Tabula launches first Paris-aligned fixed income ESG ETF and celebrates increased assets
Assets under management at Michael John Lytle (MJ)’s European fixed income ETF specialist firm, Tabula Investment Management, have been growing. The firm now manages USD300 million.
“The thing about asset increases is everyone talks about inflows,” Lytle (pictured) says. “Frankly, our aspirations are far beyond that, but it’s the 0 to a billion which is the hard part.”
He comments that once you reach a certain level, you can attract institutional investors but that the early investors often end up being the best clients, as they were the ones who were willing to take a bet when a firm was small.
“You can have creative dialogues with them about new funds you want to launch and trust each other on development of new products,” he says.
Tabula has launched a range of what it calls ‘forward thinking fixed income’ ETFs, offering investors access to develop products targeting specific risk factors in fixed income including: inflation; corporate bonds; liquidity solutions; blended portfolios; ESG and Solvency II-efficient funds.
Lytle says: “Inflation is interesting because for 10-15 years everyone agreed inflation is not much of a concern with central banks almost trying to create inflation.”
The last seven to eight months have seen a change in the inflation landscape, Lytle believes with US investors divided between those who think that inflation is still under control, and might end up in disinflation, while others believe that there is a chance of significant amounts of inflation on the horizon.
“Macro-economic debate covers such a range of outcomes that it makes it an interesting space to be in,” Lytle says. “It’s better if everyone doesn’t agree.”
China has a part to play in the US’s Federal Reserve’s attempts to create inflation against the background of a relaxed monetary policy, he says. “China effectively killed off inflation by producing goods at cheaper prices in bigger amounts and now there is a suggestion that maybe China isn’t going to play that disinflationary role in the same way either.”
With this background, Lytle believes that the fixed income markets have the only assets specifically built to tackle inflation, with bonds with inflation protected components such as Treasury Inflation-Protected Securities (TIPS).
“If you start to worry as an investor that inflation has a reason to be a concern, then you could buy commodities, such as gold, or equity assets but the only specific assets for inflation measures are TIPS and break-evens products. We came to the conclusion you didn’t have to do just one or the other, so we have both.”
Lytle believes that this gives you another exposure to inflation. “It’s a much better instrument with higher exposure and upside if inflation surprises to the upside, but a reasonable yield in a sideways inflation environment so you can own it as a long-term investment.”
Another area where Tabula has been making change is in launching the world’s first Paris-aligned fixed income ETF to help tackle climate change.
“We have seen a lot of Paris-aligned equity products which is understandable,” Lytle says. “But fixed income is the other side of the balance sheet. There is a different logic as to how you influence the behaviour of a company as an equity investor or a fixed income investor. Equity investors can invest and engage through shareholder votes to influence what a company is doing when it comes to ESG. The fixed income investor has no ability to vote, so your only way of voting is with your feet.”
Companies constantly issue new bonds so need primary access to the bond market, he says. “If the market stops buying bonds from issuers with the worst ESG ratings, these companies will rapidly get squeezed so they have to change their behaviour.”
The levers for influencing companies are fundamentally different, he says.
“Investor demand for a specific issuer and the kind of spreads they pay feeds through very rapidly. In the past, the main thing that drove interest was the credit rating but now in the ESG space we are effectively adding another dimension to the calculus on the credit perspective.”
Tabula’s latest IG bond ESG ETF has proved very popular across Europe, particularly northern Europe as Lytle comments that the Nordics have most embraced ESG investing.
“Different continents have responded to ESG in different ways but 2020 was the year that for European investors, ESG went from being a nice-to-have to being a necessity.”
Now he believes that everything needs to have an ESG overlay. “Once you accept ESG is part of how you invest, you have to come up with more of an impact approach so that what you are doing will have an investment outcome that you care about.”