Keep in mind that our commentary on the fund, as well as its past performance, is not a guarantee of what will happen in the future. The value of investments, unlike cash, will go up and down over time. Depending on the value of your investments when you sell, you may not get back as much as you invested.

We’ve tried to explain any technical terms where possible. For further explanation, view our A– Z of Impact Investing (PDF download).

How the fund works

The Triodos Sterling Bond Impact Fund aims to generate a positive impact on society and the environment, whilst also generating a stable income, by investing in a portfolio of bonds.

Bonds are investments that represent a loan made that is paid back to the investor. They pay a fixed-rate of interest on the loan over a set period, meaning the investor gets fixed income. This fund invests in corporate, green and social bonds, and bonds issued by the UK government known as gilts.

Current economic outlook

High inflation, rising interest rates, and economic uncertainty has continued to shake the bond market, and this has had a knock-on impact on the fund.

Rising inflation (that is, the increasing cost of goods and services) in the US and eurozone has negatively impacted the fund. That’s because, as inflation rises, the fixed interest rate paid on bonds is worth less. For example, if a bond pays a 4% yield and inflation is 3%, the bond's real rate of return is 1%. However, inflation has started to come down more recently.

We think that inflation is likely to remain a persistent issue, as employees demand higher wages to combat higher prices, which in turn put pressure on businesses to raise their prices further.

Central banks raised interest rates in September, and more hikes are expected by the market. As interest rates rise, the fixed rate of interest offered by a bond is less competitive. This means the price of the bonds decreases as the returns they offer look less attractive relative to other types of assets like cash savings.

We think that markets have priced in too much economic tightening. As the UK economy has already entered recessionary territory, we expect that central banks will increasingly focus on growth concerns.

Both US and eurozone 10-year government bond yields rose sharply during the last quarter. A yield is a bond’s measure of real return, and is calculated using the bond’s current market price and the amount of income it produces. There’s an inverse relationship between the price and yield of a bond. As supply increases and bond prices go down, bond yields rise and vice versa. 

We believe this increase in yields was fuelled by the prospect of more aggressive and prolonged central bank tightening. Towards the end of the quarter, new UK fiscal plans caused even more market turmoil, with yields rising sharply across advanced economies until the Bank of England intervened.

The fiscal plans of the UK government have created a volatile environment, driven by great political and economic uncertainties. We think this demands a prudent investment approach and a maintain our neutral stance on interest rates within the portfolio.

How the fund has performed

This fund compares its returns against bond and gilt indices as movements on these markets are likely to affect the fund and could explain some of its performance. We’ll refer to this as its benchmark.

It performed slightly worse compared to its benchmark in the third quarter. This underperformance mostly came from holding bonds with a shorter maturity, which is the area of the bond market that has been impacted most by rising interest rates.

Bond selection was slightly positive, driven by our preference for bonds with higher credit quality. Treasuries (US government debt) were the best performing category while corporate bonds (bonds issued by companies rather than governments) performed worst. Asset allocation effect was neutral even though the fund has a lower amount invested in UK government bonds compared to the benchmark.

Return

As of 30/09/22

Please remember that past performance isn't a guide to future returns.

Our message to investors

It’s important to remember the bigger picture, and the long-term goal. High inflation and rising interest rates create a challenging environment for bond investors. But bonds could enjoy a resurgence as and when inflation starts to recede and interest rates fall. While it’s difficult to say when this might happen, as we’ve seen in recent months things can change quickly.

It’s important to keep in mind the long-term goals of our funds whilst looking at the short-term changes in value. This fund aim is founded on the belief that sustainable investing can bring financial returns in the long run. Although, there’s no guarantees.

In the end, it’s up to our customers to make their own investment decisions. But it’s important not to make your investment decisions on performance alone. Think about whether aligns with your investment goals, financial situation and risk tolerance – and, of course, your principles.