We continue to write up the highlights from our recent Bond Fund Symposium (Online), which took place a week and a half ago. Today, we excerpt from the session, "Short & Shorter: Ultra-Shorts vs. SMAs," which features Dave Martucci of JP Morgan Asset Management and Jerome Schneider of PIMCO. This annual BFS "Godzilla vs. Kong" segment contrasts two of the biggest names in the ultra-short and short-term space. Martucci tells us, "I manage the Managed Reserves Strategy for J.P. Morgan, which is the ultra-short duration. We have 11 PMs across New York and London, and we manage money across ETFs, SMAs, as well as mutual funds.... We are part of the Global Liquidity Group ... under John Donohue.... [This group has] $839 billion in AUM, which is part of the larger J.P. Morgan Asset Management's $2.3 trillion." (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 2021 Download Center.)
He explains, "If you look at ... ultra-short duration, [the] Managed Reserves book is at $101 billion. That is at an all-time high, and that's really growth across all three segments that I talked about. I think last time we talk two years ago out in L.A., we had just started on the ETF story.... We've seen significant growth and have made a great effort to grow that product. We're currently at $16.4 billion, so that's been a great story for us.... [But] we've seen growth across all areas [mutual funds and SMAs too]."
Martucci says, "There really are three [reasons] we've seen this growth, and why we will continue to see growth, in this ultra-short area.... While I do agree ... that all asset classes did come under stress in March, and we all suffered from the ability to get liquidity, prime funds [in particular] faced a significant amount of pressure because of ... the fear of being the last person left if there was a gate and fee drop. That caused a lot of pressure and withdrawals in that space. So, I think that pressure of gates and fees did lead a lot of investors to do a post-mortem and kind of consider the ultra-short space whether it be through SMAs, or mutual funds, or ETFs, or what have you. I do think that that's something that will continue to weigh on that sector and drive money into our space, unless that is addressed in the new regulation."
He states, "Second, it's ... really the extremely low interest rates. We have to deal with that, but also in the prime and government space. It makes sense, if you don't need the daily liquidity of that space to really take a step out into the ultra-short space. Then the third piece of the puzzle [and] why we're going to see money come into our space [is the] potential for inflation and rising rates. We're starting to see people come down the curve now.... They'll look at money market funds, and they'll see either zero, or 5-10 basis points in a credit prime fund.... The next obvious step is ultra-short, so we are seeing that play out in our space as well."
Martucci adds, "At the end of the day, our definition of ultra-short is really restricted from an interest rate risk [standpoint to] one year and in -- interest rate risk is not really what's going get you here. It's going be credit risk, so you have got to make sure you're doing your due diligence and you have the resources backing you. And for sure we have that. I think that's an important attraction for our clients when considering J.P. Morgan ultra-short duration. For clients that don't necessarily need that daily liquidity, and maybe have a six month plus time horizon on their cash, we really want them to consider the Managed Reserves product. If they have a longer time horizon, out past a year, are willing to take a little more risk, then we want them to consider short duration products."
Next, Schneider says, "I think there are a lot of things that Dave and I agree on quite honestly. I think we would agree that there's a lot of lessons that came out of March. I think that there's a lot of experience that we both share in terms of how to think about this zero rate or near zero rate environment. [It's] beneficial in some ways ... we can provide value to clients looking for defense. But yet, I think it's really more about education. And I think what we have done inordinately over the past nine months is really educate clients about how to think about cash from a variety of perspectives. It's a very idiosyncratic process in that regard. Some investors are playing defense, coming down the curve, [and] some investors are simply too scared to come out of the cave of cash."
He comments, "For PIMCO as a whole, we think that this is a very dedicated set of instruments. We've been doing ultra-short and short-term strategies for almost 45 years.... At this point in time, what we've done is realize and rationalize over the past 20 years that it's a platform that requires a significant amount of resources on the portfolio management team, but also a credit research team for corporate credit, as well as structured products and asset-backeds. And so, that's exactly what we've done.... [T]his is a dedicated set of products, that really needs to have the full set of attention and not just be viewed as a reduced risk core bond, or reduced risk type of fixed income portfolio, and that everything is money good, because we've all experienced that those assumptions go south very quickly in this regard."
Schneider tells the BFS, "The big picture for 2021 is to be mindful of a few things: one, obviously, credit risk and credit risk management. Although, we would generally view that this is a pretty benign credit risk environment at this point in time, we do think that there will be undulations in growth. And there will still be some potential for volatility along the way. So simply buying the beta of credit, if you will, even in the short-term sectors, is probably a little bit foolhardy at this point in time."
He explains, "We have structural changes. One structural change is clearly LIBOR. It got pushed out to 2023, so maybe a topic for us for the next two years. But the reality is is that it's still going to have impacts, and we're starting to see it have an impact in terms of issuances of short-dated silver floaters that come into the market."
Schneider adds, "The third element is, quite honestly, liquidity management and structure. We've had a trillion dollars come into the money market space over the past year, and at the same time people have become more defensive. And so, the experiences ... in those prime money market funds are at the top of mind for us.... [P]eople should be thinking about structure, proper vehicles to actually manage this liquidity, and more importantly, how to be opportunistic to redeploy cash from that very short end right now, which is basically being subdued by the variety of pressures, both regulatory from the SLR, to obviously, the supply and demand mismatches in bills and everything else."
He also says, "Here at Pimco, across our $300 billion in assets, we think that there's true value add to being in that ultra-short space, in that short term space, which we call low duration. [We] try to minimize that cash element, not because it's bad. But being in that cash element is truly for same day liquidity, that's like government money market funds, Treasury Bills, things like that. Our expertise really lies outside that space, so our assets under management are reflective of that. Our money market fund size is pretty small, not because we can't trade repo. We trade tens of billions of repo every day. But simply because we think that the resources and acumen and the ability to provide value to clients is further out the curve."
Finally, Schneider adds, "This has been sort of the focal point of PIMCO, well before 2016 when we had money market fund reform.... The impact ... of really understanding what you own. Fundamentally, we've seen time and time again, where people are taking credit risk or structural risk which is really misunderstood in a lot of ways. And ultimately, we saw it culminate in some ultra-short strategies in 2008 that couldn't meet redemptions. And now we're sort of seeing it percolate again. Fundamentally, it's a story which we need to think about.... Right now, it's on the forefront of regulators' minds. There's a big difference between owning assets which are short-dated and might mature, versus owning good assets, which are good assets and money good, but not necessarily liquidity good at this point in time. We've witnessed that there very much can be a disconnect between this maturity transformation process, which probably should be addressed in a variety of ways."
