Kingswood Consultants of Bicester is launching a 'Third World Fund', a broker bond to be run with Skandia Life, which will invest in bonds issued by three of the world's regional development banks.
John Fleetwood of Kingswood says that the fund will offer a chance for small investors to support economic and social development in Third World countries. 'There has been a good reaction already.'
The fund is an attempt to add the sort of steady if unspectacular component to ethical portfolios that gilts traditionally provide for conventional equity-based portfolios. 'For someone who is green and aware and who wants a balanced portfolio, there is no product at the moment at the gilts end of the market. This adds that element back into their investments,' said Ian Du-Feu of Allied Provincial, the stockbroking firm that will undertake the asset management.
Investors' money will be used to buy bonds issued by the African Development Bank, the Asian Development Bank and the Inter-American Development Bank. The international bonds market works in a similar way to the more familiar gilts market: issues generally have a redemption date and a 'coupon' (the yield at the nominal par value of the stock). As with gilts, the traded price may be above or below par so that the actual yield varies accordingly. This means that overall investment returns can be guaranteed only if stock is held to redemption.
The development banks' bonds have a high 'AAA' security rating, suggesting a level of security at least as good as British government gilts. However, while the underlying investment may be sound, the overall performance of the Kingswood Third World Fund will depend on other factors. The fund's restriction to bonds from the three banks limits the scope for active fund management. 'This is a very, very confined area. I am looking at a very narrow corridor of stock available to me,' Ian Du-Feu said.
To widen the choice beyond the handful of sterling-denominated bonds, the fund will initially invest about 25 per cent of the assets in foreign currency bonds from the banks. While this increases the investment pool to about 120 bonds, the foreign currency component adds an extra risk to sterling investors from currency movements. 'We are not planning any currency hedging. It's too expensive,' Mr Du-Feu said.
He stressed that the fund should not be judged purely in terms of financial performance, as it was designed for investors concerned about social issues.
Before committing their money, however, investors may want to consider the record of the three development banks. The banks' lending policies, for example, do not always correspond to their stated concerns for the relief of poverty, the place of women in development or the environmental impact of new investment projects. Investment decisions can sometimes be linked to pressure for economic measures, such as the removal of subsidised food prices. According to Oxfam, the banks tend to find it easier to lend to big projects in large countries.
Would-be investors should also be aware that the bulk of the Kingswood Fund will be used to buy existing stock rather than newly issued bonds from the banks. It could be argued that this merely lubricates the workings of the bond market, rather than providing new capital. A percentage (in exceptional circumstances, up to 100 per cent) of the fund's assets will be held in a Skandia deposit fund not ethically monitored.
Investors in the Third World Fund will normally face a 5 per cent initial charge (reflected in the bid/offer spread) and annual management costs of 1.5 per cent.
Kingswood Consultants, 68, Sheep Street, Bicester, Oxon 0X6 7LD. Tel 0869 252545.
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