It’s been a tough road in the ultra-short mutual fund space. The category blew up in 2008 along with everything else, and yields proved little better than money market funds in the recovery that followed.
“We don’t cover many of these funds anymore,” said Sarah Bush, senior mutual fund analyst with Morningstar. “Ultra-shorts were yielding too little and got really small, and we just felt we needed to deploy our resources elsewhere.”
But when Bush took a second look, she found a surprise.
“The category has experienced modest inflows really since the beginning of the recovery in 2009,” she explained, adding that this includes the massive bond fund outflows seen in June. Floating rate funds were the only other category besides ultra-shorts to zig when all else zagged during that month.
The good news may be due to the fact that some of the funds “aren’t around anymore,” or were rolled into other funds and subject to survivorship bias. Whatever the reason, Charles Melchreit sees a strong argument for their inclusion in client portfolios.
“There were some lessons learned from several years ago,” said Melchreit, manager of Pioneer Investments Multi-Asset Ultrashort Income Fund (MCFRX). “What happened at that point is that ultra-short funds were really directed at grabbing for yield without taking adequate notice of the risks they were incurring. They essentially became overly concentrated in higher-risk, longer-weighted average floating rate mortgage securities.”
Calling them “a one-trick pony at that point in the cycle,” they chased yield without properly disclosing the accompanying risk, he claimed. “The new generation of ultra-short funds is a little bit different. There is clearly much better disclosure and transparency as far as the risks that are being taken within the fund. We’ve seen a lot of funds launched in this space recently, and everyone is very clear with their investors as to where the risks are.”
He emphasized that they aren’t “a $1 NAV type of fund” (read: money market).
Pioneer’s ultra-short fund, which Melchreit co-manages with Seth Roman and Jonathan Sharkey, is “massively diversified” in that it hits a lot of different levers at Pioneer across a lot of different sectors.
“I don’t think that’s as unusual now as it once was within this space. We’re looking to invest in sectors that are not terribly correlated. Most sectors have some correlation, but we’re really trying to take advantage of any imperfect correlations that we can in the short duration space.”
The fund has a heavy focus on risk management and trying to manage NAV volatility so it doesn’t experience massive swings.
“I think another lesson learned in 2008 is that one has to diversify one’s sources of liquidity, particularly in an ultra-short fund that may see significant outflow activity in certain market scenarios. There were a lot of people heading for the exits at the same time [during the economic crisis]. The ultra-short world is now using a lot of different sectors in corporates and mortgages and even bank loans, money market instruments and cat bonds, all of which appeal to different investors and present for us as an investment manager different pools of liquidity.”
Meaning if faced with a period of high redemptions, he has a choice of which securities to sell.
Great—so what role will ultra-short funds therefore play in a client’s portfolio?
From speaking with advisors, Melchreit said it’s a good strategy for investors “looking at a longer-term allocation to cash.”