Actively managed Harvest US Investment Grade Bond Plus ETF is a high quality, core fixed income product.

Harvest Portfolios Group launched an actively managed bond ETF in January 2020. In a Q&A, Harvest President & CEO Michael Kovacs explains why the company is bringing the Harvest US Investment Grade Bond Plus ETF (HUIB:TSX) to investors, the thinking behind the ETF and why it aligns with the Harvest strategy of conservative income.

Q: Tell us about the ETF

Let’s start with the investment manager who is sub advising on behalf of Harvest. It is Amundi Pioneer Asset Management, a US investment division of the Amundi Asset Management group of Companies. Amundi Pioneer is based out of Boston, with US$86 billion assets under management[1], and its parent company, Amundi, based in France, is one of the world’s largest asset managers with over US$1.6[2] trillion in assets. Amundi-Pioneer has an extremely high level of expertise in fixed income and manages over $50 billion in the U.S. across various fixed-income mandates.

If you want to have a best in class type of product, you need to have a best in class investment manager. Amundi Pioneer, based in Boston, is definitely in that category. Another reason why we like them is their proprietary environmental, social and governance (ESG) screening process. It is part of the quality check on the names going into the ETF. Amundi was among the socially responsible investing (SRI) pioneers, going back to 1989.

So, we asked Amundi to use their ESG screening as part of the filtering process for our portfolio. For example, it will screen out companies that have poor environmental records or companies involved with chemical or biological weapons, that use unfair trade practices, have ties to child labour and tobacco companies.  Amundi has a team of 18 analysts globally that focus on their proprietary ESG screening and is considered one of the leaders in this field.

So, we are excluding some of the companies either by their business practices or by how they generate revenue.  We know that ESG is a growing issue and companies with poor ESG practices will increasingly be excluded from investment universes globally and that will impact the performance of those companies going forward – we don’t want to own those types of investments.

Q: Tell us about the Harvest US Investment Grade Bond Plus ETF

The ETF is an actively managed US investment-grade corporate bond portfolio. That means the majority of the bonds will be of US based companies and we have specific criteria to ensure that it is quality bonds in the portfolio. We have an average credit rating of BBB+ for the portfolio, which is investment grade with the majority of the portfolio invested in A rated or BBB+, which we consider to be high-quality Fixed Income.

The average duration of the portfolio initially will be 7.8 years. Duration is important because with short duration you usually have lower risk exposure to changes in interest rates. The farther out you go, you may take on more risk. In the 7 to 8-year range, you have more of a medium level of risk exposure to interest rate changes.

It is also important to note that the average coupon rate on the bonds in the portfolio is approximately 4.10% but the ETF will pay a target 3.25% which is the actual earned income of the ETF. Many Bond Funds in the market distribute the gross coupon, but we believe paying the net income is important in order to avoid encroachment of capital. We don’t want to do that.

We want to pay what the ETF earns. It has a monthly target yield of 3.25%, and the management fee is 0.48%.

Q: What does actively managed mean?

Amundi Pioneer has a team of 4 Portfolio Managers that specialize in US Corporate Bonds.  They also have 15 analysts with an average of 19 years of experience that specialize in analyzing US bonds.  Fixed Income is highly specialized, and this is an area where having the expertise like an Amundi Pioneer to monitor the bond landscape and choose which bonds go into the fund is crucial. Some bonds will move up in the rating scale and get added, some go down and are removed. There will be over 100 names in the portfolio.

Q: Why is Harvest launching the ETF now?

We have built our business on equity income ETFs and that will continue to be our focus, but as the company approaches $1 billion in assets, we believe it is important to offer more diversity to our clients.

The other reason is that fixed income is a building block for advisors. We want to be able to bring high quality fixed-income products to the market that have top names.

Q: Is the timing related to the economic outlook?

We are at an interesting point in the cycle with interest rates. Rates are low and it looks like they will remain there. Bonds and fixed income are seen as a defensive investment category, so we want to have a few more defensive products in our lineup.

It helps us diversify our lineup and provide more products for our clients.

Q: How is the Harvest US Investment Grade Bond Plus ETF different?

We have a well-recognized global investment manager in Amundi, the ETF has ESG screening and we don’t see a lot of ESG overlays in the bond market in Canada at this time. It is Amundi’s first ETF in North America and the fact that the ETF is investment grade indicates its quality.

Q: Do you have any concluding comments?

It is a great product for advisers looking for an investment-grade bond ETF for their clients, or individuals looking for a good quality, monthly paying, bond product. This is our 12th ETF and allows us to look at other products in the fixed-income space.

  [1] Figures as at September 30, 2019 [2] Source: Amundi Asset Management as of June 30, 2019 For more on Harvest Portfolio ETFs click here. The views and/or opinions expressed in the article are of a general nature and are for informational purposes only. Article contents should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies. Investors should consult their investment advisor before making any investment decision.