The fund will invest in global bonds or the bonds of issuers that support the transition towards improved ocean and freshwater health.
Fidelity International has launched the Fidelity Funds 2 – Blue Transition Bond Fund, which the company claims is the first blue transition fixed income fund to launch globally, based on its own market analysis.
The open-ended fund, which is managed by portfolio managers Kris Atkinson and Shamil Gohil, aims to deliver capital growth over the long term and support the transition towards improved ocean and freshwater health, focusing in particular on contributing to the achievement of SDG 6- Clean Water and Sanitation and SDG 14- Life Below Water.
The Article 8 fund will invest in both global bonds or bonds of issuers that contribute to ocean and freshwater objectives aligned with one or more United Nations SDGs; use bond proceeds to finance projects benefiting ocean and freshwater related sustainability (including blue bonds); aim to improve management of water-related risks and opportunities, and reduce the negative impact of climate change on the ocean or freshwater.
A minimum of 80% of the fund’s investments will be used to meet these four objectives.
Speaking to Impact Investor, Atkinson said he hoped the fund would contribute to the growing the blue bond market and to driving investment into SDG-6 and SDG-14 related themes. “SDGs 6 and 14 address equally important themes and there is a lot of overlap but they are both chronically underinvested.”
This, he said, was a problem compounded by a lack of blue bond issuance. “We want to encourage growth in this market and are launching a fund that is a platform vehicle for pushing that issuance through.”
An underfunded sector
Impact Investor has previously reported on international commitments, most notably the signing of the UN High Seas Treaty, to boost investment into SDG 14 in particular, which remains the most underfunded of the SDGs.
Atkinson said one of the reasons for the chronic underfunding in the ocean economy or fresh water and for the dearth of blue-focused funds had been the lack of investable projects.
“Even within green bonds that mention projects that are aligned to the ocean or fresh water, the percentage of them, if they do invest in them at all, is very small,” he said. “Part of the reason for that is the difficulty in finding projects of sufficient size and that are compelling enough from an economic perspective to make it into a green bond prospectus.”
He said blue projects tended to be less revenue generating than typical green bond issuances, such as renewable energy infrastructure projects.
“They focus on important challenges such as cleaning up ocean pollution or having a positive societal benefit rather than generating revenue for the corporate or other bond issuer.”
Atkinson added that the issue of underfunding was also one of a vicious cycle.
“There’s also a chicken and egg problem. There aren’t many blue bond funds out there, and so issuers who would naturally lend themselves to issuing a blue bond, such as water companies or companies who design specific engineering solutions for water, will issue green-labelled bonds instead so they can sell them into a green fund.”
To overcome this hurdle, Atkinson explained the fund had been designed with flexibility in mind, allowing the fund managers to invest into non-labelled bonds from companies whose revenues were geared to the ocean or fresh water sectors and into green bonds with a significant allocation to the blue economy.
“There are some engineering companies for example, who design physical pieces of equipment to clean and transport water or architectural companies that design water resilient infrastructure. So, there are other ways to invest in the theme without it being explicitly in a blue-labelled security,” he said. “For the green bonds we invest in, at least 20% of the use of proceeds must be invested into blue projects.”
Atkinson said this flexibility allowed the fund to operate a diversified portfolio.
“At the same time, we can continue to push on the issue of blue investments by encouraging companies operating in the water sector or those that have a high impact on ocean health or fresh water provision, to issue blue bonds,” he added.
Investments to date
Atkinson said the fund already held around 100 securities and was over 90% invested using seed capital provided by Fidelity. He was unable to reveal any names of issuers but said the fund currently had an overweight allocation to the industrial sector, which included bonds issued by two large US water treatment companies, as well as to large infrastructure where it held a company operating underwater cables for offshore wind farms.
The fund can invest at a project, corporate and sovereign level.
“We have a couple of bank holdings in green bond format too, where they have invested about a third of the proceeds into sustainable fisheries,” he added.
Performance
Minimum investment into the fund is $2500 (€2290) and performance is benchmarked against the Bloomberg Global Aggregate Corporate Index. Although most of the portfolio is invested into investment grade securities, the fund is also able to invest into high yield bonds.
“Our high yield holdings are in the mid-single digits. That is an off-benchmark position but there are some great names in high yield that are sitting on the edge of investment grade and which are well aligned with the theme,” he said.
“We recognise that outperforming the benchmark with a universe that is a tiny fraction of the total credit universe is quite challenging, but if we can match the benchmark yield and duration and add a little on top from credit selection, then we should deliver significant enough alpha to offset our fees and generate a return that is at least in line with, if not better, than a tracker.”
