This month, BFI interviews Neuberger Berman Senior Portfolio Manager & MD Kristian Lind and PM & VP Matt McGinnis, who manage tax-exempt and taxable short-term strategies, respectively. Lind oversees the firm's Municipal Short Duration portfolios, while McGinnis is part of a team that runs taxable Enhanced Cash and Short Duration separate accounts, as well as the Neuberger Berman taxable Short Duration Bond Fund. Our discussion follows.(Note: This "profile" is reprinted from the December issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, our new Bond Fund Portfolio Holdings product, or the agenda for our upcoming Bond Fund Symposium, which will be in Los Angeles, Calif., March 22-23, 2018.)
BFI: Can you give us a little background? Lind: Our fixed income team has a long history managing cash management and short duration mandates in a variety of vehicles. Many team members have over 20 years of experience partnering with clients on customized short duration and cash management solutions. Some of our largest mandates date back to the mid 1980's.... I've been with Neuberger Berman since 2005 and Matt has been with us since 2008.
BFI: Talk about your short strategies. McGinnis: The short duration space is a significant focus for us at Neuberger Berman. As a firm, we currently manage $29.6 billion in various short duration fixed income strategies across Floating Rate Loans, High Yield, Emerging Markets, Municipals and Investment Grade debt. We manage $1.7 billion in Municipal Short Duration assets and $4.7 billion in taxable Investment Grade Short Duration assets. While we do offer a taxable short duration bond mutual fund, a large focus of ours is partnering with our clients to create customized separately managed accounts tailored to our client's individual needs.
Lind: At the moment, we don't currently have a '40-Act mutual fund in the tax exempt short duration space. The main reason for that is based on overall client demand. For the most part, our institutional and ultra-high net worth prospects are looking for highly customized separate accounts.... Our client base welcomes the idea of having the ability to tailor fit their guidelines and risk parameters. That's very tough to do with a mutual fund. In terms of how our portfolios are currently positioned, we've definitely been defensive from a duration perspective. We've already had two rate hikes this year and we're expecting another one on December 13th, so ... naturally, we've been defensive. With preservation of capital our number one priority for all cash management mandates, it's been the right position for our clients this year.
McGinnis: We do offer a taxable Short Duration Bond mutual fund (NSHLX) that's been around since 1986.... The fund and the SMA's are run by the same team and have similar overall themes. We are also defensive in terms of duration, and we take advantage of multiple asset classes in both. We have flexibility in separately managed customized accounts, and the mutual fund, to really invest in a wide range of asset classes. In the fund, we have assets ranging from investment grade credits, ABS and CMBS, to agency mortgage-backed securities and Treasuries. In the SMAs, we have the ability to do all that, [but] tailored to each client's particular objectives and constraints.
BFI: What are your big challenges? Lind: Given the gradually rising rate environment we're currently in, one of the major challenges has been trying to take advantage of the positively sloped yield curve without losing principal. By utilizing instruments such as floating rate notes, variable rate demand obligations, and shorter dated fixed rate maturities, we've been able to capitalize on rising rates by continuously reinvesting client proceeds at higher interest rates. Not only does this help us preserve principal, but it also allows our clients to enhance the yields of their portfolios throughout the year. Our short duration strategies have less interest rate risk than longer duration strategies; this has been advantageous in a rising rate environment and helps to minimize a potential risk to principal.
BFI: Tell us more about your portfolios. McGinnis: We are able to take advantage of a wide range of investment strategies based on individual client needs. We manage accounts with varying degrees of duration, several types of asset classes, and different tax considerations, which separate our suite of offerings from money funds. For example, we often invest in securities well beyond the typical 397 days a money fund is restricted to. In addition, we have created solutions for clients by building portfolios that hold both taxable and tax exempt securities, giving us the flexibility to invest in both based on relative value. The partnership with our clients and the customization we offer sets us apart from money funds and other separate account managers.
