This month, Bond Fund Intelligence recaps a session from our 5th Annual European Money Fund Symposium, which took place late last month in Paris, France. The segment, "Ultra-Short Bond Funds and Separate Accounts," featured Neil Hutchison from J.P. Morgan Asset Management, Rob Sabatino from UBS Asset Management, and Thierry Darmon from Amundi. The three discussed positioning in the fund space just beyond money funds, regulations, and the popularity of bond funds in Europe. (Note: This "profile" is reprinted from the September issue of BFI. Contact us if you'd like to see the full issue, or if you'd like to see our new Bond Fund Portfolio Holdings product.)
Crane: Tell us about the positioning of your offerings. Where is the sweet spot? Hutchison: We share a lot of the same best practices [as] Global Liquidity. So we still have a focus on principal preservation. We still have a 'buy list' approach. But we sort of go longer and lower with respect to duration and credit risk as well. So, the sweet spot for us [is] 20 to 40 bps over liquidity funds ... with minimal volatility. Strategies such as a half-year duration, 20% to maybe 30% triple-B investments, and a step out further in terms of final maturities, out to 3 years, is where we need to go to get these type of returns. So I suppose the key takeaway here ... is we go to 3 years as opposed to 2 years, which means we don't qualify for cash or cash equivalency.
Sabatino: In our U.S. business ... it's mostly SMAs [separately managed accounts] once you leave money market space.... For ultra short and short duration clients, the trend we've seen for a number of years, with the low interest rate environment, has been lower credit quality and longer duration.... Obviously, in USD [we're] concerned about rising interest rates. But given flatness of the curve, and the ability to use floating rate notes, we continue to see the sweet spot being higher yields, more credit, longer duration.
In terms of European strategy across multiple currencies, we do have standard money market funds in addition to our CNAV short term money market funds. [Editor's note: Europe has both "short-term" money funds, which are similar to U.S. MMFs, and "standard" MMFs, which are like ultra-short bond funds.] We position the standard funds more in that "ultra short, enhanced cash" space for those clients that want to take a little bit more risk both in duration and credit. Then we do have short-term corporate, Luxembourg-domiciled funds. Clearly, we've had more traction with SMAs with our U.S. clients, some being multinational with trapped cash offshore.
Crane: Are ultra shorts more popular in euros because of the negative yields? Darmon: Yes, probably the negative yields have been a trigger of a rise in not only the standard MMFs compared with Short Term, but also for the ultra-short term bonds.... I think in Europe there is a historical reason for this attraction of the Euro-denominated for short term bond funds. French asset managers have developed these ... products even before the rates turned to negative. There is a [diversity] of offerings in terms of expertise and assets in this space ... that enabled these Euro denominated products to [grow faster] than those in GBP [sterling] and USD. For the Euro denominated product, we have been helped by this negative environment.... Even if the rate in the Euro zone should come back to positive territory, the short term bond category in Europe should remain a [robust] asset class.
Crane: Do investors in ultra short funds use them in tandem with MMFs? Sabatino: Many of our conversations start with cash. We've had clients that we've had in money market funds for a number of years that have decided they don't need to keep as much cash. So the first initial conversation is typically about cash strategy, informing them what the options are: money market funds, separate accounts, ultra shorts, etc. [T]his idea of bucketing your cash is very common. Your longest-term would be strategic cash, reserves that you might need in 3 to 6 months, then obviously your operating cash being your most liquid.... We've even seen some multinationals ... take sliver of their overall treasury portfolio and put it into something higher yielding. They're still looking to stay in very short duration space, but going into ultra short high yield or emerging markets.... It's definitely a suite of products that we look to offer our clients.
Crane: Is there standardization? Hutchison: Clearly within the AAA [money fund] world there's a lot of similarities within the funds.... But once you step out from that, it's a real mixed bag.... Literally, it could be liquidity funds plus a little bit. Some funds could be rated; some could have derivative overlays; some could utilize ABS. Others have almost home biases as well. If you look at French funds, you have overweight to a certain French corporates, A3, P3 or nonrated. The same could be said for Spanish and Italian short duration offerings. You have different credits in there that arguably we wouldn't be buying in our strategy. So there is a huge range, and trying to pull that into some form of composite approach is very difficult, especially in Europe. It's probably a little easier in the sterling currency to be fair. A lot of the 'step-out' funds or managed reserve type solutions in sterling. There may be some differences but they're less broad than European equivalents.
Sabatino: The further away from a highly regulated product you get, there's more deviation.... Once you get into the ultra-short space, and especially the SMAs, it gets more difficult. But as the space evolves, you could potentially see more standardization. But [in many case] they want products that are different.
Crane: Talk about naming, and what restricts how those funds can invest in? Darmon: At Amundi, our range is quite simple. In terms of naming, we have our money market fund range with a flagship name for the investment horizon, for example our "3M" is rated by Fitch standard money market fund.... Our safest short term bond fund named Amundi 6M obviously has investment horizon recommended of 6 months and maximum maturity is 3 years. You will find our internal limits regarding the maturity, the credit ratings, the liquidity [in] the commercial material we provide the clients.
In the prospectus, we give the general way we manage the fund.... When pitching this product, we precisely give the information of the internal limits of the products we sell. We have of course piles of information in the prospectus but the precise info on the investment process and risk process we follow within the portfolio management is the commercial materials and through regular reporting we have with the clients.
Hutchison: That's part of the reason we call these funds Managed Reserve funds. There isn't any reference to 'cash.' Basically, we not looking to mis-sell. These are purely for strategic cash purposes. That's the way we set up these funds, so it's very important that we make this distinction. That's part of the reason we say our universe is 1 to 3 years, as opposed to 1 to 2 years.... It really comes down to how we sell this to our client base. We're not selling it as a higher yielding alternative to the AAA-rated money market funds that are effectively there for operational cash reasons. This is purely because some of the SMA business is to carefully work with clients for specific purposes.... We make it very clear point and not try to mis-sell, that's clearly with lessons learned from the crisis.
