In the June issue of our Bond Fund Intelligence newsletter, we interviewed Mary Beth Syal, Managing Principal and Portfolio Manager at Payden & Rygel. She heads the team that manages Payden & Rygel's suite of low duration funds, including the Payden Limited Maturity Fund. The firm is a "pioneer in providing tailored solutions for those institutions including corporate operating assets, pension funds, sovereign wealth funds and endowment funds, to name a few, that have need for short duration assets providing liquidity and flexibility." Of the ultra‐short strategies in general, she says "we think it is a sweet spot in cash management that more investors should be focusing on for their individual needs." A reprint of the Q&A that appeared in BFI follows.
BFI: Tell us about your history. Syal: What Joan [Payden, CEO of Payden & Rygel] did in the early 1980's was identify an opportunity in investment management that hadn't been developed. This involved pools of corporate cash that were being invested in Treasury bills and commercial paper. Her idea was that more could be done with this money using the management techniques typically applied to longer term fixed income portfolios. Part of creating the business involved developing the systems infrastructure to monitor and account for these securities. This area is an important part of our business. As portfolios have become more globalized, many institutions are in need of customized solutions including short maturities, currency management, and liquidity management.
BFI: Tell us about the funds you manage. Syal: We have a team approach to managing portfolios, be they mutual funds or separate accounts. Amy [Marshall], Eric [Hovey], and I are the senior strategists for the low duration team. While much of the firm's assets under management are customized separately managed accounts, we employ the same techniques in those mandates as we do in our mutual funds. We have mutual funds representing four of our low duration strategies. Payden Cash Reserves is our government money market fund. The Payden Limited Maturity Fund is the next step out from the Cash Reserves Fund, in the so‐called ultra‐short bond category. The Fund generally has a duration profile between half a year and one year.
We think that's a real sweet spot in cash management, to be able to use some of the yield curve and additional sectors to enhance the return profile without dramatically increasing the risk profile of a portfolio. We have two low duration offerings. The Payden Low Duration Fund invests primarily in government, investment grade corporate, asset‐backed and mortgage‐backed securities. The Payden Global Low Duration Fund uses these sectors, but also looks to take advantage of the "plus" sectors of the market -- non‐dollar securities, emerging market securities, and high yield corporate bonds.
BFI: How has the Limited Maturity Fund been received? Syal: If you look at the growth of the fund relative to interest rates, it tends to grow more when rates are low or heading lower. In low yield environments, investors look for greater return available from moving out the yield curve. The Fund grew throughout the early 2000's, and we've seen steady growth from the beginning of 2010 through today. The Fund is currently near the highest AUM since its inception. The reception for the Limited Maturity Fund has been positive as investors continue to look for higher returns and reassess their investment and liquidity requirements.
BFI: What are the big challenges? Syal: A big challenge is the effect of regulation on the liquidity environment -- having access to that liquidity and being able to continue to implement the strategy as you'd like. We've seen a lot of changes in the liquidity environment; it's not good or bad, it's just another factor that we have to evaluate when making investment decisions.
BFI: Has it been tempting to reach for yield? Syal: One of the main tenets of our investment approach is that we're not afraid to leave yield on the table if we feel we are not being compensated properly for the risk involved. We firmly believe that reaching for yield can put client's assets at risk. Generally, stretching for yield involves buying less liquid securities, and the liquidity profile of a security is very important within our analysis. We want to make sure we're investing in markets and securities that have a broad base of support. We have avoided securities that have failed our liquidity filter, which might have cost a few basis points on the margin. However, in our view disciplined investing is critical in the ultra‐short space where time horizons may be short and/or uncertain.
BFI: What types of securities do you buy? Syal: We run very diversified portfolios. We buy Treasuries, agencies and other high quality government paper. We also buy investment grade corporates and structured products. Most of the structured products are AAA-rated consumer receivables such as autos and credit cards. Asset-backed securities are a diversifier from corporate risk and they have maturity profiles that are a nice fit for this strategy. We are also able to buy a small allocation in below investment grade corporate debt and, generally speaking, we're talking about that first notch below investment grade -- companies rated double-B, many of which are on an upgrade path. The portfolio benefits from the return opportunity caused by ratings segmentation. GM and Ford, formerly BB-rated companies, are examples of holdings that have migrated higher in credit rating to become investment grade.
BFI: Do you look for opportunities out the yield curve? Syal: Yes. When we refer to using the yield curve, we're talking about investing a portion of the portfolio in 18 month to three year maturities. The Limited Maturity Fund is not trying to be a money market fund with a little bit of extra return potential. It uses the slope of the Treasury curve and the slope of the credit curve to generate total return. When we construct the portfolio, we begin with our macro-economic outlook and view for the level of interest rates over the next six to 12 months. The ability to use the entire yield curve from zero to three years and sometimes longer, gives the portfolio the flexibility to benefit from potential changes in the shape of the curve and the level of interest rates.
BFI: Have you had to waive any fees due to the low yield environment? Syal: We need to remain competitive with the return landscape. However, our history has been one where our fees generally have been very competitive. Occasionally we have made some minor changes in the expense cap, particularly in the past two years, reflecting the reality of the return environment. We believe that short term interest rates will be trending modestly higher over the next year and the return environment for investors will improve.
BFI: What is your outlook for Ultra-Shorts? Syal: Looking at the ultra-short bond fund category it appears that the assets under management in this part of the market have been slow to grow. We thought that money market reform would spur investors to re-evaluate their liquidity profile and see the need to make their cash work harder for them. But it is taking investors some time to come to grips with the changes and analyze any potential risks in moving out into ultra‐short bond funds. We think that as we get closer to the implementation of money fund reform, we'll see an increase in investors moving into these types of strategies. Frankly, we've been running these strategies for 30 years, and it is our belief that clients have been very well served by them.