Neuberger Berman has a deep and experienced team across a wide variety of fixed income asset classes. Driven by a collaborative research process, we partner with clients to create portfolios that take advantage of this. We have expertise in the municipal market, corporate credit market, structured products such as ABS and CMBS, and government markets such as agency MBS, agencies and Treasuries. Depending on a client's objectives, risk appetite, and tax considerations, we [then] create customized solutions.
BFI: Are you seeing inflows? Lind: Since money market fund reform took place back in late 2016, we've seen a noticeable uptick in separate account inflows. While institutional clients seem to take a binary view on whether to utilize municipal money funds subject to the new rules, the mention of a floating NAV and potential gates and fees seems to scare the average high net worth investor, especially with net muni money fund yields still well below 1.00%. The risk reward just doesn't seem palatable, so most investors seem to have gravitated to Government money funds, which are excluded from the recent 2a-7 reforms, or a separate account alternative.
BFI: Are you seeing 'outside-in' interest? Lind: We've been in this very static environment in terms of volatility on the front end of the yield curve for many years.... Now, [some investors] are starting to see that interest rates across the curve have the potential to move higher. [A] lot of prospects and clients that have been sitting in longer duration strategies, whether it be core or extended core offerings, have noticed this increased volatility, and some have begun trimming some of their longer duration exposure and are actually moving into shorter duration products. I think this is a natural response considering where we are in the interest rate cycle.
McGinnis: It's been about staying ahead of these interest rate hikes. We've really taken advantage of floating rate notes over the last couple of years. And this year, it's been a particular boon to performance and returns.... Conservatively, over 50 percent of our enhanced cash account assets are in 3-month LIBOR based floaters. We've seen great success in deploying them.
BFI: Tell us about your investors. Lind: We have a wide variety of clients who invest in our municipal strategies, including corporations, insurance companies, foundations and endowments, family offices, and high net worth individuals.... While we do manage institutional assets, a majority of the recent demand has come from high net worth investors. Even though the financial crisis happened almost ten years ago, we still find that many prospects continue to sit on unusually large piles of cash, and their frustration resides around the inability to earn a decent return on those funds. Unfortunately, traditional cash management vehicles, such as money market funds, haven't afforded them the opportunity to do that.
With net yields as low as they've been for such a long period of time, some investors have been stretching for yield.... They've been moving out the [credit] spectrum in addition to the duration spectrum. Over the past several years those products have outperformed, but if we do see a backup in rates, particularly in the long end of the curve, and increased volatility ... there's a good chance those investors will reconsider a more defensive alternative. McGinnis: We've seen growth from both retail and institutional clients. You know [for] a lot of the people and firms that we talk to -- corporations, state treasurers or insurance companies -- the customization really peaks their interest.
BFI: What about tax reform? Lind: Our Fixed Income CIO, Brad Tank, recently published a piece on the potential impacts of tax reform across fixed income markets. In it, he touches on how the House and Senate proposals would effectively eliminate "advance refunding" in the municipal market, ultimately shrinking and having a meaningful impact on future municipal supply. In addition, the House proposal eliminates the tax exemption for private activity bonds.... [T]raditional municipal market issuers such as colleges, hospitals and airports, [could] lose [this] tax exemption.
McGinnis: Tax reform could have an impact on the corporate market as well. Depending on the outcome, a reduction in the corporate tax rate should stimulate consumption spending, and the possibility of fully deducting capital spending for five years, as proposed under the House bill, should strongly encourage investment spending. So, while there are a lot of moving parts and steps to be seen, one of the major things we are watching is the jockeying in Washington.
BFI: What is your outlook? Lind: We think the money market reform that took place last fall has created a great opportunity in both the institutional and high net worth separately managed account spaces. With changes to the dollar NAV and the potential gates and fees that have been put in place, we continue to see more interest in customized solutions to achieve clients' cash management needs. We think our track record of partnering with clients sets us up well for the foreseeable future.
