John McMurdo

Australian Ethical Investment Limited (ASX: AEF) has announced it has entered into a binding agreement to acquire the sustainable fixed income asset management business, Altius Asset Management from Australian Unity.

The acquisition, when completed, will see Australian Ethical grow its funds under management (FUM) by circa A$2 billion, from $10.3 billion to circa $12.3 billion an increase of 19%.

The combined Australian Ethical and Altius fixed income capability will result in a sustainable fixed income team of seven, an expanded bond fund portfolio, and Australian Unity becoming one of Australian Ethical’s largest institutional clients.

The proposed acquisition is consistent with Australian Ethical’s strategy to serve the growing potential addressable market created by the structural drivers favouring responsible investing, and to offer super fund members and investors increased access to ethical investment capability.

Australian Ethical will pay Australian Unity $4.25 million in cash upon transaction completion, which will be subject to the satisfaction of Conditions Precedent (expected to occur in July), with an additional $1.25 million payable after completion, contingent on Australian Unity investment meeting certain transition steps and maintaining agreed minimum FUM targets. While at a lower revenue margin consistent with the fixed income asset class, this transaction will be EPS accretive from financial close and is expected to generate circa $1million of EBITDA in FY25.

Australian Ethical Chief Executive Officer John McMurdo: “The acquisition of leading fixed-income fund manager Altius is another important milestone for Australian Ethical as we scale and broaden our investment capability consistent with our strategy and Ethical Charter. Transactions such as this add to our momentum as a purpose-driven business and our ability to deliver sound investment returns while influencing progress towards a better future for people, animals, and planet.

“We are delighted to welcome the Altius team, their clients, and Australian Unity as a key institutional client partner. They join 130,000 investors and superannuation customers who have also chosen to invest ethically.”

Australian Ethical, CIO Ludovic Theau added: “This acquisition also signifies our ongoing commitment to work with like-minded organisations such as Australian Unity. We look forward to this being the first of many new investment initiatives, where Australian Ethical and Australian Unity can combine their leadership capabilities in ethical investment management and social impact best market practice.”

Altius’s Co-founder and Chief Investment Officer Bill Bovingdon: “We are excited by the opportunity to join Australian Ethical, the market-leading ethical investment platform, and to combine Altius’ deep expertise in responsible fixed income with Australian Ethical’s ethical investing heritage across asset classes.

“Naturally, clients will be at the centre of our considerations as we work closely with Australian Unity on a successful transfer of funds.”

Dr Joe Fernandes, Australian Unity Group Chief Investment Officer and Executive General Manager, Funds Management: “The transaction is an endorsement of the sustainable investment approach Altius and Australian Unity have built and refined for more than a decade, achieving continuity, additional scale and focus for the Altius business.

“The transaction with Australian Ethical aligns with Australian Unity’s strategy of partnering to accelerate its ambitions and focusing our commercial portfolio to areas where we can maximise impact.

Under the deal terms, Altius co-founders Bill Bovingdon, Chris Dickman and Gavin Goodhand, will join the Australian Ethical investment team under Chief Investment Officer Ludovic Theau.

The new capability, and combined investment team will continue to operate in line with Altius Asset Management’s Sustainability Policy and will be in line with Australian Ethical’s Ethical Charter.

Altius, as part of Australian Ethical’s expanded fixed income capability, will continue to oversee Australian Unity’s cash and fixed interest portfolios, as well as the other fixed income funds and mandates currently managed by Altius.

The transaction also includes an ongoing commitment by Australian Ethical and Australian Unity to work together. Australian Ethical looks forward to working in partnership with Australian Unity on further co-investment and product development opportunities.

Australian Ethical’s half year FY24 results and reaching a milestone $10 billion in FUM in March 2024, demonstrate that investment in the business is achieving growth and scale, supported by its strengthening business platform.

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Bill Bovingdon

Research house Lonsec has awarded “Recommended” ratings to the Altius Bond Fund and the Altius Sustainable Bond Fund.

Both Funds seek to provide investors with regular income distributions while preserving capital.  The Funds have the same benchmark and investment style; however, the Altius Sustainable Bond Fund also excludes companies from its investment universe if their primary business activity involves armaments, uranium, gambling, tobacco production, pornography, alcohol production, or production or sale of thermal coal.

The “Recommended” rating indicates that ““Lonsec has strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy.”

In particular, Lonsec noted as strengths “the stability and experience of the team” and that the “Investment Advisory Board (IAC) adds value and weight to macro views”.

Lonsec also said in its review that: “The Funds seek to shift between cash and Australian bonds at various times during the cycle in an effort to protect capital. This product might be suited to investors who would like to effectively outsource the decision between cash and bonds to a fixed interest specialist or as an active satellite blended with a strategic allocation to defensive assets.

“Advisers should note the Manager has significantly greater leeway in duration positioning than more benchmark aware Australian Fixed Interest funds, so at times could outperform (or underperform) either Australian Bond funds or Australian Cash funds by a significant margin depending on its positioning.”

The review also commented on Altius’s joint venture with Australian Unity Investments: “Similar to other boutique managers with institutional backing, Altius’ partnership with Australian Unity Investments provides it with a range of non-investment support services. This arrangement is beneficial for tightly run teams like Altius, allowing it to focus on core investment operations. Lonsec observes Australian Unity Investments adopts a ‘partner for life’ mentality, giving some comfort towards its commitment to the partnership.

