Investors may have a lot on their minds these days: a late-cycle market subject to bouts of volatility and illiquidity, and a global economy offering significant potential – and significant risks. Amid these uncertainties, many investors have gone on the defensive, turning to money market funds and other traditional vehicles geared toward liquidity and capital preservation. Instead, those who can bear a modest increase in risk may want to consider a more active, sustainable approach, which also reflects a growing preference for investments that “do good while doing well” – that is, investments focused on environmental, social, and governance (ESG) factors.
In this Q&A, portfolio managers Nathan Chiaverini, Jelle Brons, and Jerome Schneider and strategist Ken Chambers discuss the outlook for cash and short-term markets with an ESG lens. They suggest that investors seeking to influence positive change with their short-term assets may find an attractive option in PIMCO Enhanced Short Maturity Active ESG ETF (ticker EMNT), an ultra-short active bond strategy.
Q: What is the PIMCO Enhanced Short Maturity Active ESG ETF (EMNT), and why launch it now?
Chiaverini: EMNT is a short-term active ETF designed to seek maximum current income with a focus on capital preservation and liquidity, all while emphasizing sustainable and socially conscious companies. EMNT harnesses PIMCO’s approach to ESG in fixed income to support the sustainability goals of issuers, and we believe EMNT can help investors manage the risks of an uncertain environment, as its ultra-short duration profile can help reduce interest rate sensitivity and manage overall volatility.
Following the success of MINT, PIMCO’s Enhanced Short Maturity Active ETF, which recently hit a 10-year track record, we have launched EMNT for those who seek to drive positive change while targeting attractive returns in their short-term investments. We believe PIMCO is well-positioned – because of our scale – to influence and support positive environmental and social change. Our expansive reach and nearly five decades of expertise in fixed income markets make us well-positioned, in our view, to meaningfully engage issuers, guide companies, and influence the growth of more sustainable markets.
In addition, 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 thoughtful allocations. And with EMNT, investors can take advantage of PIMCO’s active management approach to ESG, including our dynamic, proprietary ESG analysis across the fixed income universe and our engagement with socially conscious issuers to drive positive change.
Finally, we think the recent shift to commission-free ETF trading across many major brokerage platforms is a watershed moment for investors, enabling them to more dynamically and efficiently manage their overall liquidity profile.
Q: What kinds of investments are the focus of the EMNT portfolio?
Chiaverini: PIMCO designed Enhanced Short Maturity Active ESG ETF as a conservative, ultra-short ETF solution with an emphasis on sustainable and responsible issuers. Given our resources and expertise, the portfolio team actively manages the portfolio’s interest rate exposures, and we invest in both high quality money market assets and a wide range of non-money-market securities with attractive liquidity profiles. U.S. Treasury bills and repurchase agreements tend to be the most liquid, and commercial paper and agency mortgage-backed securities also tend to provide high levels of liquidity combined with attractive yield potential. We also invest in select high quality corporate bonds and asset-backed securities that we believe offer attractive yield and relatively favorable liquidity.
Q: What is EMNT’s ESG approach?
Brons: The EMNT portfolio uses PIMCO’s established and disciplined approach to ESG investing. PIMCO has incorporated material sustainability-focused factors in our top-down, bottom-up research process for many years. Benefitting our broad investment processes, our global analyst and research teams evaluate material ESG-related issues across the fixed income universe as part of their credit analysis. EMNT and PIMCO’s ESG platform go beyond ESG integration – the incorporation of material nonfinancial factors in our broad investment process – to build portfolios designed to achieve sustainability objectives (such as fostering the transition to a low-carbon economy) alongside financial ones.
Within the EMNT strategy, we seek to emphasize best-in-class issuers with environmentally conscious practices, strong corporate governance, and industry-leading social policies – thoughtfully selecting each bond in the portfolio to align with an ESG mandate. To uncover attractive ESG opportunities for EMNT while managing the risks, we focus on three building blocks:
- Exclude: We exclude – by prospectus and in practice – issuers fundamentally misaligned with sustainability principles.
- Evaluate: Using our proprietary and independent ESG scoring system, we seek to optimize portfolios to emphasize issuers with industry-leading ESG practices. For example, with our proprietary green bond score, we differentiate among the growing field of green bond issuers, in turn seeking to gain an analytical edge in security selection.
- Engage: We believe that collaborating with and allocating capital toward issuers willing to improve the sustainability of their business practices can generate a greater impact than simply excluding issuers with poor ESG metrics and favoring those with strong metrics.
Q: How is EMNT different from MINT (PIMCO Enhanced Short Maturity Active ETF)?
