Last month, UK asset manager Legal & General Investment Management (LGIM) launched a strategy, the L&G India INR Government Bond UCITS ETF (TIGR), which provides exposure to a segment of the market that investors had previously missed. not previously accessed.
The Indian local currency government bond market is still a fixed income niche, but it is starting to grow rapidly and is expected to be added to JP Morgan’s broader emerging markets index in 2022.
Raymond Backreedy, CIO, Sparrows Capital
LGIM is targeting a fairly niche investor base with this product, but which could expand as JP Morgan adds Indian bonds to its GBI-EM indices. TIGR currently comprises 14 Indian government bonds denominated in INR with maturities ranging from three to 29 years, all of which have been made available to foreign investors.
The duration of the portfolio (which strangely does not seem to be published by LGIM) is low, although the portfolio is significantly barbelled, with maturities strongly grouped in the 2024-2030 and 2049-2050 ranges.
The short end, which makes up around three-quarters of the portfolio, is essentially a currency game, while the long end is largely a domestic interest rate game. Investors should take this construction into account in their risk assessment.
In the short term, TIGR is an index inclusion game and should see demand. We’ll have to see if investors want to have such a granular stake in the long run.
Verdict: no purchase
Allan Lane, Founder and CEO, Algo-Chain
LGIM has shown a certain talent in offering innovative ETFs which, on this occasion, are the first to offer exposure to Indian government bonds in their local currency. Given that India is seen as a future superpower, it is surprising that no other similar product exists on the market today.
As an investor, innovation counts for nothing, what matters is the suitability of this ETF for inclusion in their portfolio. The good news is that the tracked index offers a return of around 6%, the bad news is that it introduces currency risk.
However, over the past decade, the Indian rupee has depreciated by around 50% against the US dollar, just like the sums. If the net return after accounting for foreign currencies is around 3% over a six-year term, I think most managers would agree with this proposition.
What tips the scales in the buy camp is the fact that this ETF offers an additional source of diversification to its portfolio.
Andrew Limberis, Investment Manager, Omba Advisory & Investments
It’s a really interesting launch and I hope being the first to market will pay off for LGIM. The appeal is twofold: first, returns greater than 6% over a reasonable period (six to seven years); second, the possibility of having exposure to a market that currently has very little foreign participation, but with an expectation of this change in the years to come.
While it is too simplistic to present this opportunity as the next Chinese bonds, parallels can be drawn and there are many good reasons to be interested. The main risk is in the Indian rupee and here investors have to make a big call on the Fed, rates and inflation.
Andrew Pottie, Senior Fixed Income Portfolio Manager, Titan Asset Management
TIGR is giving investors liquid access to what we predict will be the next big story in fixed income index inclusion.
In addition, the current yield compensation per unit term, given India’s credit rating, makes this ETF very attractive.
Time will tell if the low correlation of the Indian local currency government bond market with other emerging bond markets is a result of low foreign ownership, which is likely to increase, or if this position actually offers diversification within of a wallet. We look forward to seeing him grow to a suitable size.
Ben Seager-Scott, Head of Multi-Asset Funds, Tilney Smith & Williamson
There is growing interest in emerging market debt as an asset class, particularly local currency debt where asset prices tend to be sensitive to local monetary policy conditions rather than defined policy. by the Fed.
There is naturally a growing appetite for more targeted options, so TIGR – which is physically replicating and therefore more retail friendly – is a good solution for those looking for exposure to Indian government bonds in local currency. .
The cost at 0.39% might seem high to some, but I would say it’s fair enough considering the targeted exposure. While this is not an area that I am looking to allocate at the moment, I would be happy to have it in the toolbox to expose myself to this market when needed.
Peter Sleep, Senior Investment Manager, 7IM
The LAM Sun Zyfin India Sovereign Enterprise Bond UCITS ETF was the first European ETF to offer exposure to local currency bonds guaranteed by the Indian government.
The Zyfin ETF was launched in 2016, but it closed after just a year. Strictly, Zyfin did not invest directly in government bonds like TIGR, but it was very similar economically, the difference ultimately being the recognition and distribution of the name of the ETF issuer.
I’m not sure the market has moved a lot over the past five years, but LGIM has deep pockets and significant local monitoring activity in emerging markets, which should reassure investors and allow it to gain traction.
Verdict: no purchase
This article first appeared in ETF Insider, ETF Stream’s new monthly ETF magazine for professional investors in Europe. To access the full number, Click here.
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