“Despite being a boutique fund manager, Lonsec is pleased with the independent risk monitoring function performed by AUI. Lonsec believes post- trade compliance conducted by an external party can enhance the overall integrity of the process.”

Bill Bovingdon, chief executive officer of Altius, said that the rating underlines the role that bonds funds can play in investor portfolios.

“Investors continue to be concerned about how to generate yield and income in the current market environment, with volatility an ever-present issue.

“Well-managed, nimble bond funds have a useful role to play in helping create income throughout all market cycles.

“We are particularly pleased that Lonsec has recognised the flexibility of our approach to duration which is a key element of our investment philosophy,” Mr Bovingdon said.

Lonsec has also recently named the Altius Sustainable Bond Fund as a finalist in the innovation category of the Lonsec Awards.  The winners will be announced as part of the 14th Annual Super Ratings Fund of Year Award being held on the 18th of October.

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He joins existing advisory committee members Dr Don Stammer and Mr Tony Fitzgerald as well as three Altius portfolio managers.

Mr Gordon has over 30 years’ experience in the financial services and funds management industry, in Australia, the UK and Hong Kong.

He was most recently group executive at Perpetual Investments and has also held global chief investment officer roles at Fidelity International and BNPP Investment Partners in London as well as chief executive officer and chief investment officer at Schroder Investment Management in Sydney.

Mr Gordon also chairs the group investment committee of FWD Group and is a director of Total Risk Management Pty Ltd.

Bill Bovingdon, chief investment officer at Altius, said that Mr Gordon brings immense depth of global experience and knowledge to the committee.

“The role of our committee is to interrogate and thereby enrich our views on economic and financial market issues, and Michael has a broad range of expertise and understanding to draw on in this role.

“With global economies and markets continuing to deal with unprecedented challenges, having experts of Michael’s calibre providing invaluable insights to our investment process is increasingly important,” Mr Bovingdon said.

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The fund was launched after a successful book build period in late November.

Bill Bovingdon, chief investment officer of Altius, says every well-diversified investment portfolio should include an exposure to bonds but investors seeking responsible investment choices in fixed income have had few options available to them.

“Unfortunately there are limited investment options available to investors looking for fixed interest investments managed with regard to environmental, social and corporate governance principles.  As a result, fixed income may have been left out of their investment portfolios, which has restricted diversification and performance.

“Often investors use bank-issued hybrids as their main solution. However hybrids include equity-like risks so lack the defensive characteristics that bond investors require.

“We are seeing an increasing number of investors mentioning responsible investing as a consideration for them and decided to launch a fund that meets this growing demand while at the same time delivering solid, stable returns.”

“Bonds will be automatically excluded from the fund’s investment universe if the primary business activity of the issuer is clearly at odds with the fund’s ESG principles. This includes activities such as production of armaments, uranium and tobacco.

“The remaining investment universe is screened in line with the Altius Sustainability Policy, with companies in the universe  given a sustainability rating which is incorporated into the portfolio construction process.

“This ranking process is intended to assess the impact of the company’s operation on the well-being and sustainability of the community and environment in which it operates,” Mr Bovingdon says.

“To  provide investors with a voice on how the investment universe is formed and evolves over time we have established the Altius Sustainability Advisory Committee which consists of two investor representatives. The current members include the  cornerstone investor groups, Matthew Moore senior portfolio manager from Uniting Financial Services who sits on the Uniting Church (NSW) Synods Ethical Investment Committee and is a former director of the Responsible Investment Association Australasia and Trevor Thomas from Ethinvest.”

The Altius Sustainable Bond fund joins the other funds in the Altius stable – the Altius Bond Fund and the Strategic Fixed Interest Trust.

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“Indeed, there is increasing evidence that many investors are confused by what fixed interest really means. 

“Equating fixed interest with term deposits is not a balanced approach and, from a diversification point of view, is not much better than having no fixed interest investments at all,” Mr Bovingdon said. 

He said that fixed interest securities play a crucial defensive role in any well-balanced investment portfolio. 

“Fixed interest can provide predictable, regular income and act as a foil against the losses made on equity holdings during an economic downturn. 

“However, a poorly constructed defensive allocation will fail in meeting defensive and risk-management objectives in times of market turmoil, such as we have seen in recent years. 

“Investors need to do some research to educate themselves about fixed interest investments. 

“Advisers should encourage their clients to spend the same sort of time understanding fixed interest as they do equity markets, to ensure they have a basic knowledge of the range of products that make up the fixed interest sector and the benefits and risks associated with each. 

“Not all assets that have been labelled fixed income are ‘true to label’, and furthermore, not all bonds are made equal. 

“Advisers and their clients need to be aware that some are inherently much more risky than others, and others are just not fit for purpose if the objective is to create a safe, predictable source of income that also diversifies a portfolio’s equity risk,” he said. 

Mr Bovingdon said investors and advisers should appreciate the two desirable characteristics of fixed income in a portfolio. 

He said they provide:

• a predictable and regular source of income (the investor gets predetermined coupons plus the principal back at maturity, making cash flows predictable)
• portfolio diversification.

“The importance of defensive role of bonds cannot be underestimated for all investors, and for some, such as retirees, it is particularly critical. 

“In addition, the relative stability of bond returns not only reduces overall portfolio volatility, but also over the medium to long term, bonds are negatively correlated to equity prices which improves the risk return profile of the overall portfolio. 

“These are points that investors should understand about fixed income,” he said. 

Altius has developed a list of risks that investors should consider for fixed interest investing, as well as a definition of investment products that make up fixed interest (see attached).

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