Schneider: Both EMNT and MINT are conservative, ultra-short active strategies with a strong emphasis on risk and liquidity management. They both seek to provide capital preservation, liquidity, and strong total return potential relative to traditional cash vehicles with a modest increase in risk, and both invest in a broad range of high quality short-term instruments. The primary difference is EMNT employs the ESG investment process mentioned above as we exclude, evaluate, and engage issuers with the goal of creating positive change.
In addition, EMNT has the flexibility to invest up to 10% of its portfolio in assets not denominated in U.S. dollars, while fully hedging any residual foreign currency exposures. This allows us to target attractive opportunities globally and provide additional diversification to the portfolio.
Q: What strengths does PIMCO offer when managing a short-term active ETF solution with a focus on sustainability?
Schneider: Through many different environments, our short-term strategies have sought to offer investors attractive return potential and low volatility, along with low interest rate exposure. Combining our short-term investment skill with our expertise in active fixed income, ETF management, and ESG investing, we believe we have the resources, process, and experience to seek to deliver attractive risk-adjusted returns for investors in EMNT while promoting positive and sustainable change.
PIMCO is a leader in liquidity management: We are one of the largest managers in this space, with more than $130 billion in assets under management in dedicated short duration and low duration portfolios as of 31 December 2019. On behalf of our short-term portfolio management team, I was honored to be named the Morningstar Fixed-Income Fund Manager of the Year (U.S.) for 2015. Our large, experienced team focuses on cash and short-term investment management for both dedicated short duration and liquidity portfolios as well as liquidity for all portfolios firmwide, and PIMCO’s size and scale helps us target a liquidity premium and competitive market prices. In aggregate, we manage over $330 billion in portfolio assets for our clients as of 31 December 2019, including dedicated short-term and low duration portfolios as well as cash-equivalent and short duration allocations within other portfolios across the firm. We believe such scale and resources benefit our investors throughout market cycles, and should be an impactful influence on EMNT as it helps meet investors’ demand for ESG solutions.
PIMCO has been a market leader in actively managed ETFs since MINT was launched in 2009, and MINT is the largest single active ETF in the U.S. with almost $14 billion in assets under management as of 31 December 2019. Both EMNT and MINT benefit from PIMCO’s time-tested investment process, with the potential advantages of an ETF vehicle.
PIMCO is also a leader in ESG investing in the fixed income sphere. We believe our size, scope, and history give us an expansive reach in global markets, with the ability to influence change and guide companies. We see investments as relationships: We engage with issuers, encouraging them to improve their approach to sustainability and ESG reporting (and potentially improve their credit risk in the process). We may engage with issuers through several rounds of bond issuance, encouraging them to advance their own sustainability goals and ultimately issue a green bond or even a bond linked to the Sustainable Development Goals (SDGs). We aim to nurture the market for sustainable fixed income and encourage issuance of more green and SDG-aligned bonds that could benefit all stakeholders, including investors, employees, society, and the environment.
Our dedicated ESG technology team has built an integration and engagement platform to audit and measure ESG practices, enabling us to scale our efforts to influence more issuers over time.
We also have established relationships with major groups focused on sustainability in markets. Among these are the UN’s Global Investors for Sustainable Development (GISD) Alliance, which focuses on accelerating long-term investment in support of the SDGs; the UN Global Compact, which unites businesses worldwide in support of sustainability; the Principles for Responsible Investment (PRI), a global initiative to foster ESG-focused investing; and Climate Action 100+, an investor-led climate coalition that engages with systemically important carbon emitters.
Q: What role could PIMCO’s Enhanced Short Maturity Active ESG ETF play in an investor’s broader portfolio?
Chambers: We believe EMNT could be an attractive solution for investors looking to step out incrementally from traditional cash investments into ultra-short strategies that seek higher yields in exchange for a modest increase in risk, while helping foster sustainable change in the world. Many people have become more interested and engaged in the broader long-term impact of their investments. They want to be a part of the solution that shifts the global economy toward greater sustainability, and we believe fixed income investments in particular can help drive that transition while seeking positive financial returns.
Many investors are also focused on low-risk, more liquid investments amid a range of uncertainties: market imbalances, volatility, and secular disruptors such as geopolitics, trade, technology, and climate change. We believe investors should thoughtfully assess their risk tolerance within their short-term 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. Investors willing to take a step out from traditional cash investments into an actively managed short-term strategy may add attractive risk-adjusted return potential in exchange for a modest increase in risk. And with EMNT, investors can also put their short-term allocation to work in support of sustainable companies and long-term solutions.
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