Interview

5 questions for Dr Frank Engels, head of portfolio management at Union Investment

November 2018

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

Do you (still) buy fixed-income securities, and, if so, why?

Dr. Frank Engels

Dr. Frank Engels

Union Investment

Of course. We still invest in fixed-income securities, even if it’s increasingly challenging to generate sustainable positive returns in the current yield environment. That said, this asset class has continued to earn decent money in recent years with relatively minor volatility. Looking ahead, on the other hand, bond yields are facing a stronger headwind. At the end of the year the European Central Bank (ECB) will end its bond purchase programme, while inflation is still rising. And yet fixed-income securities are not a thing of the past: with all the geopolitical turmoil going on in the world, they will probably become more and more sought after as a safe haven. Covered bonds in particular provide appreciable stability in a more turbulent market environment. For investors, it’s also worth considering niche markets on the bond side, such as subordinated or high-yield bonds.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

What role will the ECB play as an investor from 2019?

Dr. Frank Engels

Dr. Frank Engels

Union Investment

Even when the ECB ends the bond purchase programme at the end of the year, it will still be a major bond investor. Although it will buy no more new bonds in 2019, it will continue to hold the assets previously acquired. In addition, the same volume of maturing bonds will be reinvested. As a result, the market as a whole remains well supported, and, in our view, this is especially so for covered bonds.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

How do you expect bond market interest rates to develop?

Dr. Frank Engels

Dr. Frank Engels

Union Investment

The US Federal Reserve (Fed) has been raising interest rates for a while now, and this is set to continue. We expect four interest rate hikes in the next 12 to 15 months. The ECB is also on the way to normalising its monetary policy, albeit around four years later than the Fed. In our opinion, the ECB’s first interest rate rise will take place in autumn 2019, shortly before Mario Draghi passes the monetary policy baton to his successor. Of course, this reversal of monetary policy in the US and eurozone is driving yields. At the same time, rising inflation exerts pressure on bond yields. Specifically, during the next 12 months we expect ten-year US government bond yields to rise slightly to 3.4 %. In the eurozone, yields for ten-year German government bonds should climb to 0.9 %.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

What is the significance of sustainable investments for Union Investment?

Dr. Frank Engels

Dr. Frank Engels

Union Investment

Sustainable investing is a strategic corporate goal and therefore an integral part of our portfolio managers’ day-to-day business. With assets under management worth more than EUR 42 billion we are the leading fund manager for sustainable investments on the German market. The bottom line is that we have integrated sustainability into our overall investment process. Compliance with ESG criteria is part of the comprehensive risk management of our managed funds. As well as an ESG committee, which turns sustainability issues into investment decisions, every portfolio manager works in tandem with an ESG expert. This is because those who engage with these issues get a much better feel for the sustainability of business models. Also, as an active fund manager, we believe sustainability means entering into dialogue with companies and clearly setting out ESG requirements.

Christian Walburg

Christian Walburg

Association of German Pfandbrief Banks

What are your hopes and fears regarding the current harmonisation of covered bonds in Europe?

Dr. Frank Engels

Dr. Frank Engels

Union Investment

On the one hand, creating a single harmonised framework can facilitate analysis of covered bonds. There should also be a more precise, EU-wide definition of the term “covered bond”. But at the same time we expect the “gold” status of the German Pfandbrief to remain unchanged, as every EU country will have to transpose this framework into their national legislation. On the other hand, harmonisation carries a risk that market complexities will increase, leading to uncertainty for investors. For example, matters under discussion include splitting the covered bond market into ‘premium’ and ‘ordinary’ segments, and whether European Secured Notes (ESN) should be part of the directive. The products’ stability and ‘simplicity’ should not be threatened.