Strategy Spotlight

Don’t Let Your Cash Get Swept Away: Consider PIMCO Enhanced Short Maturity Active ETF (MINT)

Investors who usually keep their liquidity allocation on autopilot may want to consider a more active approach.

In a late-cycle market where volatility and concerns about liquidity are on the rise, many investors have gone on the defensive. In the U.S., allocations to T-bills and money market funds have spiked in 2019 despite unattractive net yields. But these traditional “cash” allocations generally are not keeping pace with other short-term investments. Investors who tend to treat their liquidity allocation as a given may want to consider a more active approach to generating return within this growing allocation to capital preservation within their portfolios.

At the same time, the advent of commission-free trading across major brokerage platforms – combined with concerns over “cash sweep” portfolios at those same brokers – means that many investors are looking more closely at alternatives to traditional liquid investments.

In this Q&A, Jerome Schneider, PIMCO’s head of short-term portfolio management, and Ken Chambers, fixed income strategist, discuss the outlook for cash and short-term markets along with the important developments at brokerage firms. They suggest that investors who can tolerate a modest step up in risk may find an attractive option in PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (ticker: MINT), an ultrashort bond strategy designed to provide capital preservation, liquidity, and attractive risk-adjusted return potential.

Q: In today’s uncertain and low-yield environment, many investors focus on liquidity, typically via money markets. What is the outlook for these investments, and what are the potential risks and benefits?

Schneider: Safety is paramount for many investors these days. They hold significant allocations to traditional vehicles, such as money market funds, given their desire for liquidity amid a range of uncertainties: bouts of market volatility, concerns that buoyant stock markets mask underlying imbalances, and secular disruptors such as geopolitics, trade, technology, and demographics.

In fact, this year we’ve seen more than $530 billion in net inflows to U.S. money market funds, according to the Investment Company Institute. But there’s an opportunity cost to money markets, because their returns are sourced primarily from yield – often below benchmark rates – rather than from a combination of yield and capital appreciation. Money market investors may see the relatively attractive yield levels at the front end of the curve today, but what’s important is that those yields are likely to remain structurally lower for a significant period of time. Money market funds by nature tend to demand T-bills, but the Federal Reserve is increasing its purchases of T-bills in an effort to improve overall market liquidity. While the Fed is buying T-bills, so will money market funds – but usually at less attractive and lower yields than other short-term benchmark rates, despite the net supply of T-bills (net issuance combined with Fed purchases) turning negative.

Money markets tend to be “autopilot” allocations for many investors who seek liquidity and defense. But as the economic cycle stretches into yet another year and uncertainty and volatility persist, investors may hold higher allocations to money markets for much longer than they intended (often as a result of behavioral biases). As Figure 1 shows, government money market assets increased during the past four Fed rate-cut cycles – and remained elevated for 18–24 months after the rate cuts ended. At today’s low yields, however, staying so long in money markets could mean a significant drag on longer-term portfolio returns.

Figure 1 is a bar chart showing the amount of assets flowing into government money market funds after four different Fed rate-cutting cycles. During the 2007 to 2008 period, assets under management rose $476 billion to nearly $1.1 trillion. Other periods had smaller, but positive flows: from 1995 to 1996, assets rose by $55 billion, in 1998, they climbed by $24 billion, and 2001 to 2003, when they went up $10 billion.

One option is to shift some of those money market assets into modestly higher-risk short-term bond strategies, which are often benchmarked to three-month Libor. Looking at the performance of money market funds versus three-month Libor over those same historical Fed rate-cutting cycles (see Figure 2), we find that as policy rate cuts commenced, three-month Libor outperformed the average money market fund slightly, and as the easing cycles lengthened, Libor outperformed more significantly – by as much as 100 basis points.

Figure 2 is data on rate cuts and spreads as detailed in tables, as of 6 August 2019.

Short-term bonds may rise in price and potentially maintain a high degree of liquidity in response to Fed rate cuts – and the current easing cycle may not be over should growth concerns persist into 2020. Following consecutive rate cuts at the July, September, and October meetings, the Fed indicated its current interest rate policy is likely appropriate if the economy doesn’t materially deteriorate … but that’s a big “if.” Further cuts are possible over the coming quarters if the Fed decides it must respond to a continued evolution in negative developments.

Q: How are liquidity investors affected by the elimination of ETF transaction fees by most brokers, as well as questions about yields on industry standard cash sweep investments?

Chambers: The announcement of commission-free trading across most major brokerage platforms is a watershed moment for investors. It happens at a time when these brokers’ so-called cash sweep vehicles have attracted regulatory scrutiny and become recognized as a potential restraint on investor returns. (A cash sweep is where excess cash in an investment portfolio – often resulting from market moves or transactions – is “swept” into an interest-bearing allocation, typically a money market fund.) The combination is helping focus investor attention on “cash alternatives.”

We believe the elimination of transaction costs is great for investors: It enables them to more efficiently manage their liquidity profile, shifting easily among strategies in an effort to capitalize on slightly longer-term investments. Investors historically have allocated heavily to immediate cash investments, such as money market funds or sweep vehicles. Now investors can be more dynamic. By choosing high quality, short-dated investments, they may see higher return potential for only modest added risk out of an allocation that historically underwhelmed because of the structural hurdles of trading.

