A press release entitled, "U.S. Bank Partners with StoneCastle to Provide High Net Worth Insured Cash Solution" tells us, "U.S. Bank announced today that it has entered into a distribution agreement with StoneCastle Cash Management, LLC to provide FICA For Advisors, a federally insured cash solution, to its registered investment advisor (RIA) clients. The product is designed to maximize yields and provide high levels of FDIC insurance while reducing market, credit and principal risk on clients' cash balances." We review the release, and also cover some recent news on ultra-short bond funds, below.
The release explains, "U.S. Bank is the sixth largest custodian in the United States and the first major custodian to offer the position-traded insured cash solution. The U.S. Bank account is seamlessly connected to a network of more than 800 banks, which enables clients to receive $25 million in federal insurance protection with the ability to insure up to $100 million per account."
Alan Markarian, manager of Investment Advisor Services for U.S. Bank, comments, "We've seen increased demand for alternative investment options in the short-term fixed income and cash space. This product provides a forward-thinking option for our clients that would be difficult for them to replicate on their own. It has a unique risk profile and a yield that clients may find attractive compared to other cash products they may be considering.... The product has a great balance of liquidity, yield, and principal protection."
StoneCastle CEO Dan Farrell adds, "Our business model has always been to connect institutional and retail investors to banks through innovative deposit and cash management solutions.... Partnering with U.S. Bank is a great privilege and a perfect extension of that message, which we are certain will help them become an even more competitive organization while contributing to their clients' business and financial successes."
Finally, StoneCastle says, "Extended FDIC insured products are designed to provide safety and underscore the importance of principal protection on cash holdings. Through a large network of pre-screened banks administered by StoneCastle, U.S. Bank provides an opportunity for its clients to extend FDIC insurance well beyond the $250 thousand dollar threshold normally found on a single deposit."
In other news, J.P. Morgan's latest weekly "Short-Term Fixed Income," features a "Short-term bond fund" update. It tell us, "In general, the rise in interest rates during the course of this year has not been friendly to bond returns. Our GABI aggregate index has returned –2.33% year to date (through 10/24/18). However, the very front end of the bond market universe has fared somewhat better. Data show that many ultrashort bond fund shave managed to generate positive returns that in many cases still exceed average yields earned by MMFs."
JPM continues, "However, short-term bond funds have generally not been able to match the ultrashorts. Even so, based on data from Morningstar, low duration bond funds have continued to see strong growth in recent months. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $629bn as of 9/30/18, up $61bn year over year. Perhaps unsurprisingly, most of the increase came from ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), which grew $49bn to $162bn, though short-term funds, with a slightly longer duration of 1.5 to 3.5 years, have also seen some modest growth, especially in 3Q18."
The piece also says, "Among ultrashort categories, the riskier multi-sector and credit styles have continued to outperform government and conservative credit funds on both an absolute and a risk-adjusted basis.... In the short-term space, government funds consistently underperform, though the picture among the various credit styles is more mixed. This is partly because in addition to being more volatile from month to month, short-term funds show more variation in returns between different funds."
It explains, "Flows have largely followed performance, with ultrashort funds seeing strong inflows across all styles except government funds, and short-term funds largely flat.... Allocations have been relatively stable in recent months, with mostly idiosyncratic changes."
JPM adds, "Looking ahead to 2019, we expect the FOMC to continue to raise policy rates at a pace similar to what we have seen this year, and for the overall yield curve to bearishly flatten. In this environment we expect demand for ultrashorts to persist, while short term funds may struggle if their returns cannot beat MMF yields."
Morningstar also comments on ultra-shorts in a new video entitled, "3 Funds That Could Be Cash Alternatives." They tell us, "Funds in the ultrashort bond category are generally high quality. You have some sector flexibility. Although they maintain durations of one year or less, they aren't replacements for FDIC-insured bank money market funds or certificates of deposit. That being said, here are three Morningstar Medalists in the ultrashort bond category that investors can use to diversify their cash holdings."
Analyst Alaina Bompiedi explains, "Fidelity Conservative Income Bond is indeed conservative, but it is not risk free. The fund invests below the one-year mark on the yield curve in a mix of commercial paper, floating rate, and short-term debt. That's pretty similar to other funds in the ultrashort bond category, but compared to money market funds, this one has a wider investment range. It can invest in taxable municipals, corporates, as well as foreign bonds."
Eric Jacobson adds, "Bronze rated BBH Limited Duration looks for undervalued bonds that have enough income to compensate for the liquidity and credit risks and that have an extra margin of safety. That's not a novel idea, but its process, both quantitative and qualitative, is meant to keep the fund invested in proven robust structures or time and battle tested guarantors."
Finally, Miriam Sjoblom adds, "One of my favorite ultrashort bond funds is PIMCO Enhanced Short Maturity ETF, which gets a Gold analyst rating. One of the reasons we like it, it's got a very experienced team. Jerome Schneider's been running it for nearly a decade and he's supported by PIMCO's vast resources across pretty much every bond sector globally.... Adding it all up, this one's tough to beat."
