Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is David Katimbo-Mugwanya. He is Manager of the EdenTree Amity Sterling Bond Fund. Hello.
David Katimbo-Mugwanya: Hello, Holly.
Black: So, do you want to tell us what the fund does?
Katimbo-Mugwanya: The primary objective of the Sterling Bond Fund is to achieve an attractive level of income, all while integrating EdenTree's award-winning Amity investment process.
Black: So, you had to slip in the award-winning and I know it's there. But Amity basically is an ethical parameter, isn't it?
Katimbo-Mugwanya: It is ethical and what we mean by ethical is responsible and sustainable. So, typically, you have responsible screening criteria and then you also have sustainable criteria in there as well. So, if you think positive and negative, we're trying to maximize the impact that we're generating by investing in companies that are responsible and sustainable.
Black: So, this is quite a buzzword at the moment. But you guys have been doing this for a while.
Katimbo-Mugwanya: We have been. We are pioneers in this space having launched one of the first retail Oeic ethical funds in 1988, that is, our CEO Sue Round, who did that and having launched other funds ever since. So, the Sterling Bond Fund has been going since about 2008. I joined in 2015 and over the last four years have helped manage on a responsible sustainable basis as well.
Black: So, what are some of the most important things you're looking for in your investments?
Katimbo-Mugwanya: We are looking for profit with principles as a start. So, it doesn't make sense for it just to be about the principles, just sort of have this nice, sort of, ethical criteria. You need to have the income that goes along with it, specifically for the Sterling Bond Fund. And so, we're looking for companies that are sustainable, that have robust earnings, that are basically leveraged quite well, sustainable leverage is quite important for us, and robust cash flows as well to go along with that. And so, those key criteria along with them having passed Amity screening is how we sort of narrow down our universe and get the most impact for what we invest.
Black: So, does that tend to lead you to certain sectors? Or do you find those companies across a broad spread of areas?
Katimbo-Mugwanya: I'd say, it leads us away from certain sectors. So, you have your typical sin stocks out, so alcohol, tobacco, gambling, weapons production, animal testing for cosmetic purposes as well folds out. What you then find is, it levels the rest. And so, some actually fail on the positive screens that we have, such as environmental management, where they have a poor track record of managing environmental risks, they can actually be barred on that basis. But I'd say on the whole, it's a case-by-case basis by which you look at the companies and the bonds that we invest in.
Black: So, what is it like managing a bond fund at the moment and finding that decent level of income?
Katimbo-Mugwanya: It is a challenge as you, sort of, rightly pointed out. The decent level of income when yields are rock bottom, credit spreads are rock bottom, it is quite difficult. However, if you have the flexibility like we have, you're able to find pockets of yield. And so, I would say, it's a challenge, but one we're happy to sort of take on and have produced consistent income in the fund. And so, our track record is always quite visible in that regard.
Black: So, do you have any concerns for the year ahead?
Katimbo-Mugwanya: For the year ahead, I'd say fiscal policy is not necessarily being as talked about as it should be. After a long bull run in credit, especially credit spreads have been tightened to near all-time lows, central banks having stimulated the market quite aggressively, the risk is that market participants aren't factoring as much fiscal stimulus as they might be coming ahead. Monetary policy I think has done as much as it can. The time for the baton to be passed on to fiscal policy I think is quite soon. And if anything is to be taken from December's general election, there is some fiscal spending coming. Typically, you have yields tick higher when more borrow income is in play. And looking ahead as well in the US, you have an election year, which also coincides with some fiscal pledges as well. You might have some fiscal policy in Germany as well. They've so far been quite resistant towards fiscal policy. But if the economy continues to deteriorate, you might have fiscal policy turned up there. And so, yields, the risk is that they'll rise. Credit spreads as well being so low, are probably due a bounce at some point. And so, we'd like to bias our portfolio towards high quality. It has the highest investment grade proportion that it's had through the cycle at 70%. And we like sort of picking up those names that are high quality, where you're getting at least a compensation and income in a low yielding environment.
Black: Well, thank you so much for your time.
Katimbo-Mugwanya: Thank you.
Black: And thanks for joining us.
