Perpetual launches new Ethical SRI Credit Fund for retail market

Perpetual has launched the Perpetual Ethical SRI Credit Fund that applies ethical and SRI screens to a portfolio of diversified floating rate credit.

Vivek Prabhu, portfolio manager and head of fixed income, Perpetual

The fund is based on Perpetual’s flagship Diversified Income Fund, launched in 2005, combined with the ethical and SRI screens developed by Perpetual’s responsible investment team.

“It is a strategy that, for a very long time, has delivered through various market cycles and resonated with investors,” says Vivek Prabhu, portfolio manager and head of fixed income. “With [the Income Strategy – to which Diversified Income Fund belongs], we manage $2.2 billion in assets. That strategy has also seen rapid growth – in December 2012, the strategy had over $500 million, and by the end of December 2017, almost quadrupled to over $2 billion. It has resonated with investors, particularly in an environment of lower interest rates.”

The new fund is an extension of that strategy.

“We have taken that strategy and also applied our SRI and ethical filters to meet investor demand for a fund that also look at ethical and social responsibility,” Vivek says. “The ethical and SRI process has had a long history here at Perpetual – we have an SRI/ethical equities fund which has been running for almost a decade as well, and that strategy has attracted over $1 billion in assets under management. So you have two successful strategies with a long history and proven track record, launching something for fixed investors. There is a dearth of fixed income offerings in the ethical/SRI space. From our research, most tend to be fixed rate bond funds, whereas this is a floating rate credit fund.”

The fund must have a minimum 75% invested in predominantly investment grade ‘core’ credit assets, with up to a maximum 25% investment to a ‘plus’ allocation of high yield and unrated securities. This “barbell strategy” seeks to preserve the defensive characteristics of fixed income, while offering the potential for strong cash-plus returns, Perpetual said.

The fund takes the investible security universe of the Diversified Income Fund, and screens out the securities that don’t meet the ethical and SRI screens, Vivek says.

“The ethical/SRI screens are managed independently by Richard Morris, our manager of responsible investment,” he says. “The ethical screen considers the business the company is in – is the business earning 5% or more of revenue from things from alcohol, tobacco, gambling, nuclear armaments genetic engineering, upstream fossil fuels, pornography. The SRI screen considers how those companies conduct their business, and that’s the ESG side of things. The two screens eliminate around 20-25% of the diversified fund, but the universe is still large enough for us to populate a diversified portfolio – that’s not going to be a constraint.”

Integrating ESG considerations to a fixed income portfolio can provide protection to the downside risks unique to the asset class, Vivek adds.

“When you’re investing in credit, you have asymmetric risk profile – it’s a binary outcome,  either the issuer pays the bond out or it defaults,” The ethical and SRI screens out some of the biggest risks to fixed income, which works well in a credit portfolio.”

The fund is designed to suit investors that are seeking an investment with income, and is poised “to benefit from rising interest rates as the assets are not locked into a fixed interest rate,” Prahbu added.