Today, we excerpt from the March issue of Crane Data's new publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. Our latest monthly "profile" follows.... This month, Bond Fund Intelligence interviews Managing Director & Portfolio Manager Dave Martucci and Managed Reserves Investment Policy Committee Chairman and Risk Manager Saad Rehman from JPMorgan Asset Management. Martucci runs the $6 billion JPMorgan Managed Income Fund, which is the largest fund we currently track in our Conservative Ultra Short Bond Fund category, and Rehman has been instrumental in the creation of our new "Conservative" category. We discuss risk management, the growing demand for short-term products, and conservative ultra short’s place within a cash segmentation strategy, below.

BFI: How long have you been involved in the conservative ultra short bond space? Martucci: JPMorgan Chase & Co. has been managing money for corporations, governments, endowments, foundations, and individuals worldwide for well over a century. Currently, J.P. Morgan Asset Management has $1.7 trillion in AUM, around 25% of which is in our Global Liquidity business, which we've been in for over 30 years. Within the Global Liquidity business we manage cash and money market fund portfolios, as well as our conservative ultra short bond fund offering, which we call the Managed Reserves strategy.

The strategy dates back to 2004 and currently has $43 billion in AUM. Of that, around $9B is in mutual funds and the remainder is in separately managed accounts. Within the Managed Reserves strategy is the JPMorgan Managed Income Fund (JMGIX), which was launched in 2010 and now has $6B, an all-time high. I'm the lead portfolio manager and head of our Managed Reserves trading desk. I have 15 years of experience running liquidity strategies, and I've also been a portfolio manager for short duration and intermediate portfolios.

Rehman: I am a Risk Manager and Chairman of the Managed Reserves Investment Policy Committee, which formulates and approves investment policies and procedures as they relate to credit, market, and other risks applicable to the investment management of these funds and accounts. I've worked at JPM for 10 years.

BFI: How has the fund been received? Martucci: We've seen a significant amount of interest recently, as clients continue to be challenged by the Fed's zero interest rate policy. Additionally, they now face the prospect of floating NAVs on the short end and rising rates on the long end. These clients are looking for some incremental return over money market funds, but they still want a conservative approach. Rehman: In the wake of the financial crisis, a lot of clients built up large cash positions on their balance sheets. This excess cash, combined with an effective segmentation strategy, has been driving growth in this space. A natural place to put a strategic cash position to work is in a conservative solution that offers an incremental return over money funds.

Martucci: This is where the Managed Reserves strategy comes in, as it was a natural extension of our well-established money market fund platform, leveraging the best practices and procedures that we employ in that platform. For instance, an approved credit list that you typically find in a money market fund has been built upon and expanded, serving as a key piece of our Managed Reserves strategy. Since the strategy launched, these conservative foundations have enabled Managed Reserves to provide a strong track record of consistent returns over money market funds, with very limited volatility. Since inception, the Managed Reserves composite has had no period of rolling three-month losses. Fund assets are at an all-time high.

BFI: What are the biggest challenges for funds in the conservative space? Martucci: The main issue that we see is the variability of funds in this category. The issue comes from trying to define what that conservative ultra short space is. We're happy that industry leaders such as Crane and others are starting to focus on this and trying to establish it as a category of its own. Clearly, the space is somewhere between money market funds and short duration. We believe that the conservative ultra short space is not determined solely by interest rate duration, but also by spread duration, credit selection, the type of securities these funds can and do choose to hold and, most importantly, the volatility of performance. We address all these factors through robust risk management.

Rehman: What clients are looking for in this space is not just returns, but the risk associated with those returns. We have seen a period of low volatility over the past few years, which we think is masking some of the potential downside. We expect to see more volatility, potentially due to diverging central bank actions, regulations for money market funds and banks, as well as geopolitical risk. With volatility, we expect that we'll start to see divergence in performance for these conservative ultra short funds. One of the factors driving that divergence will be credit selection in these funds. For example, some funds in the ultra short space actively participate in below investment grade credit while others, like JPMorgan Managed Income, do not.

There are many ways you can analyze the risk and returns of funds in the ultra short space. For example, when you look at the average monthly returns of these funds they are somewhat clustered tightly around a mean -- whereas there's a much wider range when you look at the volatility of those returns. Another way to get a general sense of how risky a fund's returns are is to compare the percentage of negative monthly returns over a period, such as the past 12 or 36 months. You can see that the percentage for some funds is almost double that of others in the space. (Note: Watch for more excerpts from our latest BFI "profile" in coming days, or contact us to see the full issue of our new Bond Fund Intelligence.)

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