Earlier this month, PIMCO celebrated the 10th birthday of MINT, or PIMCO Enhanced Short Maturity Active ETF, the oldest and largest actively-managed fixed-income exchange traded fund. Below, we discuss the origin, success and current state of the short-term bond ETF and the ultra-short space with PIMCO MD & Portfolio Manager Jerome Schneider and Product Specialist Ken Chambers. Our Q&A follows. Note: This profile is modified slightly and reprinted from the November issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set, which was published Friday.
BFI: Tell us briefly about your history. Schneider: PIMCO is approaching 50 years, and a focus on active bond management and fixed income has been the key to our success. We take into account macro-economic trends and utilize our resources to identify bottom-up opportunities for clients.... In 1987, we created the PIMCO Short Term Fund.... We've been at the forefront of creation of value for clients who want to identify a more neutral risk opportunity [and] take advantage of structural situations in the front end of the yield curve.
Over the past 10 years, we've been adapting and segmenting that short-term opportunity set on two fronts. [We've been] building out our expertise and growing our portfolio management team. We're up to 12 PMs in the front end.... [We've also expanded] in terms of the products we’ve offered and created. [We have] not only separate accounts, as you might figure for institutional clients, but a large set of client friendly and accessible venues which are focused on the front end.
Ten years ago, we launched MINT, which is the PIMCO "enhanced cash" ETF.... It was introduced right after the depths of the financial crisis with the goal of giving clients the ability to differentiate credit risk and structural risk. But it was also [built] to avoid some of the low yields that you might find in traditional savings venues, including money funds and CDs.... We [wanted] to give clients a better risk- reward opportunity.
The other motivation was to create a new distribution framework for actively managed fixed income strategies. That was really the ulterior motive for PIMCO to launch an ETF, which appealed to a broad array of financial advisors.... Today MINT is the largest actively-managed fixed income ETF with over $13 billion.... Seven years ago, we also introduced our Short Asset Investment Fund (SAIF), a very low volatility, ultra-short strategy.
When we started this endeavor back in 2009, the ultra-short category was only $38 billion, but [it's] about $269 billion today. So, the growth has been pretty tremendous.... PIMCO has obviously benefited. But more importantly, so have investors. For those investors who are willing to segment and take a step outside that money market space, it's been quite rewarding. The performance of these ultra-shorts, and specifically MINT, has been pretty substantial [compared to] what you would find in a traditional money fund.
BFI: Talk about ETFs vs. funds. Schneider: We are indifferent whether it's a mutual fund, an ETF or a separate account.... We do see an awful lot of retail investors who gravitated to MINT.... But the balance between institutional investors and retail investors in MINT, and really across our ETF universe (which includes our Low Duration ETF, called LDUR, and our longer duration Core Bond fund, BOND) is really more balanced than it's ever been.
BFI: Talk about active vs. passive. Chambers: When you start to think about trying to replicate an index within the fixed income space -- take the Barclays 'Agg' with over 10,000 individual securities -- you have to do some type of sampling. When you create that, you start to create tracking errors because you're looking at specific duration and spread targets that you're trying to mimic.... PIMCO, with an active view, can take a position where ... we can implement some of those forward-looking projections and benefit investors.
Schneider: It is simply performance. A lot of that performance is driven not only by making the right asset selections, but how you manage the portfolio. Part of being an active manager is knowing what bonds to buy and what bonds to avoid. But also when to sell and what bonds to sell. Part of our return profile comes from income, what we earn from holding the bond. But it also comes from capital appreciation.... Whereas the vast majority of our competitors ... are simply buy and hold strategies, looking to outperform proxies like T-bills, you lose a lot of value by not actively optimizing your portfolio. We traditionally are much more active than our other brethren in the ultra-short universe at maximizing that total return aspect.
BFI: What does the portfolio look like? Schneider: I would say from a macro point of view, we're fairly defensive. We have been shedding corporate credit risk for quite some time.... It's been supplemented by a diverse approach that also includes: high quality asset-backed securities, prime quality auto loans, and agency mortgage securities.... We are more defensive in our credit posture than at any time over the past five or six years.
BFI: What is your biggest challenge? Schneider: Actually, our biggest challenge is education.... Our bias is to be more conservative, because PIMCO's ultrashort strategies have an emphasis on principal preservation and liquidity.... A lot of strategies have done well over the past year by embracing a ton of credit risk.... In our mind, it's not really the time to be taking risk. [We want to] educate investors on the differences between various ... solutions and the potential pick-up in return versus risk.... Investors really need to look under the hood to understand some of the schemes out there.... Some are relatively short-sighted.
Chambers: We try to work with distribution partners to understand the need for immediate liquidity versus intermediate liquidity. Many clients and institutions think they have to go to a money market fund because that's where the safety is. If you really don't need that liquidity over the next month or so, you're actually, as an investor, going to be better off in terms of return potential and liquidity by being in some type of ultra-short strategy. We've spent a lot of time talking about a liquidity management framework, a 'tiering' approach.... Oftentimes, clients get stuck in these [cash] allocations for a lot longer than they think. By landing in some type of an ultra-short strategy, you're going to be essentially paid more.
BFI: What are you most thankful for? Schneider: The growth of the ETF space is something that we all need appreciate. There's significant growth in terms of the people who are looking to embrace fixed income ... and ETFs are a digestible way for them to do it. The growth that we've seen too in terms of extra returns over the past 10 years ... is very substantial.... So all that extra return is the gravy on the turkey dinner.... We've been able to give clients proper risk adjusted returns and manage liquidity more actively.
Chambers: We talk a lot about it being 'sensible risk' that you want to add to an asset allocation.... Investors are much better off being in an ultra-short relative to just sitting in a money market fund, not only from the return potential, but for the cumulative return over time.... A lot of investors get stuck in an allocation, not realizing that they're going to stay there for six months or longer, and the return that you give up can be sizable.
BFI: What about your outlook? Schneider: We have often said over the past decade, that the short-term and ultra-short asset class, if you will, is not just simply an afterthought, it's a structural allocation. We think that theme will probably continue in a variety of ways, even though yields remain subdued. There is no doubt that strategies like MINT have outperformed since zero interest rate policies [arrived].... We think that the next 10 years will be [marked] by volatility management. These portfolios should help ease indigestion with risk asset prices, whether in equities, emerging markets or high yield.... We're also considering other strategies, including an ESG version of an ultra-short ETF in the near future.
Chambers: From an ETF perspective, there's a lot of things in play.... Now that [brokerage commissions] have gone away, the ability for clients to actively manage liquidity utilizing an ultra-short like MINT makes a lot of sense. We continue to try to be not only a thought leader within this space, but also in product development.... We're trying to think about what our investors over the next ten years are going to want out of their ultra-short.
