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 and included expandable segments for more information. You may also want to view our A–Z of Impact Investing (PDF download).

Investment approach

The Triodos Sterling Bond Impact Fund aims to generate positive impact and a stable income from a portfolio of bonds such as corporate, green and social bonds, and bonds issued by the UK government known as gilts. We select organisations for their contribution to our sustainable transition themes. In an integrated financial and sustainability analysis we identify the impact of material environment, social and governance (ESG) issues on a company's ability to create value.

Current outlook

Government bond yields rose during the quarter, fuelled by the prospect of more aggressive and prolonged increases to central bank interest rates. 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. Rising yields usually means that the capital value of the bonds is falling.

In the first two months of the quarter, yields steadily fell as investors anticipated that central banks would put a pause on rate hikes in early 2023. However, cautious statements released by central banks suggested that interest rates increases weren’t off the agenda, and so yields started to rise.

Headline inflation is the key factor driving central bank policy on interest rates. We expect US inflation to fall faster than UK and eurozone inflation, because in the first half of 2023 European inflation will still be affected by the Russian gas supply cuts. US inflation will in the meantime fully benefit from easing global supply chain pressures and slowing global demand. We expect eurozone and UK inflation to catch up in the second half of the year, but we still expect US, UK and eurozone inflation to be materially above the 2% central bank targets by end-2023, with the US at 3.4%, eurozone at 3.8% and the UK at 5.2%.

It has been a volatile few months in the UK bond market with rapid changes in political leadership. Liz Truss’s plans to support economic growth caused a lot of political and macroeconomic uncertainty. During the quarter, the Bank of England (BoE) raised the interest rate by 0.75% in November and again by 0.50% in December. The policy rate now stands at 3.50%.

More hikes are expected by the market, but we think they have priced in too many. As the UK economy is likely to enter recessionary territory, we expect that the BoE will increasingly focus on growth concerns. We expect longer-term bond yields to start falling (and prices rise) as we approach the interest rate peak.

Overall, the threat of inflation remaining higher than predicted, forcing the BoE to be more aggressive with increasing interest rates further, still makes us cautious. This volatile environment, driven by great political and macro-economic uncertainties, demands a prudent approach regarding our portfolio positioning. In the short-term we therefore maintain a neutral stance for bond valuations.

Performance review

The fund increased by 4.0% in the fourth quarter, marginally underperforming the benchmark. This underperformance of the fund’s investments compared to the benchmark is driven partly by our preference for higher credit quality of our positions. Corporate bonds were the best performing category while gilts performed worst. The effect of asset allocation was positive due to our underweight position in gilts.

Return

As of 31/12/22

Calendar year return

Please remember that past performance isn't a guide to future returns. Full year performance figures prior to 2021 are not available as the fund launched in October 2020.