J.P. Morgan Asset Management recently hosted a webinar entitled, "Opportunities in Short-Term Bonds," which featured JPMAM Portfolio Managers James McNerny and Rick Taormina. They discuss "current market conditions and [the company's] two ultra-short duration bond strategies," in particular JPMorgan Ultra-Short Municipal Income ETF (JMST) and JPMorgan Ultra-Short Income ETF (JPST). We excerpt from their comments below. (Note: Crane Data continues to plan for its upcoming Bond Fund Symposium, which is March 23-24 in Boston. We're monitoring coronavirus developments carefully, but Boston continues to be low risk according to the latest from officials. We'll keep you posted and will offer credit if attendees, sponsors or we need to cancel. Please let us know if you want more info, or an extra ticket!)
On the recent webinar, JPMAM's McNerny explains, "One thing I want to do is ... define what the ultra-short space is for anybody who's not aware. Ultra-short portfolios, by definition, are those which have a weighted average duration of one year or less at the portfolio level. To be in the Morningstar category, that's the only characteristic that you have to meet.... Typically, here at J.P. Morgan anyway, we are buying five years and shorter in maturity on the curve."
He asks, "Why ultra-short? Why should clients be interested, and why have we seen tremendous interest in ultra-short in general? It's the steady returns that the space has delivered historically with low volatility, which obviously then results in strong risk adjusted returns.... All in all, [the fund has] an attractive yield/duration profile.... I think the space has been well received by clients ... as evidenced by [all the] money in motion."
McNerny discusses bond fund assets by category in 2019, saying, "[Among] the top 10 categories of flows in the mutual fund and ETF space ... the ultra-short space was the number eight category overall. And so, [it was] a good year for ultra-short, [with] $38 billion in. But [this is] after a tremendous record-setting year in 2018 with over $90 billion in net new flows.... It's important to note that the lion's share of this space is going to be [in] the active space. There aren't too many passive managers here and the majority of those are going to be in longer floating rate passive products.... In January, we saw about another $6 billion [move] into the category. If you think anecdotally, just talking about JPST here, we've seen over $1.25 billion in year-to-date, which eclipses our quarterly average over the last two years."
He continues, "Again, this space is going to be one-year weighted duration -- it's just outside of money market funds. But you should not think of these as cash replacements or money market funds. These are low duration bond funds, [so] you have exposure to price movement and you could have some volatility, albeit we would expect it to be low. That being said, for a lot of clients that have too much cash in money market funds and are looking for a little bit more income, if they're willing to move out the curve.... We would recommend at least a six month investment horizon, [so] this is a space where we see a lot of interest in. And, similarly if you're looking to reduce interest rate duration, especially on the rally that we've had in here, we see clients moving down the curve and coming out of risk into this space as well."
Taormina comments, "This space is very interesting, and as rates fall, it becomes actually more interesting. [A] lot of folks use it just as a core holding when they step out of cash to pick up an extra 30 to 50 bps. I think when you look at some of the yields … [they] really [look] quite attractive versus the 10-year.... So, we see them using that as a step out. We also see a lot of folks using it for an event. They have retirement, they have a sale of a business, any type of asset deployment or cash that they've come into that they're going to redeploy into markets, maybe an equity market like today, where we see equities off significantly. So, it's really a holding tank."
He adds, "What we're seeing more recently are folks that may be taking chips off the table, whether that be in a high risk asset [in] equities or in fixed income, or maybe some of the higher yield sectors ... that maybe are a little bit more volatile.... They're moving down the spectrum into these types of accounts, and I think it could be a very useful tool as part of a total portfolio process. We see a lot of folks pairing accounts like JPST and JMST with longer duration strategies and they toggle back and forth depending on the opportunity set."
Taormina also tells us, "I think it's crucial to have a large team, whether it's taxable or tax-exempt, in front of you. [With] the tax-exempt team ... Josh Brunner has been with us for multiple decades. Josh really is an expert in structured product, he manages insurance assets for us and really keeps track of flows in the marketplace and opportunities where we see folks selling and structuring deals for us in the front end. And then [we also have] Curt White, again a multi-decade veteran with us. He grew up in the money market arena, which has been really crucial. I think when you look at JMST and where the yield is, there's a nuance here with the timing, where we are in the year, and in the seasonal factors."
He states, "It's crucial not only to have the PM side, but the analyst side here. And again, [we have] a very deep, seasoned team, a very large team. And when we see events like ... what's going on currently in the marketplace, you have to have a team that's going to separate the noise from the facts and really look at what's going on, and what could be going on three to six months down the road if this escalates into a situation where we see state and local tax revenues start to slip. So, again, [we have] a deep and seasoned team that's had not one default since I've been here. We want to keep that in mind, that credit is crucial and knowing the risks that you're taking ... is paramount."
Finally, McNerny says, "J.P. Morgan Global Liquidity ... is the business within which we reside. It includes our money market fund business and then our Managed Reserves book of business (including JPST), which is the next step out of money market funds, and some short duration product as well. Portfolios with a longer duration than that would be run by our fixed income team.... It's important to note that ... it's a business that's anchored by our roughly half a trillion dollar money market fund complex. It's a big, important business for J.P. Morgan, and certainly, when you think about the conservative style with which money market funds are going to be managed, that is going to permeate throughout our organization and everything that we do here in these ... products."
He adds, "We would say our alpha target on the fund is 40 to 60 basis points over a prime money market fund per annum through a cycle.... Even given the compression in the yield curve and prior to this recent move, the compression in credit spreads, we are still finding active opportunities to generate that alpha and meet that alpha target." (Note also: Let us know if you'd like to see our most recent Bond Fund Intelligence publication, which tracks the bond fund marketplace and which focuses on the ultra-short sector.)
