Late last week, we hosted Crane's Bond Fund Symposium (Online), which took place virtually after being cancelled last year due to the pandemic. Today, we quote from the session, "Senior Portfolio Manager Perspectives," which featured BlackRock's Brett Davis, Putnam Investments' Joanne Driscoll and UBS Asset Management's Dave Rothweiler. Thanks again to those who attended and supported BFS, and attendees and Crane Data subscribers may access the Powerpoints, recordings and conference materials at the bottom of our "Content" page or via our Bond Fund Symposium 2021 Download Center. (Mark your calendars for our return to live events with Crane's Money Fund Symposium, which is now scheduled for Sept. 21-23, 2021 at The Loews Philadelphia, in Philadelphia, Pa, and for next year's Bond Fund Symposium, March 28-29, 2022, in Newport Beach, Calif.)
Moderator Pete Crane asked panelists to give a little background first. Driscoll tells us, "I'm head of the Short-Term Liquid Markets Group, and a member of Putnam's Fixed Income Management Committee. My team is responsible for Putnam's short end products, including the short-term bond mandates, money market funds, cash management, [and] securities lending. In terms of the Ultra-Short Duration Fund, I'm the lead PM, and in that space, we manage about $18 billion."
Rothweiler comments, "I've been in the business over 25 years as a credit analyst, trader and PM. I spent most of my career as a PM for UBS Asset Management. I've managed 2a-7 funds, short duration portfolios, [and] intermediate strategies. Globally, we have about $300 billion in fixed income assets with about $88 billion in global money markets, of which $74 billion is U.S. In terms the ultra-short space, I co-manage the $3 billion UBS Ultra-Short Income Fund, with additional separate account assets."
Davis says, "I am one of the portfolio managers on the cash and liquidity platform ... responsible for managing several short-term, fixed income separately managed accounts. Most of our client bases are corporations, financials, and insurance companies. In addition, I'm one of the portfolio managers responsible for managing our active ultra-short mutual fund, which we call Short Obligations, as well as our active ultra-short ETF, which is ticker iCash."
When asked, "What are you buying?" Rothweiler answers, "I would say we see the most value in Tier 2 commercial paper.... If you think about the amount of spread you can get in Tier 2 CP relative to longer dated corporates, we view that as the place to be. Let's face it, in terms of the credit markets, things have become notably richer since the March crisis. If you want to favor somewhat of an upper quality type bias, asset-backeds are a nice way to play that as well. I'd say from that standpoint, that's probably one of our more favored trades."
Driscoll adds, "I agree with Dave. We also favor Tier 2 commercial paper. A lot of the issuers that have been out of the market since March of last year have come back, so Tier 2 CP outstanding is up almost 50% year-to-date. So that's been a nice move. We're also really active in the investment grade new issue market, because that's a place that allows us to get decent sized positions.... [With] front end issuance, in the IG space last year, there was $425 billion taken out of the market with calls and tenders ... that, combined with inflows into short-term bond funds, really exacerbated that supply-demand imbalance. Luckily, we've been seeing, at least this month, a pickup.... But ... with yields and spread so compressed, it's a time where you have to take a more conservative approach, and we're very selective on credit in this market."
Davis responds, "Similarly, to what Dave and Joanne said, we are a big participant in the Tier 2 commercial paper market. We buy Tier 1 and Tier 2. We look at the relative value between those two. For example, at the end of last year, you did have some supply-demand dynamics, where you actually had fairly cheap Tier 1 commercial paper a little bit further out the curve that maybe the money market funds weren't as big participants in. The ultra-short and SMA spaces were very active because we knew that rates were probably going to go tighter as we entered the New Year, and we wanted to hold onto that excess yield for as long as we possibly could.... We really stay away from that bottom rung of the investment grade universe, so anything that's really rated BBB- or anything that we think will get downgraded to triple B-minus during the duration of our holding periods. So, we're a little bit more conservative from a credit standpoint."
When asked about the importance of cash flows, Rothweiler comments, "Touching on what Joanne just said in terms of the amount of tendering and calls that have been going on in the corporate market, it always seems like you get the cash when you least want it.... One thing we look at is also shareholder concentration risk. What's the risk of shareholders needing their cash at various points in time? For us, with a separate account there's probably less risk of that. But in a commingled fund, like the UBS Ultra-Short Income Fund, thanks to our Client Services team we have a lot of contact, oftentimes with FA's, with larger shareholders. We try to forecast that as well on the other side in terms of any kind of outsized risk."
Driscoll says, "Our model is probably a little different from others. Putnam is an advisor sold firm, so ours is really driven by external and internal advisor consultants, and they have the relationships with the financial advisors. We think about what our clients are looking for. Some are looking for more income than a money market fund with a little more risk, and others are trying to shorten their duration.... When we launched the Ultra-Short Duration Income Fund in 2011, we limited any one client to about 10 percent of the fund, just to limit that volatility. Now that the funds are more like $17 billion, individual clients aren't as much of an issue. But ... we have to be really cognizant of the fact of who's recommending our fund, what the biggest concentrations are, and ... the profile of our shareholders."
She adds, "I think financial advisors are really driving a lot of the growth, because their model, they don't get compensated, for the most part, to sell the money market fund. But you do if you get into an ultra-short fund, so it's in their best interest. [A] fund like ours, it sits just outside of the money market space. We're more conservative than a typical, ultra-short ... so, they've been very comfortable with how we position our product."
Discussing last March, Rothweiler states, "If you cut your teeth in 2008, if you got through that, you could probably see this coming to some extent by beginning of March.... There's a life lesson that I learned in '08 -- there's no liquidity like a maturity.... So, when the bid on the Street dries up or becomes more challenged, having a properly structured portfolio where you have maturities, where you have liquidity that you can get to [is key]. That was just another example that reinforces our process at UBS. That to manage risk, liquidity is a big part of it, whether it's a 2a-7 fund or an ultra-short."
Davis says, "Another source of liquidity is diversity of asset classes, because certain debts from the dealer community will act in different ways during different points of crisis. We saw certain debts freeze up a little bit earlier than others, where we still had liquidity in corporate bonds maybe a little bit further out the curve, or ABS securities, or municipal bonds. So, that is another way to have diversity and liquidity in a portfolio. We think by having the natural liquidity ... by having a maturity is most beneficial during that period of time.... The different asset classes that we had within the portfolio, and the different pieces of paper that we had really helped with the liquidity profile."
She adds, "That being said, also on the SMA side, a lot of it is driven by the Client Investment Guidelines. We make sure we take the time to educate them, because the front end of the market is a little bit different than other parts of the market. What is the majority of the issuance that we are buying? If it's commercial paper, nearly 80% of it is in financials or asset backed commercial paper. So, if you have diversification limits on financials, just making sure that you have other available asset classes and other available security types to make sure that by being too restrictive you're not actually creating more risks for the portfolio."
Finally, when asked about ESG, Davis answers, "Across all of our SMAs, our Cash and Liquidity platform, we have PM integration within ESG, meaning that, regardless of what the underlying mandate is ... our credit analysts are doing environmental, social, and governance analysis, along with their typical financial analysis. We believe we are improving, even though these are short-term funds, the long-term performance by bringing forward what we think are future risks to today. It also allows us to identify possible new opportunities for our funds even if they are not ESG focused." Watch for more excerpts in coming days and in the April issues of our Money Fund Intelligence and Bond Fund Intelligence.
