Brookmont cat bond ETF aims for deep diversification and risk-adjusted outperformance
The team behind the Brookmont Catastrophic Bond ETF (ILS) says its strategy is built on deep diversification and a long-term aim to outperform the broader catastrophe bond market on a risk-adjusted basis.
The Brookmont Catastrophic Bond ETF (ticker ILS), listed on the New York Stock Exchange (NYSE) at the beginning of April, becoming the first catastrophe bond fund strategy to be US exchange-listed and traded.
Speaking during a recent webinar hosted by Brookmont Capital Management and King Ridge Advisors, the fund’s creators laid out the philosophy behind the ETF, which offers exposure to the insurance-linked securities (ILS) market through a diversified portfolio of catastrophe bonds.
The webinar featured Ethan Powell, Principal & Chief Investment Officer of Brookmont Capital Management, LLC, Rick Pagnani, co-founder of King Ridge Capital Advisors LLC, and Vijay Manghnani, Managing Partner, CIO and CUO at King Ridge Capital Advisors.
During the webinar, Manghnani stated that the team are looking to “create a very diverse portfolio.”
“We expect to have about 60 to 75 holdings in the portfolio, and they will be diversified across various perils, hurricanes, earthquakes, storms in Europe, Japan, typhoons—as well as different geographies,” Manghnani explained.
However, Manghnani highlights that the ETF’s diversification doesn’t stop at geography or peril type.
“We are also going to look at various sponsor quality metrics. The universe of cat bonds has about 300 different sponsors. We have a view on the quality of those sponsors and the vintage of those catastrophe bonds which might span the last three or four years,” he added.
“At core, both Rick [Pagnani] and I and our product team, we are insurance, reinsurance, underwriters. We have done this for a couple of decades, and we are going to bring all of that to bare and look at it from that perspective.”
Moving forward, Powell discussed what the overall general goal of the strategy is, whether that is to outperform the Swiss Re cat bond index across the cycle, or instead, generate a return and risk comparable to the index?
“The way I characterise it is market exposure in a liquid vehicle. So, there may be some instances where the liquidity factor has to play a more prominent role in the portfolio, and in a perfect world, we’re never having to explain underperformance relative to broader market. But with that being said, if that was our only objective, I could do that,” Powell explained.
“What we’ve got here are industry leading experts that have been doing this for decades, and we feel very confident with their investment process and the people that are sort of powering that process, and our expectation is that we’re going to beat the market on a risk-adjusted basis.
“Right now, we’ve got a slightly less risky portfolio, but we think we have a very capable yield relative to the market.”
While some catastrophe bond funds have started to explore non-traditional perils such as cyber risk and terrorism, Pagnani discussed whether the team plans to expand into these areas in the future.
“We don’t have a ton of conviction on those models quite yet, like we don’t have on wildfire. There are certain areas where the market in general is building it’s knowledge base, but it’s got some room to go.
“We’re following the market, we think it’s super intriguing. We’d love to see every one of these classes be sort of eligible, if you will to meet our standards, and because you know the broader the better. So we’re hopeful, we’re keeping an eye on it, but presently, no.”
Powell, added: “There’s a lot of human element associated with some of those other risks. If they become very significant in the market, we’re likely to acquire some expertise in that and incorporate them. But right now they’re still very much on the margin.”
As of April 25th, the Brookmont Catastrophic Bond ETF had just over $4 million allocated across 16 catastrophe bond positions, with a further $2.9 million reported in cash or equivalents.
