David Zahn, head of European fixed income at Franklin Templeton, believes that now is a good time to invest in green bonds, saying that sustainable investing will be a dominant investment trend.

David Zahn (pictured) at Franklin Templeton is positive about the outlook for fixed income, highlighting opportunities in particular in longer-duration assets, such as green and social bonds.

Zahn expects interest rate cuts in the UK, the US and Europe this year, with two to three rate cuts by the US Federal Reserve and cuts each quarter by the European Central Bank (ECB) for the next six quarters. He thinks that the market will continue to be supportive of fixed income, especially in the UK and Europe, which offers good yields and a steady performance. “Markets will be volatile which presents opportunities for investors. Fixed income should do well,” he told WealthBriefing in an interview. “We’re reducing the amount we have in credit, not because there’s a big issue with it, but it can be expensive. We’re moving towards European government bonds, and away from corporates.” 

Zahn believes that fixed income provides a good diversifier and that the asset allocation of 60 per cent equities and 40 per cent bonds is still relevant. “Clients are increasingly looking to increase their allocation to fixed income and I think that this will continue,” he said. Within Europe, he favours Austria, Germany and Spain as well as UK gilts, which he finds higher quality than in the rest of Europe. He is also underweight in France and Italy, as they have fiscal issues.

“Green bonds also continue to do well,” Zahn continued. With rates coming down, Zahn thinks it is an opportune time for investors to invest in green and social bonds, which are typically issued to fund longer-term projects, and are a good source of longer-duration investments. He told WealthBriefing that they have done well this year and he expects them to continue to do so.

Zahn also believes that an expanding and increasingly diverse sustainable finance market means that attractive returns can go hand in hand with a positive impact on the environment and our communities. He expects demand for green and social use-of-proceeds instruments to remain strong in future, with both markets set for dynamic growth. Sustainable investing will be a dominant trend in the coming years, in his view, with structural tailwinds that could help improve financial returns.

Franklin Templeton has four green bond funds, two of which were launched last October. They include the  Franklin Global Green Bond Fund, the Franklin Sustainable Euro Green Bond UCITS ETF, the Franklin Sustainable Euro Green Corp 1–5 Year UCITS ETF and the Franklin Sustainable Euro Green Sovereign UCITS ETF. “They’re doing very well overall. The good news about them is that they are higher duration and are less volatile. We’ve seen really good issuance in green bonds this year and we expect it to continue,” he continued.

Franklin Sustainable Euro Green Bond UCITS ETF
Zahn manages the Franklin Sustainable Euro Green Bond UCITS ETF which aims to provide exposure to the European green bond market whilst maximising total returns. It is classified as Article 9 under the EU Sustainable Finance Disclosure Regulation (SFDR), and invests mainly in bonds that are labelled green and denominated in European currencies. The fund, which is heavily weighted towards Germany, followed by the Netherlands, France, Spain, Belgium, the UK and Ireland has outperformed the index over a three to five-year period. Zahn said he invests mainly in the energy transition, namely in renewables.

He also manages the Franklin Sustainable Euro Green Corp 1-5 Year which aims to contribute to environmental goals, by providing exposure primarily to the European corporate green bond market with a short to mid duration of less than five years, whilst maximising total returns. The fund is classified as Article 9 under the SFDR, investing mainly in bonds that are labelled green and denominated in European currencies.