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Pimco, a leading global investment management firm, and Source, a European provider of exchange-traded products, have announced the launch of the actively managed Pimco Covered Bond Source UCITS ETF (COVR).
Listed on the Deutsche Börse, the product offers a unique way to invest in the covered bond market, combining the advantages of an ETF with Pimco’s pedigree in active fixed income management.
The fund, 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. It is benchmarked against the Barclays Euro Aggregate Covered 3% Cap Index.
Covered bonds are debt securities issued by a financial institution and backed by a group of loans residing on the balance sheet of the financial institution known as the “cover pool”. Traditionally, this type of bond has been unique to Europe, first issued in Germany and then followed by other European countries. Increasingly, however, covered bonds are being issued outside Europe.
“This expanding investment universe creates new opportunities for investors and fulfils their increasing demand for ‘safe assets’,” said Mr 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, said: “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.”
Ted Hood, CEO of Source, added: “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 EUR 130 billion. Having over 15 years of experience, Pimco has demonstrated their ability to add value in the asset class to outperform various market benchmarks.”
The fund has a first year annual management fee of 0.38%. Distributions are paid monthly.
In addition, Pimco has entered into a cooperation with Clearstream, giving investors the possibility to order shares of the ETF through Clearstream’s Vestima platform as a mutual fund with daily fixing. This is a ‘first’ for Vestima and Pimco.