How bond funds can let you invest with less volatility

Looking for less volatility in our investment or super portfolio? Concerned about investing your hard-earned savings in activities and industries that don't fit with your ethics and values?

The Altius Sustainable Bond may meet your requirements.

What is it?

This bond is a unit in the Altius Sustainable Bond Fund. Bonds are a form of debt that provides a steady stream of income - when they work properly. The fund is managed by Australian Unity Funds Management, which has a number of other investment funds in its stable.

Australian Unity says Altius Sustainable invests only in companies that conduct their business and apply their capital responsibly, giving full consideration to a range of environmental, social and governance issues.

Investor applications into the fund are pooled to purchase a portfolio of fixed-interest securities, derivatives and cash, including government, corporate, bank and other bonds, debentures, notes and other debt-related securities. That pool is then divided into units, which are given a price each business day.

The current holdings, worth $34 million, include bonds issued by the Australian government, the states of Victoria and NSW and Westpac Banking Corp.

Altius Sustainable has several no-go areas. Its portfolio automatically excludes companies if their primary business involves, or becomes involved in, armaments, uranium, gambling, tobacco, pornography, alcohol or thermal coal.

How do I invest?

The minimum initial investment is $5000, with additional investments of $1000. There is also a regular savings plan that requires an investment of $100 a month. The bonds can be bought directly or through a broker or financial adviser.

What return can I expect?

The fund was launched in November 2014, so it is too early to determine how it is faring. Australian Unity says the objective is to outperform the Bloomberg AusBond Composite Index by 1% a year or the Reserve Bank (RBA) cash rate, whichever is the greater, through a cycle, before fees are taken into account. Currently the cash rate is 2.25%. The RBA cycle generally lasts between two and three years.

As a guide, the Altius Bond Fund, which has the same investment process but is not screened for sustainability, has returned 3.22% above the cash rate since its inception in October 2011 but trails the bond index by 0.19%. So the fund has done better than term deposits but not as well as a regular bond fund.

What fees do I pay?

The fee is 0.5681%pa of the net asset value of the fund. I other words, for every $50,000 an investor has in the fund the fees will be $284.05pa. There are no establishment, contribution, withdrawal or exit fees.

Other fees such as an advice fee may apply if the fund is recommended by a financial adviser.

The manager advises that the bonds be held for at least three years. They are valued daily so investors know exactly where they stand. The investment risk attached to the bonds is described as being low to medium with a relatively high level of capital preservation.

Australian Unity says the bonds are purchased for the fund by the Altius Asset Management team of portfolio managers.

They buy and sell bonds in the portfolio via a preferred panel of brokers that include major Australian and international investment banks. In ranking security issuers, the fund considers factors including environmental effects of the issuer, social consequences of their business and the quality of governance.

Pros

• Will not put money into areas of economic activity that many investors want to avoid.
• Stability.
• Low management fees.
• A low-risk investment.

Cons

• Low risk also means low returns. Don't expect fabulous payouts.
• The fund has only recently started up and does not have an earnings track record.

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