Since rates on cash investments hit virtually zero six years ago, a growing chorus of advisors and managers have pushed investors to reach for yield and to explore enhanced cash and ultra-short bonds. UBS Advisors is the latest to jump on the bandwagon; the brokerage has started a campaign to push brokers towards enhanced cash and short-term alternatives. The idea, documented in a piece entitled, "Cash & Short-Term Alternatives," is to give financial advisors the opportunity to redeploy the assets sitting in cash as many advisers have maintained, or even grown, cash positions in recent years. According to a recent article in Investment News entitled, "Cash Holdings Finally Getting Some Respect", advisers have been increasing cash positions this year due to market uncertainty, many holding upwards of 20%, or more, in cash.
UBS's advice to brokers breaks possible alternatives into three levels -- Level I, "Fully Liquid, Lower Yield;" Level II, "High Liquidity, Moderate Yield;" Level III, "Moderately Liquid, Higher Yield." Level 1 includes "cash or cash equivalent investments that offer immediate liquidity, target a $1.00 per share NAV, are of the highest credit quality," with less than one year duration. UBS's cash product offerings include UBS Bank USA FDIC Insured Deposit Sweep, UBS Select Tax-Free Institutional Fund (STFXX), UBS Select Prime Institutional Fund (SELXX), UBS Select Treasury Institutional Fund (SETXX), UBS Select Prime Preferred Fund (SPPXX), UBS Select Tax-Free Preferred Fund (SFPXX), and UBS Select Treasury Preferred (STPXX). Their outside money fund offerings include: Dreyfus Cash Management (DICXX), Federated Prime Cash Obligations (PCOXX), Federated Prime Obligations (POIXX), and Federated Municipal Obligations (MOFXX).
Level II of UBS's "Short-Term Alternatives" are "investments with high liquidity, high quality, and lower price volatility than Level III. Investors at this level will give up fixed target price NAV and immediate liquidity of Level I investments to increase yield. Durations are typically less than 1 year. Investments include, UBS Global AM Ultra-Short Bond Strategy, UBS Global AM Ultra-Short Muni Bond Strat., UBS Corporate Cash Mgmt (customized service providing tailored liquidity), UBS AG NY-Private Bank Active Liquidity, Guggenheim Enhanced Short Duration Bond ETF (GSY), and PIMCO Enhanced Short Maturity Strategy Fund (MINT).
UBS's Level III products, "Moderately Liquid, Higher Yield," offer "moderate liquidity and greater price volatility than Levels I and II, and investment grade credit quality." They cover a broad range of securities and offer more competitive yields, yet greater price volatility compared to the other levels. Products include: UBS Global AM Short Duration Bond Strategy, UBS Global AM Short Duration Municipal Bond Strategy, UBS Corporate Cash Mgmt (customized service providing tailored liquidity), and UBS AG NY-Private Bank Short Dated Fixed Income. Other funds include: Franklin Adjustable U.S. Gov't Securities Fund (FAUZX), RidgeWorth U.S. Gov't Ultra-Short Bond Index (SIGVX), Federated Ultra-Short Bond Fund (FULIX), Wells Fargo Ultra-Short Muni (SMAIX), Calvert Ultra-Short Income Fund (CULYX), BlackRock (PPM) Short-Term Taxable Fixed Income & Short-Term Municipal SMAs (customized), Putnam Absolute Return 100 (PARYX), and Putnam Short-Duration Income Fund (PSDYX).
Short-term alternatives and ultra short bond funds have been garnering attention from investors in recent months. The Guggenheim Enhanced Short Duration ETF (GSY), which invests in ultra short bonds, has $717 million in assets under management, up $246 million year-to-date. The Wall Street Journal wrote in August, "[I]nvestors pumped nearly $2.5 billion in net new cash into ultra short bond mutual funds in the first half of 2014, boosting their assets to $64.45 billion, according to Chicago-based investment researcher Morningstar. That comes after net inflows of nearly $10.7 billion and $9.5 billion in 2013 and 2012, respectively. (See our August 11 "Link of the Day, "WSJ Warns on Ultra-Short Bond Funds"."
The largest funds in the ultra-short bond space, as of September 30, include: PIMCO Short Term Bond Fund with $14.6 billion in assets, DFA One Year Fixed Income Fund with $8.5 billion, JP Morgan Managed Income Fund with $4.8 billion, Fidelity Conservative Income with $3.9 billion, and Federated Ultra Short Bond Fund with $3.3 billion. Note that the JP Morgan Managed Income Fund and Fidelity Conservative Income Fund are run with mandates closest to money market funds.
Money managers continue to launch new ultra short vehicles. In July, Invesco launched the Invesco Conservative Income Fund. According to the press release, "The fund's investment objective is to provide capital preservation and current income while maintaining liquidity, and will invest in a diversified portfolio of short duration, investment grade money market and other fixed-income securities. However, the fund is not a money market fund and its net asset value is expected to fluctuate."
"This fund can provide institutional and high-net-worth investors a compelling complement to their cash allocation with potentially lower interest rate risk exposure," commented Laurie Brignac, senior portfolio manager and co-head of Invesco's North America Global Liquidity management team. "Combining the strengths of Invesco Fixed Income's Global Liquidity team with the insight of the entire Invesco Fixed Income platform, the fund will use a top-down analysis of macroeconomic trends combined with a bottom-up fundamental analysis of market subsectors and individual issuers to continuously identify investable information advantages throughout a market cycle."
In September, Western Asset Management rolled out the Western Asset Short Term Yield Fund. As we wrote in our September 4 "Link of the Day, "Western Launches Short Term Yield"," the fund is "a short term bond fund that seeks to generate high current income while maintaining a low sensitivity to interest rate volatility. The fund will invest in U. S. dollar-denominated investment grade fixed income securities. The total portfolio duration is expected to be one year or less." The strategy "may be appropriate for investors seeking the potential for greater yield than cash equivalent securities while mitigating volatility via a low duration fixed income portfolio.""
Look for further coverage of the ultra short bond sector in the November issue of Money Fund Intelligence. Note: Crane Data is in the process of starting a collection of ultra-short bond fund, enhanced cash and separate account performance information. Contact Pete for more information or to trial the pending "beta" version of our new "Enhanced Cash Intelligence."
