Invest acts as Social Advisor to the strategy, via the Social Advisory Committee. The Committee
has six members, comprising three representatives from Big Issue Invest, two representatives from
Threadneedle and an independent member. The Committee’s role is to advise, review and challenge
the strategy’s investments from a social performance perspective.
The Committee meets quarterly and also holds an annual meeting to review the portfolio and strategy’s
investment methodology from a strategic perspective. Big Issue Invest will also report to investors
annually on the strategy’s social performance.
Figure 1: Investment team
Social Advisory Committee
Simon Bond
Portfolio Manager
27 years experience
Investment Grade Credit
Governance and Responsible Investment
David Oliphant
Head of Investment Grade Credit /
Portfolio Manager
24 years experience
Jonathan Pitkanen
Head of IG Research
Industrials & Insurance Sectors
19 years experience
Iain Richards
Head of Governance and
Responsible Investment
19 years experience
Alasdair Ross
Portfolio Manager
10 years experience
Paul Smillie
Senior Investment Analyst
Banks & Other Financials Sectors
12 years experience
Cathrine de Coninck-Smith
Sustainable and Responsible
Investment Officer
5 years experience
Tammie Chan
Portfolio Manager
9 years experience
Arabella Duckworth
Senior Investment Analyst
Telecoms, Media & Consumer Sectors
16 years experience
Fionnuala O’Grady
Governance and Responsible
Investment Analyst
2 years experience
Henry Cooke
ABS Portfolio Manager / Analyst
27 years experience
Ryan Staszewski
Senior Investment Analyst
Utilities, Oil & Gas Sectors
11 years experience
David Morgan
Senior Investment Analyst
Healthcare & Structured Sectors
11 years experience
Karan Samtani
Analyst
1 years experience
Page 2 of 4
UK Social Bond Strategy
Social Assessment Methodology
Idea generation
Big Issue Invest, working with Threadneedle’s GRI team, has developed a
Social Assessment Methodology that positively screens all bonds with a
focus on the degree to which they deliver positive social outcomes across
eight key fields of investment. This provides the framework under which
the social characteristics and intensity of an investment is assessed for
consideration alongside the yield and liquidity characteristics in building
a balanced, diversified portfolio.
Investment ideas can be sourced from the Investment Grade Credit and
GRI teams, as well as other investment teams within Threadneedle, or
from external research. Key themes and ideas are shared and developed
by the Credit team across a series of formal company-wide investment
meetings, within its own investment grade meeting cycle, as well as
informally across Threadneedle’s Fixed Income, Equity and GRI teams.
Under the methodology, potential investments are reviewed across five
dimensions to assess the overall ‘social intensity’ of qualifying bonds.
Investment process
The portfolio manager first identifies bonds, which are categorised
and weighted to form a social universe. From this investable universe
potential investments are reviewed using an innovative Social Assessment
Methodology, to evaluate the ‘social intensity’ of qualifying bonds, with
each security ranked as high, medium or low social intensity. Investments
are taken from this universe and analysed by Threadneedle’s GRI team.
The portfolio manager then takes the social aspects into account when
building a diversified and socially-balanced portfolio, which meets the
required liquidity and financial returns.
Figure 2: Investment process overview
Universe
creation
Idea generation
Research / debate
Investment Grade
Credit Team
Social
Classification
& Weightings
Macro & Themes
Governance &
Responsible
Investment Team
Social Advisory
Committee
Implementation
The aim of this part of the process is to distil the investable social
universe into a series of recommendations for credit quality, social
sector and stock selection, and liquidity, which can ultimately be used
to construct a portfolio of investments.
Research/debate
The Investment Grade Credit team evaluates bonds using Threadneedle’s
established credit research process to ensure that investment ideas meet the
necessary financial and liquidity requirements for inclusion within the portfolio.
Our credit process is built around proprietary credit grids, which we
extrapolate across our investable social universe. For each sector/rating
combination, our credit analysts use a ‘scorecard’ approach (-2 to +2) to
provide an overall rating for each bond. Convictions are driven by confidence
in the fundamental and structural views balanced against market valuations.
