PIMCO and Source have launched the PIMCO Covered Bond Source UCITS ETF (COVR), which combines the advantages of an exchange-traded fund with PIMCO’s approach to active management.
The ETF, which will be the first actively managed covered bond ETF available to investors, is managed by Kristion Mierau, senior vice president and head of PIMCO’s European covered bond portfolio management team.
Covered bonds have traditionally been unique to Europe, first issued in Germany and then followed by other European countries but increasingly they are being issued outside Europe.
“This expanding investment universe creates new opportunities for investors and fulfils their increasing demand for ‘safe assets’,” says Mierau. “In the current low interest rate environment, covered bonds offer attractive risk-adjusted yields and are potentially a compelling alternative to broad European government bonds, as the asset class has historically provided higher returns with lower volatility and lower sensitivity to changes in market yield levels.”
At current spread levels, covered bonds also offer investors a more attractive and secure way to gain credit exposure than unsecured senior bank debt.
For certain institutional investors, covered bonds offer additional advantages from a regulatory perspective. Banks benefit from the treatment of covered bonds as lower risk-weighted assets (RWA) under Basel III. Covered bonds are also considered “liquid assets” under the new Basel III liquidity regulation (LCR). Insurance companies can benefit from the privileged treatment of covered bonds under Solvency II.
Howard Chan, vice president and product manager for PIMCO’s European ETF products, says: “We have designed this product as a unique solution for a wide range of investors who seek access to the covered bond market, combining PIMCO’s active approach to covered bonds with the intra-day pricing and daily portfolio holdings transparency of the ETF vehicle.”
Source CEO Ted Hood says: “We are delighted to grow our product offering in partnership with PIMCO, adding to our successful fixed income ETF suite. PIMCO is an acknowledged expert in the covered bond market, with existing assets under management of over EUR130bn. Having over 15 years of experience, PIMCO has demonstrated their ability to add value in the asset class to outperform various market benchmarks.”
The PIMCO Covered Bond Source UCITS ETF is traded on Deutsche Börse and has a first year annual management fee of 0.38 per cent. Distributions are paid monthly.
PIMCO has partnered with Clearstream, giving investors the possibility to order shares of an ETF through Clearstream’s Vestima platform as a mutual fund with daily fixing.