Q: From an overall portfolio perspective, how do you suggest investors approach liquidity management?

Chambers: Investors should thoughtfully assess their risk tolerance within their liquidity allocation, along with their liquidity needs over various horizons (daily, monthly, annually). Often, the desire for same-day liquidity is much greater than the actual need for it.

One exercise many investors find helpful is to tier their liquidity allocation into different buckets, and then shift allocations among them as appropriate (which may be easier now that there are fewer or no transaction fees – see above). We suggest three liquidity tiers:

  • Tier 1: Objectives are principal preservation and daily/immediate liquidity; often allocated to traditional cash strategies such as money markets
  • Tier 2: Objectives are still principal preservation, but with an eye on strong returns to cash along with liquidity; focused on intermediate needs (next few weeks or months); often allocated to short-term bonds
  • Tier 3: Objective is to grow the cash balance over the long term; focused on needs over the next few years; often allocated to lower-duration core bonds

Investors willing to take a step out from traditional cash investments (Tier 1) into an actively managed short-term strategy (Tier 2) may add attractive risk-adjusted return potential in exchange for a modest increase in risk. Investors seeking less duration or market risk may also consider taking a step in from traditional lower-duration core fixed income (Tier 3) to a short-duration strategy given the current yield environment.

Q: What is the investment philosophy underpinning PIMCO Enhanced Short Maturity Active ETF (MINT), and what is its approach in markets today?

Schneider: We designed MINT to be a conservative, active strategy with a strong emphasis on risk management. It aims to provide capital preservation, liquidity, and strong return potential relative to traditional cash vehicles. It invests in a broad range of high quality short-term instruments, actively manages interest rate exposures, and targets attractive opportunities just outside the scope of regulated money markets.

We believe active fixed income ETFs are an attractive solution for liquidity management. An active approach fosters potentially stronger yield and capital appreciation while managing interest rate risk. It also offers greater flexibility to avoid areas of potential volatility through precise yield curve positioning and opportunistic allocations to less affected sectors, such as high quality credit and mortgages. MINT is designed to offer incremental return and income potential above that of traditional cash investments with only a modest increase in risk.

We launched MINT 10 years ago, right after the global financial crisis, a time when many investors were questioning traditional money market funds not just because of their essentially zero yields, but also due to concerns over credit risk. MINT filled a niche and represented an important evolutionary step in the investment pillar of cash management and capital preservation by relying on thoughtful active management. And since MINT’s launch, we’ve seen a transformative decade in markets. From credit risks to quantitative easing to the taper tantrum to the lower-for-longer interest rate environment to the swings in market volatility, many factors have challenged investors – both savers and risk-takers.

Looking forward, our baseline outlook is for a low-growth period of vulnerability – with trade, monetary, and fiscal policy acting as swing factors – that gives way to a moderate recovery in U.S. and global growth in the course of 2020. We remain cautious on overall credit risk, and believe that short-term, liquidity-focused investments offer optionality for investors to pivot toward higher risks if and when we see a firmer foundation to the growth outlook.

Within our short-term strategies, such as MINT, this means we are maintaining a high degree of liquidity while seeking some modest income, and we’re staying near the front end of the yield curve, considering that rates have been relatively stable there recently.

In managing MINT, we take a diversified approach, looking to generate alpha by emphasizing structural opportunities present in the markets. Currently, we’re seeing a wedge in markets (see Figure 3) that may offer a structural return advantage to strategies like MINT versus money market funds due to short-term strategies’ greater flexibility to invest in higher-yielding securities beyond T-bills and short-term government securities.

 Figure 3 shows 3-month yields of Libor versus comparable T-bills, the fed funds rate, and the Fed interest rate on excess reserves, from December 2018 to October 2019. All the rates trend downward during the time span, but Libor was above the others for most of the period. By October 2019, Libor was about 1.9%, compared with 1.8% for the effective fed funds rate, and about 1.5% for the 3-month T-bill and the Fed interest rate on excess reserves.  

Q: How has MINT performed for investors over time?

Schneider: In the decade since its launch, MINT historically has offered attractive risk-adjusted returns (see Figure 4), and we believe we have the significant resources, process, and expertise to continue to deliver attractive risk-adjusted returns for investors despite the broader market uncertainties. The innovation and evolution of MINT offers an example of how a flexible, accessible, active approach to liquidity management may provide benefits beyond those of traditional money markets.

Figure 4 is a graph of hypothetical growth of $10,000 invested in the PIMCO Enhanced Short Maturity Active ETF, from November 2009 to month-end October 2019. The value increases to more than $11,500 over the time period. A table below the chart details returns during various performance periods. Performance current to the most recent month end is available on www.pimco.com.

