Expert Investors: ‘Give me more fixed income ETFs’

Expert Investors is a series where ETF Stream interviews fund selectors on the role of ETFs within their asset allocation. In the hot seat this month is Francis Chua of LGIM

Theo Andrew


Francis Chua, fund manager at Legal & General Investment Management, has said there is currently a gap in the market for fixed income ETFs as the asset class comes back in vogue in 2023.

Investors piled a record €9.5bn into fixed income ETFs in January, however, Chua (pictured) is still struggling to find innovative solutions for his portfolio.

“I have been metaphorically grabbing ETF issuers and saying, ‘give me more fixed income, give me more non-plain vanilla ETFs’,” he said. “We need both of these. At the moment, there are also gaps in ESG outside of equities, specifically fixed income and alternatives, where I have struggled to find solutions.”

Following a tumultuous 2022, ‘bonds are back’ has been the mantra this year on the view central banks are set to slow the pace of rate hikes over the course of 2023.

In response, Chua has been upping his allocation to bonds so far this year, especially to duration due to the attractive yields on offer and the potential incoming recession.

“We have been adding duration in our portfolios over the course of the last six months,” Chua continued. “We are probably around mid-duration currently.”

Overall, Chua, who uses ETFs as “opportunistic” add-ons to portfolios made up of index fund building blocks, would like to see more choice in UCITS ETFs.

“If you are looking for the second stage of growth – that important market beta – the US has all sorts of quirky products and that is a really exciting area of growth,” he said.

Chua added the evolution of ETFs in Europe has come a long way in a short space of time with areas such as thematic ETFs and currency ETFs showing strong growth.

“We like the decarbonisation theme and we hold clean energy and clean water ETFs. Our ETF usage varies in nature but we do not use US or UK equity ETFs, specifically, because those we can get as index building blocks from LGIM,” he said.

Furthermore, Chua said he has captured Indian government bonds through an ETF “because there is no index for the market” and a minimum volatility ETF due to the current “stage of the economic cycle”.

Chua added fixed income markets will likely see a “continuation of volatility” in 2023 adding the chances of a recession is more “when rather than if” as inflation remains uncertain.

As a result, he has been selling down his equity allocation over the past six months, and more recently, has taken profit on the tech-related positions following bullish market sentiment so far this year.

He added the firm has also been active in high-yield and emerging market debt, with a preference for the latter.

“There is a risk of spreads widening in high yield in the event of a recession,” Chua warned. “Where we do like is emerging market debt. There has been a spread pick up and it still looks reasonable in terms of compensation for risk.”

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

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