Risk
Management
Credit Analysis
Social Intensity
Internally-generated issuer research is the backbone of our research
process. This internal research, which includes both financial analysis
and the Social Assessment Methodology, is supplemented with research/
information from external sources, such as broker research. For example,
we use thematic and company specific broker research as an input into
both our macro and micro discussions, as well as to aid the generation of
credit-specific trade ideas.
Portfolio
Construction
Social Advisory
Committee
This provides a concise view on the attractiveness of issuers within the
context of the broader investment grade credit market and provides a
tangible link between credit research and portfolio construction. This
process is aligned with the credit analyst’s role in identifying relative
value and alpha generation, rather than pure research production.
To assess the overall social intensity of qualifying bonds we use the
Social Assessment Methodology, with the GRI team evaluating potential
investments across five dimensions. These relate to:
Universe creation
Using the constituents of the Merrill Lynch £ Non-Gilt Index (c.1,050),
together with a select number of non-benchmark bonds, the portfolio
manager filters and categorises bonds into socially responsible sectors.
These are then weighted and mapped across into the eight key social
outcome fields. These social outcome fields are: employment and training;
education, learning and skills; community services; health and social care;
financial inclusion; housing and property; transport, communications and
infrastructure; utilities and the environment. This forms a social universe
of around 350-400 securities.
nnPrimary and secondary social outcomes – the social development and benefit
a bond issuer supports and any additional fields in which benefits accrue.
nnGeographical focus – the degree to which a bond benefits a low-income
region or community where the need for growth, investment and jobs is
relatively high.
nnLevel of social development – the extent to which the bond helps to tackle
poverty and inequality or has a broader economic development impact.
nnThe nature of the financing – consideration of the bond’s purpose and
its related intensity, ranging from the funding of new social initiatives
through to on-going support and exposure to them.
nnIssuer level assessment – an assessment of the bond issuers’
ESG performance using Threadneedle’s established methodology.
Based on this assessment, each bond is ranked as high, medium or low
social intensity.
Page 3 of 4
Implementation and monitoring
The portfolio manager has ultimate responsibility for portfolio construction,
which starts with the recommendations from the research process and
Social Assessment Methodology described above. The portfolio will be
well-diversified, with a minimum of 80% in domestically-focused bonds.
Securities will predominantly be investment grade, with some unrated
bonds and smaller issues especially when they have high social value.
Particular attention is paid to managing liquidity, through holding more liquid
social investments and cash, for the purposes of servicing the daily liquidity
requirements of the portfolio.
We believe that focusing on a single standard measure of risk can lead to a
poorly constructed portfolio based on a misleading picture of the distribution
of risk. Therefore, we monitor a variety of risk measures, which include
credit beta, duration, curve and sector allocation, as well as broader
measures such as tracking error and Value-at-Risk. Significantly, market
weights (absolute and relative) and scenario analysis supplement the
metrics described above.
Our independent risk management team produces daily reports on every
portfolio we manage, using a proprietary risk system to provide comprehensive
risk analytics. We use these to understand and assess where we are taking
risks, ensuring their direction and extent is appropriate.
The Social Advisory Committee plays a key role in monitoring the
implementation of the portfolio and meets formally each quarter, as well
as on an ad hoc basis when appropriate. Its remit includes the application
of the Social Assessment Methodology across the portfolio; advising
the portfolio manager on the social intensity of existing and potential
investments; and challenging, where appropriate, the social analysis
and social footprint of the strategy’s portfolio.
Important information: For use by institutional clients, other investment professionals and consultants only (not to be passed on to any third party). Past performance is not a guide to
future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not
get back the amount invested. The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted
upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from
external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued
by Threadneedle Asset Management Limited. Registered in England and Wales, No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the UK by the Financial
Conduct Authority. Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies.
threadneedle.com
Issued 12.13 | Valid to 04.14 | T15437
Page 4 of 4