We asked Wellington Management's Campe Goodman about the purpose of his new impact bond fund and where this new market is heading
What is the purpose of the Wellington Global Impact Bond Fund?
In short, two objectives: strong financial returns and addressing some of the world's social and environmental challenges through impact investments.
For us, those challenges fall into three major groups: life essentials (e.g., affordable housing); human empowerment (e.g., improving education) and protection and improvement of the environment (e.g., recycling and renewable resources).
How do you select investments for the fund?
It's a two-step process. We identify the issuers and create our universe of impact issuers - setting a high bar. Then from that universe, we construct the portfolio that we think is going to have the risk/return characteristics we are looking for.
Can you give examples of your impact investing in the UK?
One of the big problems in the UK and other developed countries is insufficient affordable housing. UK housing associations are a great way to address that so we've been buying bonds issued by some of them. Likewise, we invested in a quasi-governmental transportation authority in the UK that issued a green bond to make improvements to train capacity in a major urban centre, and to expand hybrid buses and create more cycle lanes.
What key performance indicators (KPIs) do you use to measure impact?
One of the most straightforward is metric tons of CO2 and methane emissions that have been avoided. That's generally a good KPI for clean energy. Other KPIs include units of affordable housing created or, for hospitals, dollars of charity care provided, or the number of people provided with clean water.
Is there any reason to think impact investing is risky this late in the economic cycle?
I'd say there isn't any skew in the universe of impact bonds that makes it either riskier or less risky than the whole universe of bonds. There's a range of high-quality impact bonds available - including quality sovereigns and multinationals - that provide really great protection in a negative cycle environment. Then there are more risky investments that are great to have in an early or mid-cycle environment. So we feel we're able to position the portfolio right now as defensively or as aggressively as we want to.
How will impact bond investing evolve over the next 3-5 years?
First, we're seeing more issuers, and we're also seeing more issuers figuring out how to package some of their activities as impact investments. So the supply of investment opportunities is growing, though I'd love to see it grow even faster.
Second, demand is growing. I've been doing fixed income investing for 20 years and, even five years ago, nobody was talking about impact bonds. Absolutely nobody. The growth of interest is amazing.
But because global needs are so great, the big challenge is to get even more investors coming into the space. Hopefully, if people see strong returns, they'll gain confidence that they can meet both their investment and their impact objectives.
Third, standards and KPI measurement will evolve over time. We've got lots of good ideas but other people will have good ideas as well. We want to be sure our reporting is best in class. One thing that won't change is our twin goal: generating strong investment returns and having a positive social and environmental impact.
Risks
CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time.
CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance.
CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds.
CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility.
INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds.
BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs.
EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.
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