For the most recent quarter-end performance data for PIMCO Enhanced Short Maturity Active Exchange-Traded Fund, please click on the link below:

PIMCO has been the market leader in in actively managed ETFs since MINT was launched in 2009, and MINT is the largest single active ETF in the U.S. with over $13 billion in assets under management. MINT benefits from the same time-tested investment process – the “PIMCO DNA” – that underpins all of our actively managed investment strategies, with the benefits of an ETF vehicle (now including commission-free trades at most major brokers).

PIMCO is one of the largest managers of ultrashort and short-term bond strategies, with more than $130 billion in short-duration assets under management as of 30 September 2019. Our short-term PM team was named the Morningstar Fixed-Income Fund Manager of the Year for 2015, and this year MINT was named a Morningstar Gold-Rated Bond ETF. Through many different environments, our short-term strategies, including MINT, have offered investors attractive return potential and low volatility, along with low interest rate exposure. A decade after MINT’s launch, we remain committed to its thoughtful, active approach amid the market’s uncertainties.

Learn more about PIMCO Enhanced Short Maturity Active ETF (MINT).

CLICK HERE

The Author

Jerome M. Schneider

Head of Short-Term Portfolio Management

Kenneth Chambers

Fixed Income Strategist

Related

Related Funds

Disclosures

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the Fund’s prospectus, which may be obtained by contacting your PIMCO representative. Please read the prospectus carefully before you invest.

Past performance is not a guarantee or a reliable indicator of future results. The performance figures presented reflect the total return performance and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized.

Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.

There is no assurance that any fund, including any fund that has experienced high or unusual performance for one or more periods, will experience similar levels of performance in the future. High performance is defined as a significant increase in either 1) a fund’s total return in excess of that of the fund’s benchmark between reporting periods or 2) a fund’s total return in excess of the fund’s historical returns between reporting periods. Unusual performance is defined as a significant change in a fund’s performance as compared to one or more previous reporting periods. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions. Due to the costs inherent in buying or selling Fund shares, frequent trading may detract significantly from investment returns. Investment in Fund shares may not be advisable for investors who expect to engage in frequent trading. Net Asset Value (NAV) represents an ETF’s per-share value. The per-share value of an ETF is calculated by dividing the total value of the securities in its portfolio, less any liabilities, by the number of ETF shares outstanding. ETF shares are valued as of the close of regular trading on the NYSE Arca (normally 4:00 P.M. Eastern Time) (The “NYSE Close”) on each business day.

The Fund’s Net Asset Value, shares outstanding and total net assets are calculated as of the close of regular trading on each day that the NYSE Arca is open, and do not reflect security transactions or Fund shares created or redeemed on the date stated. Such transactions are recorded on the next business day and reported on the website the following business day.

Returns are average annualized total returns, except for those periods of less than one year, which are cumulative. Market returns are based upon the midpoint of the bid/ask spread at 4:00 pm Eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times.

Premiums (when market price is above NAV) or discounts (when market price is below NAV) reflect the differences (expressed as a percentage) between the NAV and the Market Price of the Fund on a given day, generally at the time the NAV is calculated. A discount or premium could be significant. Data in chart format displaying the frequency distribution of discounts and premiums of the Market Price against the NAV can be found for each Fund at pimcoetfs.com.

A word about risk:

Investing in the bond market is subject to certain risks including the risk that fixed income securities will decline in value because of changes in interest rates; the risk that fund shares could trade at prices other than the net asset value; and the risk that the manager's investment decisions might not produce the desired results. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. Diversification does not ensure against loss.

Exchange Traded Funds (“ETF”) are afforded certain exemptions from the Investment Company Act. The exemptions allow, among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased from or redeemed by the ETF. Purchases and redemptions directly with ETFs are only accomplished through creation unit aggregations or “baskets” of shares. Shares of an ETF are bought and sold at market price (not NAV). Brokerage commissions will reduce returns. Investment policies, management fees and other information can be found in the individual ETF’s prospectus.

Current holdings are subject to risk. Holdings are subject to change at any time. An investment in an ETF involves risk, including the loss of principal. Investment return, price, yield and Net Asset Value (NAV) will fluctuate with changes in market conditions. Investments may be worth more or less than the original cost when redeemed.

ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for PIMCO ETF shares will develop or be maintained, or that their listing will continue or remain unchanged.

The Morningstar Fixed Income Fund Manager of the Year award is based on the strength of the manager, performance, strategy, and firm's stewardship.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

FTSE 3-Month Treasury Bill Index is an unmanaged index representing monthly return equivalents of yield averages of the last 3 month Treasury Bill issues. Libor, the London Interbank Offered Rate, is administered by the Intercontinental Exchange (ICE) and is the rate banks generally charge each other for short-term loans; the Bloomberg US0003M Index measures 3-month Libor. The iMoneyNet All Government 7-Day Simple Yield is an index of U.S. government money market funds. It is not possible to invest in an unmanaged index.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO

PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, 10019 is a company of PIMCO.

Investment Products

Not FDIC Insured | May Lose Value | Not Bank Guaranteed

CMR2019-1119-425463

Reassessing Short-Term Strategies Amid Market Recalibration: Liquidity, Libor and the Fed
XDismiss Next Article