We continue to review highlights from our recent Bond Fund Symposium conference, which took place last week in Philadelphia, Pa. Below, we excerpt from the session, "Senior Portfolio Manager Perspectives," which featured PGIM MD of Fixed Income Joseph D'Angelo and J.P. Morgan Asset Management Portfolio Manager & Head of Managed Reserves Dave Martucci. They discussed ultra-short investment strategies, as well a number of other issues. (See also our March 27 News, "BFS Keynote: PIMCO's Schneider and BlackRock's Mejzak USBFs vs. SMAs.") Attendees and Crane Data subscribers may access the Powerpoints, recordings and conference materials at the bottom of our "Content" page or our via our Bond Fund Symposium 2019 Download Center.
Martucci told us, "I'm a portfolio manager at J.P. Morgan Asset Management in the Global Liquidity Group. The team I'm responsible for is the Managed Reserves Group. I've been there for 19 years, all as a portfolio manager, in basically the ultra-short out to the intermediate part of the curve. The Managed Reserves product is the brand name for our ultra-short duration products, which totals around $76 billion, of which $21 billion is in commingled vehicles -- mutual funds as well as ETFs -- and the other $55B is in SMAs. We have a team of 11 portfolio managers/research analysts."
D'Angelo commented, "I work for PGIM which is effectively Prudential Financial's fixed income asset manager. We have $80 billion in the front end. There's five of us that do it, and I've been there 30 years. I grew up working for the treasurer of the company so I was involved in our direct issuance of commercial paper and or other sec lending borrowing programs and then I jumped over to do the reinvest about 20 years ago.... We have everything from 2a-7 funds to ultra-short bond funds, and then we launched an ETF in April."
When asked about the strategies of Managed Reserves, Martucci explained, "We were able to tell a story with the success of the money market fund business, particularly the approved for purchase list, we put risk parameters around concentration limits as well as a spread duration limits. That really resonated ... with clients who were looking for a little bit more ... return.... As Jerome was saying, a lot of it is hand-to-hand combat and educating our clients on really the benefits of taking a step outside of money market funds, and really being able to do that with a very low volatility and a very controlled fashion. That's the investment process that we've built using the expertise that we have at JP Morgan."
He added, "We are starting now to see money come down the curve, which was last year, and now we're starting to see money as more of an allocation play, where people are looking to de-risk.... Obviously, money market fund reform also has helped us, with the floating NAV. Now clients do have to consider us versus the prime fund. So that's been very beneficial for us."
When asked where he looks for adding yield, D'Angelo responded, "I think we choose to view ultra-short as sort of like a mini, multi-sector thing. In almost all of our ultra-short mandates, we have anywhere from 10%, 20%, up to 50% in structured product. So I think for us the biggest question is 'How much money do you need to have laying around based on what the client's needs are?' That to me is the trickiest part of ultra-short. That being said, from a bank exposure standpoint, I would say we're 20-25% in banks in ultra-short."
The PGIM manager explained, "We buy a lot of A2-P2 commercial paper in those products. We like the diversity there, and through 2008, we felt like that liquidity there was pretty strong. [There are] far fewer banks in ultra-short than you might expect given how heavy 2a-7 is. And from a multi-sector standpoint -- you talked about the trading floor being like a football field -- and we kind of run up and down the football field asking 'Can you find me some of this 3-year CMBS Triple-A fixed?' We'll put swaps on it and do we have to do with that, but a lot of what we do is ... is based on what's going on throughout our complex."
Martucci also told the Philadelphia crowd, "The only repo that you'll find in our ultra-short universe is going to be nontraditional repo.... Typically, SMAs we find that for the most part they're not around long enough where it makes sense to put the time and effort into setting up the repo docs.... But typically, that's a product that we use for our commingled vehicles that we know we'll be around for a while."
He stated, "As far as Treasuries and Agencies actually, right now we have probably the largest percentage that we've had in quite some time in our ultra-short universe.... About a month or two ago, we decided, well spreads have come in significantly and valuations are tight, we think that that will continue. But as kind of a hedge to that we decided let's start to add some Treasuries in here.... We have a Fed that has proven to be very dovish and will be there to react to the market.... How we move forward with that position, we're still we're still in discussion. But that's where we are right now."
Martucci added, "Coming out of the crisis, there was definitely a lot of clients didn't really want any structured products. I think just to get them to do credit cards and auto receivables at Triple-A level was an effort and an education process. I think the client base has become more knowledgeable and understands the process a little more. But still, I think in general mortgages for the most part, excluding a handful of accounts are excluded from most of our base.... We do have a 5% limit on high yield in the ETF that we do not currently use. That was more just to match us up with what the other ETFs are capable of doing.... I think structured product is probably the biggest area where clients either totally exclude or only allow certain types."
When asked about cash flows, D'Angelo commented, "Believe it or not that's pretty challenging for us, because most of the ultra-short products, especially for the insurance company, are around securities lending. So, the cash is being originated through securities lending activity and you're relying on those loans staying out. If you have volatility with overnight rates or you come into a quarter-end and have all this balance sheet stuff going on, a lot of times you get whipped around a little bit. That has been the most challenging aspect for us. That's specific to ultra-short that's largely driven by securities lending."
"So, what we try to do in that example would be to say, 'Look, you can't have all your money in ultra-short... You have to put some of the money somewhere else. And I think the biggest part is sitting down with clients and saying, 'How much do you need laying around? and how much are you really willing to take risk with? And if you are, you can't come to me in three days and say I need it back."
When asked about active vs. passive in the ultra-short space, Martucci responded, "I think it has to be active. Clients come to us with, for the most part, a principal preservation and liquidity [mandate]. They don't want to hear that an index will force you into doing something or buying something to match an index. I think that to me is why that won't work in this space. I think clients are looking for active management, and we're adding our expertise to kind of avoid those pitfalls."
Finally, D'Angelo added, "I lived through 2008, and I think the thing that resonated with me was just thinking about subprime and sitting around the table of analysts and everyone is like, 'This is a layup.' Nothing is a layup.... Nothing is a sure thing in what we do. You realize a lot of times the pendulum swings and everyone is on the same side of the trade. I think both of us will probably say we hate that right? You don't want everybody going the same way. That's when it gets dangerous."
