A week and a half ago, Crane Data hosted its latest online event, Bond Fund Webinar: Ultra-Shorts and Alt-Cash. The hour-long session, led by Peter Crane, featured a panel including J.P. Morgan Asset Management's Cecilia Junker, UBS Asset Management's David Walczak and J.P. Morgan Securities' Alex Roever. The discussion involved ultra-short bond fund and separately managed account investment strategies, the latest on flows and asset movements, and the search for yield in the current zero yield environment. (Click here to hear the Bond Fund Webinar replay, and register here for our next virtual event, Crane's Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET.)
Crane comments, "You saw $1.2 trillion move into money funds but $350 billion has moved out over the last few months. Some of that money is starting to seek alternatives, to seek higher yields. Bank deposits have [also] had a huge cash buildup as well, [so] there's a tremendous amount of cash.... A big chunk of that is, as we've seen in the past, yield sensitive and should start moving into ultra shorts and other options as it scrambles for yield."
He explains, "Bond funds have had just tremendous inflows.... Inflows into ultra-shorts have been strong, but the big money in bond funds is out in the Core, in the Intermediate, in the High-Yield. Looking at the segments ... Conservative Ultra-Shorts and Ultra-Shorts are about $100 billion each. Looking at them combined ... you're talking about $200 billion dollars. When you look at the Short-Term space, it's double that, $400, maybe $500 billion depending on who's counting. And then Intermediate is double that again. The Conservative and Ultra-Short spaces have been growing rapidly, they're up 20% ... and ETFs are up 30%."
When asked about CP, Roever says, "There's a pretty wide blend of investors who have not only stayed in the commercial paper/CD markets now, but also, have for some time.... Money funds have been coming down.... One of the things I would say about both the bank issuers and ... nonbank issuers, is I think their need to access the CP market is muted somewhat.... Part of that was deposits increasing because lines were being drawn. But deposits have remained relatively high at the larger banks. So, the banks feel pretty well funded right now.... If you go further out the curve into the corporate space ... there's record corporate issuance right now [but] not in the front end of the curve."
Junker tells us, "Our J.P. Morgan ultra-short product, called Managed Reserves, just hit a new milestone of $100 billion in assets. But ... the bulk of that, $65 billion, is in separately managed accounts. So that's got a wide range and a diverse client base. We also actually have commingled vehicles as well. We have $35 billion of that actually in commingled vehicles both onshore and offshore. That includes our $16 billion Managed Income Fund, which is U.S. mutual fund, and our $14 billion actively managed ETF which is JPST.... We offer these products globally, and we offer them in different currencies. But the bulk of those assets are in US dollars."
Walczak states, "At UBS, we view ultra-short and even short duration from some portfolios, as part of our overall liquidity management program. So that would also encompass our money market funds as well. [W]e've definitely seen growth over the past couple of years.... We launched an ultra-short mutual fund in May of 2018 and just crossed the $3 billion mark. Notably, since the drawdown in March, we've seen assets up about 50%. So, I think that's a pretty good stat.... I think it reflects the fact that people are definitely comfortable with the asset class, but also ... looking to gain some additional yield above and beyond money market funds."
He adds, "We also are pretty heavily engaged in separately managed accounts. We recently rolled out an offering within our wealth management franchise that's gaining some traction as well. We have had a presence for the past several years, but we launched a new product at a different fee tier. I think overall we're looking to ensure that we have the products that our clients and investors want in this low interest rate environment. In terms of what an ultra-short portfolio looks like ... we approach it from a very conservative stance. We want our investors to feel comfortable that we're looking to minimize principal volatility as much as possible, while looking to earn additional return over money market funds."
Junker also tells the webinar, "One of the things [driving] the growth in our funds, we actually fill that gap ... where money funds are not investing.... Traditionally, it was 13 months. Anything beyond 13 months, we could let that roll down.... Obviously, after Money Fund Reform, they shortened their WAMs.... We just see it as an opportunity. We have the flexibility, and a lot of our ultra-shorts have the flexibility [in their] guidelines. Not only can we do Tier-1 paper [and] Tier-2 paper, we can go out the curve as far as three, and in the case of our ETF out to five years. So, we really have a lot of flexibility and that gives us the ability to take advantage of any dislocations that we see."
She adds, "So, if you do see a step back from money funds, you would actually see someone like ourselves be able to step in. And we're able to take advantage of steep curves if you do see that.... Particularly as you came out of this last crisis in March, money funds were very, very short ... not really understanding where their flows would be. As far as our fund stabilizing, we realized, hey, listen, anything that's just right out of their reach would be a good opportunity. So that was our low hanging fruit when we first started adding risk, you know, pretty aggressively come April when our funds stabilized."
When asked what he's buying, Walczak responds, "We have seen not only yields collapse, but also spreads as well. It definitely is a challenging time to be investing just given our available alternatives. With that being said, we do see some pockets of opportunity, one of which is in secured credit. We have increased the amount of asset-backed exposure in our ultra-short portfolios.... We've seen a lot of this paper trade pretty comparable to even corporate credits.... It's a great way ... to add yield into the portfolio, but also, to boost the overall credit profile.... A lot of the asset-backed names that we buy are triple-A rated. There is some double-A exposure in there as well."
He also comments, "On the Tier-2 side, we definitely have seen more limited supply in recent weeks and months.... Corporates are looking to term out their debt [and have] less need to necessarily fund themselves very short. But we are still engaged in the space ... and view it as a good way to pick up additional yield, but not go too far out on the yield curve [or] take a lot of duration risk. So, it continues to be an attractive portion of the commercial paper market for us."
Roever tells us, "What happened in March hit every market out there. I mean, the Treasury market was having liquidity issues, pretty significant ones, where essentially the dealers said, 'We're having trouble intermediating the flow of investors, including from foreign central banks who were liquidating Treasury portfolios.' And, other folks who were trying to sell credit exposures, and other folks who were trying to sell mortgage exposures. There's only so much balance sheet to go around. So essentially, we came to a point before the Fed intervened where balance sheets were very clogged and there just really wasn't much room to go."
Finally, Junker says, "Negative rates are not good for anybody. They're not good for our clients, not good for our products. But I would say negative rates in the U.S. are not our base case. We think the Fed has a lot of levers to pull before they would do that. But we're always thinking ahead. And as you mentioned, if you think back to the last zero interest rate policy period, we did not have to waive fees on our credit funds and on our ultra short funds. We don't expect that. I think we bottomed out at about 35 or mid-to-low 30s [bps] as far as yield in our ultra short. We don't really expect that we're going to have to waive fees there."
She adds, "Obviously, with Government funds that's another story. If you look right now, Governments, I think they're like two to three basis points net yield right now. So that's going to be something that you're going to think about, and it's probably going to happen sooner than later. There will be waivers there.... The other thing I would just add is, Europe has had negative yields for quite some time, right? And we have a global business. So, we do have a playbook, if we go there. It just really is not our base case, and it's really not our expectation that we will need to waive fees in our ultra short product."
