ING Investment Management’s (ING IM) Covered Bond Strategy has delivered an annualised return of 7.8 per cent over the three years since 2011, outperforming its benchmark, the Barclays Euro Aggregate Securitized Covered Bond Index, by an annualised 73 basis points.
Dirk Frikkee, lead portfolio manager of the ING Covered Bond Strategy, says: “Covered bonds remain an attractive and popular asset class as they are a unique risk-return proposition for investors and relatively safe debt instruments. To date, no covered bond has defaulted.
“Covered bonds’ status as a ‘last resort’ funding tool for banks during times of crises has been acknowledged by regulators, who give them preferential treatment under various regulatory regimes like Basel III and Solvency II and this has further spurred interest from investors.”
The covered bonds market has grown rapidly in the past decade and is now worth a total of just under EUR3 trillion.
Frikkee says: “One advantage of covered bonds is that they have a lower volatility and higher yield compared to government bonds. In particular, they outperform the government debt of their respective countries during times when the sovereign is undergoing stress.”
Covered bonds also compare favourably to senior unsecured bank debt, which often fails to price in the different treatment imposed under the Bank Recovery and Resolution Directive (BRRD) that excludes covered bonds from bail-ins.
Frikkee says: “We believe that covered bonds remain an asset class of choice, especially in an environment influenced by central banks’ policies, mortgage market shifts and bank credit risks. We are well positioned to exploit the opportunities that this presents for our clients.”