The Compelling Opportunity in Fixed Income ETFs
Ausbiz: PIMCO, a global leader in active fixed income management, has launched four new ETFs in Australia designed to provide investors with institutional grade investment solutions and access to global fixed income opportunities. Executive vice president Samuel Watkins joins me now. Good to see you, Samuel.
Just tell us about, the overall environment at the moment and what you're seeing in early 2025.
Watkins: So we've actually just released our outlook for the year. And the headline I think is one that many people would be able to, I think, perhaps sympathise with, which is Uncertainty is Certain. And really what we mean by that is that we're in an environment where we have enormous political policy uncertainty, not just in the US, but of course, we're soon to go to election in Australia.
Secondly, there's a lot of geopolitical uncertainty, and that uncertainty is not just in, of course, the hot spots where wars are underway right now, but some of the, I guess, cold tension places as well. And at the same time, we've we're faced with record valuations in the equity markets. And that sets a very, you know, interesting backdrop. And as I say, one where we think uncertainty is is certain looking out into 2025.
Ausbiz: So how attractive does that make bond yields look then?
Watkins: Look that's something of course that we spend a lot of time pondering. For us, the environment that we find ourselves in, after the period leading into 2022, where we had an unprecedented hike in rates, we find ourselves now in a place where interest rates are close to, in our view, the peak of the cycle.
And so what this paints is a backdrop where not only are yields starting to peak because of this, I guess environment, the macro backdrop that I mentioned, but also we have this level of uncertainty in other asset classes. That makes fixed income a particularly compelling story right now.
Ausbiz: I guess this is why you've decided to move into ETFs as well.
Watkins: There's a number of reasons why. Certainly, the macro backdrop is a big part of that. But I think also we've been watching the exchange traded fund market for some time. And as I'm sure you and many of your viewers have noticed, there's been rapid growth. And that rapid growth has now seen assets grow to around about $250 billion. But and of course, a growing level of sophistication that's gone with that.
But interestingly, fixed income, while it only makes up around about 11% of those assets, it's been one of the fastest growing classes. And add to that the announcement that we had recently, that there will be a phasing out of hybrids that has painted a picture where we've got a macro backdrop, which we think is compelling. A market that has grown in sophistication and size. But then also this I guess, change that is going to in some ways limit some of the investment options that historically investors have had in fixed income.
Ausbiz: How much demand, particularly potentially from retail investors, has there been in recent years for ETFs?
Watkins: Much of the market in Australia is non-institutional. And by that I mean that the end investor is either coming to the market directly via a stockbroker or via their financial planner. So in fact, the vast majority of the activity we've seen in exchange traded funds has been direct investor led.
Ausbiz: And so tell us about these four new ETFs I understand they're trading on Cboe. So what are they covering? What are you sort of looking at here?
Watkins: Sure. So what we've started with is our four flagship funds. So they are the PIMCO Global Bond Fund, the PIMCO Global Credit Fund, the PIMCO Australian Bond Fund, and the PMCO Diversified Fixed Income Fund. And these four ETFs are, really represent the flagship, funds that have been available in Australia to institutional clients and via advisors for some time, but not available to direct investors. And that's really why we've taken a step of listing them on the exchange.
Ausbiz: So they've been trading, I believe, since the 5th of February. What sort of activity have you seen so far?
Watkins: We've seen some reasonable activity. What I would say is that, of course, having been only just over a week, they're relatively new to the market. But that said, what they are, are listed classes of our largest existing funds.
So to give some perspective to that, the global bond fund, the PIMCO Global Bond Fund that I mentioned, that is actually over 8 billion of assets as at the end of December. So it's a very large, fund and certainly one that has been recognised as being one of the top performing in Australia for some time.