Brookmont to launch exchange-traded cat bond fund, Catastrophic Bond ETF
Brookmont Capital Management, LLC, an SEC registered investment manager, has launched a prospectus for the Brookmont Catastrophic Bond ETF, a new exchange traded fund strategy that will have a predominant focus on the catastrophe bond and insurance-linked securities (ILS) asset class.
The Brookmont Catastrophic Bond ETF will be actively managed and have a ticker symbol of ROAR, with plans for its shares to list and be traded on the New York Stock Exchange (NYSE).
It’s going to be a non-diversified fund, as defined in the Investment Company Act of 1940, but will be more readily available than the other mutual catastrophe bond and ILS funds already in the market, with ROAR set to have shares that can be traded directly on the NYSE.
As a result, this will be more readily available to retail investors as well, given other mutual ILS fund strategies tend to only be available to be invested in via registered investment advisors.
Which is the difference in an ETF, versus the dedicated mutual cat bond and ILS funds we see today in the market that have together gathered over $6 billion in assets, across strategies managed or offered by Stone Ridge, Amundi US, City National Rochdale, and Embassy Asset Management.
The Brookmont Catastrophic Bond ETF will attempt to invest at least 80% of its assets in catastrophe bonds, but the prospectus notes that the definition of this will be broad, in ILS asset terms, saying, “For purposes of the Fund’s 80% test, catastrophe bonds include other forms of insurance-linked securities (“ILS”), including quota share instruments (a form of proportional reinsurance in which an investor participates in the premiums and losses of a reinsurer’s portfolio of catastrophe-oriented policies), bonds or notes issued in connection with excess-of-loss, stop-loss, or other non-proportional reinsurance (“Excess of Loss Notes”), collateralized reinsurance investments and industry loss warranties, event-linked swaps, and other insurance-and reinsurance-related securities.”
That gives the ETF’s portfolio managers plenty of optionality to both acquire assets in different formats, as well as diversify across perils, regions, triggers, terms and structures more readily as well.
It’s quite typical that registered catastrophe bond funds have the ability to invest in other kinds of ILS and reinsurance assets, but in this case we assume that 144A cat bonds will be the main target anyway, given they have far greater liquidity than most other ILS’.
As well as catastrophe bonds and other ILS, the exchange traded fund will be allowed to invest in a broad range of issuers and segments of the debt securities market, the prospectus says.
The main investment objective of the Brookmont Catastrophic Bond ETF will be to generate current income, while a secondary objective will be to achieve capital preservation for investors.
As an exchange-traded fund, shares can be purchased by so-called authorised participants who enter into agreements with the ETF’s distributor to acquire blocks of shares known as creation units. These authorised participants are often acting on behalf of more institutional type investors and can be the RIA’s we know are an entry point to existing mutual ILS funds.
However, as an ETF, it will also be possible for retail investors to buy and sell shares on a national securities exchange, in this case the NYSE, through a broker-dealer of some description which could even be a trading app.
ETF’s can also attract market-makers and liquidity providers, if they gain sufficient traction and are an attractive prospect to these types of investment entities and in some cases authorised participants will act as market-makers, to create more capacity and liquidity in an ETF fund strategy.
All of which means, as what would be the only catastrophe bond ETF, the Brookmont Catastrophic Bond ETF could be a very intriguing prospect to enter the market, especially if it gained traction among retail investors and market makers, of any kind.
What’s also interesting about ETF’s is the way they trade on an exchange and are subject to supply and demand factors, that can mean they trade above or below net asset value.
The mutual ILS funds in the market today trade at NAV. But a true ETF sees its shares sold at market prices, based on supply, demand and market factors, so heightened demand with a lack of sellers available can drive the price higher, and the reverse is also true.
Where the mutual ILS funds and interval funds we see currently tend to only have price movements based on NAV, so secondary market prices, seasonality, premium earnings and any events that occur, the ETF can see its price fluctuate during the day, as demand and supply influence the shares.
In an asset class that can have relatively limited liquidity even at times where there aren’t catastrophe events threatening, this could make for an interesting situation and could be why the 80% rule would see the manager’s investing in debt securities or instruments with greater liquidity, as well as providing a role for market makers too.
This cat bond ETF will have an as yet unnamed sub-adviser, acting as a portfolio manager to the cat bond ETF strategy, while Brookmont will be its investment adviser.
It will be interesting to see who gets named as that sub-adviser and whether it is an established ILS market name.
Ethan Powell, Portfolio Manager for Brookmont, will also have joint responsibility for the fund alongside the sub-adviser.
Which is another interesting point, as Powell, who is also a Principle and the Chief Investment Officer of Brookmont Capital, is also the founder of Impact Shares, an ESG ETF focused adviser that previously tried to launch a catastrophe bond and reinsurance exchange traded strategy.
Impact Shares proposed a strategy named the Climate Risk Reinsurance Corporation, that was designed to be an ESG appropriate investment opportunity that features sees catastrophe bonds, insurance-linked securities (ILS) and related reinsurance investments within its portfolio.
That first iteration was also intended to be an index-tracking ETF strategy, but that fund was later renamed and became the Climate Risk Reinsurance ETF, dropping the index angle to the fund as well.
The ticker symbol for those previous strategy’s prospectus’ was also ROAR, so this is the latest iteration, but this time Powell and Brookmont are working with well-established ETF servicing, accounting, administration and distribution specialist company Commonwealth Fund Services, as well as Wolters Luwer subsidiary Corporation Trust Company.
It’s going to be interesting to track this new strategic direction and the launch of the Brookmont Catastrophic Bond ETF.
ETF’s make some in the ILS market nervous, over the potential for retail investors to access what is a complex and not always so liquid asset class.
But, it is an inevitable development many would say, as risk and capital gets increasingly democratised and a well-managed cat bond ETF may prove more liquid than many esoteric and alternative ETF investment strategies that are already available to retail money anyway.
