BNP Paribas Asset Management (BNPP AM) joined rivals in active ETFs last week with the addition of two sustainable fixed income products tracking euro-denominated government and corporate bonds.
According to the French asset manager, the BNP Paribas Easy Sustainable EUR Government Bond UCITS ETF (BJLM) and the BNP Paribas Easy Sustainable EUR Corporate Bond UCITS ETF (BJLN) take an “index-like approach” and are described as “active purely in an ESG sense”, not from an alpha generating perspective.
To create BJLM and BJLN, BNPP AM utilises its proprietary ESG methodology and exclusion policies to optimise the ETFs against their benchmarks.
BLJN – labelled Article 9 under the Sustainable Finance Disclosure Regulation (SFDR) – starts with a universe of 700 issuers across 3,500 bonds in the Bloomberg Euro Aggregate Corporate index, 42% of which qualified as a sustainable investment.
Following the optimisation, which involves multiple exclusion metrics and close work with its quantitative research team, the ETF tracks 283 bonds from 177 issuers with a 100% sustainable investment universe, based on its own methodology.
Marie-Sophie Pastant, head of index and ETF strategies, portfolio management at BNPP AM, said: “It was important for us to make ensure our clients respect the 100% sustainable investment.
“If we are tracking another ESG data provider such as MSCI the percentage of sustainable investments is difficult to define precisely.”
Despite this, BJLN is well ahead of its tracking error target of 50 basis points (bps), which is currently at 11bps, according to Pastant.
Meanwhile, BJLM – which targets at least 30% sustainable investments and is categorised as Article 8 under SFDR – will look to maintain a tracking error of less than 25bps.
Active without alpha
Active fixed income ETFs have experienced some growth on the continent over the past 18 months, with the likes of AXA Investment Managers, Franklin Templeton and JP Morgan Asset Management all expanding their offering.
Traditionally, however, these active ETFs aim to outperform their respective benchmarks by being flexible in their duration or credit risk, for example.
However, BLJN and BLJM have the ability to exclude issuers involved in controversies between rebalancing dates instead of seeking alpha.
“We have seen a strong request from our clients and the market to have exposure to a vanilla index with our ESG approach implemented,” Pastant said.
“When you do not replicate an index exactly, you cannot be considered an active ETF anymore, we are not trying to beat the index but have active ESG integration instead.”
As well as the ability to exclude companies before the rebalance, Pastant said the group can track BNPP AM’s corporate engagement with companies to see if it is making a difference.
However, she said it was “slightly different” for sovereigns due to the difficulties of engaging with governments.
The investor view
Abdelhakim El Attar, multi-asset portfolio manager at Eres Gestion, said the ability to add an active product with a low tracking error was a “great alternative” in the equity space to JP Morgan Asset Management’s Research Enhanced Index ETF range.
“Whether it is active in the true sense depends on many factors. To what extent do you need to actively implement decisions to consider a product active, and that depends on each investor’s view.
“Quantitative strategies with a clear deviation can already be considered active.”
Stephan Kemper, chief investment strategist, team advisory desk at BNP Paribas Wealth Management, added whether the ETFs are active in the true sense was “debatable” but of “lesser importance” to the overall strategy.
“The investment process incorporates active steps influencing the portfolio construction, albeit the approach is new and the goal is different.
“It is maybe more about creating alpha in terms of sustainable outcome or impact than performance alpha. I would see it as some sort of evolution of the idea of active ETFs, a new subspecies if you like.”
El Attar said: “The products are quite innovative in the way that it left behind the constraining approach of tracking an index.
“BNPP AM has taken a smart choice to implement its view and especially be reactive to controversy which was one of the limits of tracking a specific index blindly.”
Despite not gunning for the outperformance of a traditional active product, there is still just as much value to be drawn from having such a low-tracking error product, particularly in ESG.
“As a fund of fund allocator, we love a strategy with alpha potential and limited tracking error compared to the benchmark of our funds or asset classes exposure,” El-Attar said.
“This is especially the case in our ESG range where we invest in the ISR French label. We lack an alternative and hope to have more products coming our way, something that has become difficult under the constraints of the V3 for the French label.”
Kemper agreed, adding BNPP AM’s pedigree in the sustainable investing space means it could be attractive for sustainable investors.
“This approach could make sense for investors who wish to stick to traditional benchmarks for whatever reason, for example, sector composition or weight, but still want to invest in an ESG-compliant way,” he said.
