A new opportunity for Credit Unions
Goodbody is delighted to introduce the new Amundi Fund Solutions ICAV - Select Investment Grade Bond. There has been a lack of viable opportunities for credit unions to invest in corporate bonds since the asset class was introduced as an allowable investment in 2018, but this has now changed. We have partnered up with Amundi Ireland Limited to design what we see as the ideal solution. Amundi Asset Management is the largest fund manager in Europe and is well placed to manage the fund, while Goodbody will provide oversight of the fund manager and report on key aspects of the fund to enable Credit Unions fulfil their regulatory obligations and ensure good governance. By investing in circa 90 corporate bonds, the fund is intended to provide Credit Unions with important diversification (2) and attractive risk-adjusted returns (3). The fund will trade on the market every day, allowing Credit Unions to access their funds at short notice.
Trust and governance
For all investments, but especially new investments we believe it is important to have the best governance practices in place. Amundi Asset Management has developed this product according to Goodbody’s brief and Goodbody will continue to monitor the Fund. We will also provide Credit Unions with regular detailed reports to facilitate full transparency and easy to complete prudential returns. Amundi Asset Management will manage the fund on a day to day basis, seeking to achieve returns while maintaining an appropriate risk profile (3).
Amundi Asset Management is the largest asset manager in Europe and in the top 10 globally, with €1.6 trillion assets under management (1). It was formed in 2010 as a result of the merger between the asset management businesses of Societe Generale and Credit Agricole. It is headquartered in Paris, with offices in 37 countries, including a significant operation in Dublin. Amundi Asset Management has impressive resources (66 fund managers, 44 credit research analysts and 30 traders) and significant experience in managing Buy and Maintain strategies. This fund will be managed by Sarah Donnelly, who is a Senior Portfolio Manager based in Dublin.
Risk control and diversification (2)
One of the key advantages of a UCITS* fund is that Credit Unions get significant diversification across a broad range of bonds via a single investment in a fund. Amundi Fund Solutions ICAV - Select Investment Grade Bond will invest primarily in corporate bonds and will have the ability to hold some European government bonds. At the beginning, it will target to hold circa 90 individual bonds with no counterparty representing more than 5% of the fund. Given that Credit Unions already have significant exposure to banks, this fund will not invest in bank bonds. This will also facilitate a smoother reporting process.
Equally important, academic research shows that diversification may allow investors to achieve higher returns for a given level of risk. With this in mind, we believe for example that it is more attractive for a Credit Union to invest in a basket of bonds rather than an individual corporate bond.
It is also worth pointing out that Credit Unions can invest up to 50% of their regulatory reserves in corporate bonds, which typically coincides with 5% of total assets and 6-7% of investment holdings. As such this new asset class will likely represent a relatively modest albeit important proportion of a Credit Union’s overall investment assets. All bonds will be Euro denominated and investment grade. Somewhat akin to how Credit Unions approach investments, Amundi Asset Management, will buy bonds with the intention to hold to maturity, unless there is a change in their view over credit quality or if specific opportunities arise. This should be a key success factor for the fund and where we expect Amundi Asset Management to add real value.
Attractive risk-adjusted returns and stable income (3)
This new investment option, with the associated benefits of diversification, should in our view offer Credit Unions one of the most attractive returning investment options in the market, while still maintaining an acceptable risk profile. The fund is designed to have a weighted average BBB credit rating, stemming from circa 90 corporate bonds across a broad range of sectors and geographies. This strategy should allow Credit Unions to access more attractive risk-adjusted returns, while also maintaining a conservative risk profile.
To provide Credit Unions greater visibility on future cash flow, Amundi Asset Management expects to provide a coupon of 0.35% in each of the first four years (3). This is intended to prevent significant swings in the cash coupon from one year to the next as the fund matures and bonds get reinvested at different yields for example. Amundi Asset Management also intends the Fund to earn an annual income buffer(4) of 0.20%, to be retained within the Fund. This buffer will effectively belong to the Credit Union as an investor in the Fund and will get recognised in the Credit Union’s accounts as it will be reflected in the Fund’s daily value and accessed on exit.
Informed decision
This is a new asset class for most Credit Unions and one which should fit well in investment portfolios. That said, we are committed to ensuring Credit Unions make well informed decisions. With this in mind please contact your Relationship Manager to discuss your specific requirements including suitability etc.
* Undertakings for Collective Investment in Transferable Securities.
1 Source IPE ‘Top 400 asset managers’ published in June 2019 and based on AUM as of December 2018.
2 Diversification does not ensure a profit or protect against a loss.
3 Income target can be exceeded or undershot and should not be construed as an assurance or guarantee. Returns are not guaranteed and a loss of the capital invested may occur.
4 Accumulated and put towards future coupons unless used to stabilise the model during that period.
There are a number of risk factors associated with an investment in the Fund or in bonds generally, including credit risk, credit rating downgrade risk, market risk, interest rate risk and risk of capital loss. Amundi Asset Management has allocated the Fund a Synthetic Risk and Reward Indicator (SRRI) of 3 on a scale of 1 to 7, where 1 is the lowest expected risk and reward and 7 is the highest.
Credit Risk: The Fund will invest in bonds which provide fixed maturity values and fixed coupons. However, these fixed payments are subject to the credit risk of the issuer, in the same way as a credit union’s holdings in bank bonds are. In the event that the issuer of any of the bonds in which the Fund invests defaults, becomes insolvent or experiences financial difficulties, this will impact on the value of the bond and/or any amounts due to be paid, which will in turn negatively affect the NAV of the Fund.
Credit Rating Downgrade Risk: The Fund will only invest in bonds issued by companies that are allocated investment grade credit ratings. One feature of credit risk is that ratings agencies upgrade or downgrade their ratings if their opinion of the risk of the issuer has improved or deteriorated. If the issuer of a bond loses its investment grade ratings, either through downgrades or rating agencies no longer providing any rating, the Fund will sell that bond. In that scenario, it is highly likely that the market value of the bond will decline either as a result of the downgrade or will have declined prior to this, so the Fund will likely suffer a loss on this sale.
Market Risk: The market value of bonds changes continuously and can fall based on a wide variety of factors, including political and economic news, government policy, natural or human-caused disasters and changes in demographics, cultures and populations. The effects of market risk can be immediate or gradual, short-term or long-term, narrow or broad.
Interest Rate Risk: One aspect of market risk is linked to interest rates. Generally speaking, if interest rates rise, or the market expectation that interest rates will rise in the future increases, the market value of bonds is likely to decline, as the yield required for investors to buy bonds increases. This in itself does not change the final return on individual bonds at maturity but it does impact on the market value of bonds during their term. As a result there may be a decline in value which is gradually recovered by the time the bond matures. A key difference between a fund and holding bonds directly is that there is no specific maturity date on the overall fund and therefore no point in time when there is a defined return of a fixed maturity value, as the bonds will be maturing at different times.
Risk of Capital Loss: The Fund is open-ended, with no fixed maturity date and no point in time where either capital or returns are guaranteed. Investors in the Fund may suffer a loss of capital, which may arise from a number of factors, including any of the risks outlined above. The value of the Fund will increase or decrease over time, as will the income paid out. The total return to investors will be the total of any income paid out and the change in value of the Fund over the investors holding period. It is possible that the total return from the Fund will be lower than the return from other investments available to credit unions.
