Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
Amid the health pandemic, the European Union took a massive step towards a more unified Europe in times of crisis by putting forward two new programmes, SURE and NextGenerationEU, which will be funded by European Union (EU) bonds. The projected EU bond issuance of €850 billion will position the EU as the second largest AAA rated issuer in Europe and the largest European Supranational. By the same token, the EU is now one of the largest social bond issuers in the world and we expect significant green bond issuance for the NextGenerationEU programme positioning EU bonds as an interesting tool for investors trying to create more Environmental, Social, and Governance (ESG) friendly portfolios.
The WisdomTree European Union Bond UCTIS ETF gives investors market access to this evolving asset class of European Union (EU) bonds by aiming to capture all EU bond issuance under SURE and NextGenerationEU in a transparent and highly liquid UCITS Exchange Traded Fund (ETF) vehicle. Issuance for the programmes is in the early stages and projected issuance will grow substantially in the coming years. The index rebalances monthly and can provide investors with an efficient way to capture exposure to this growing asset class.
By gaining exposure to only EU bonds, an investor can more easily utilise it as a building block to construct a diversified portfolio as EU bonds has historically shown diversification benefits versus many of the key asset classes such as equities, emerging market debt and commodities to name a few.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
Amid the health pandemic, Europe is demonstrating a more unified front by utilising European Union (EU) bonds in a completely new way to support Europe recover from the wounds of the pandemic. The ability of the European Commission on behalf of the EU to assist EU member states by issuing European Union bonds ultimately has implied that European governments can reduce the amount of new national government debt issuance required to nurse their economies back to health.
The massive, expected EU bond issuance is a sign of EU integration and we are likely to see further integration as demonstrated with common borrowing for a common purpose. This is a strong precedent the EU has taken, and EU bonds could be a more widely used tool by the EU in future crisis. Meanwhile, EU bonds are generally issued with maturities from 3 to 30 years and issuance for the two new programmes are only in its infancy, therefore, we could expect the EU bond market to be around well after we recover from the Covid-19 crisis. The new issuance will position the EU as the fifth largest bond issuer and the second largest AAA rated issuer in Europe.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The strategy currently holds 7 EU bonds but this number is positioned to grow substantially as issuance continues to increase. From a technical perspective, the ECB announced in December 2020 that they would increase their quantitative easing (QE) programme to €1.85 trillion providing a positive tailwind for Supranational debt as the QE programmes can buy substantial amounts of Supranational debt. All EU bonds issued for the SURE programme fall under the social bond framework and a portion of the EU bonds for the NextGenerationEU programme can be green or social making EU bonds an interesting investment proposition for investors looking for more ESG friendly bond solutions. EU bonds have been heavily oversubscribed in the primary markets and while supply of EU bonds will increase, there are several factors leading to strong demand for the asset class which could make EU bonds a unique investment theme to play in 2021.
Amid the massive market volatility experienced in 2020, EU bonds returned over 4% meanwhile the FTSE 100 was down over 16%*. Asset class diversification can be a useful strategy in building more resilient portfolios amid continued uncertainty and EU bonds have historically shown to offer diversification versus several key asset classes.
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*Source: Bloomberg, period from 31 December 2019 to 31 December 2020, FTSE 100 represented using the ticker UKXNUKEU, Euro Bonds represented by the iBoxx EUR European Union index - this index is not live, all data presented is backtested.
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