In the May issue of our Bond Fund Intelligence newsletter, we profile Charles Melchreit, Senior Vice President and Portfolio Manager at Pioneer Investments. He manages several funds, including the $2.7 billion Pioneer Multi-Asset Ultrashort Income Fund -- one of the largest and oldest ultra-short funds on the market. He discusses how the fund "threads the needle" between short-duration products on the market using a layered investment strategy. Of its reception, Melchreit said, "As measured by growth of AUM, this was one of the most successful product launches in Pioneer's Boston investment hub. We have found it encouraging that a single fund strategy has appealed to such a wide range of investors with a range of objectives." The following is a reprint of the BFI article.
BFI: Tell us about your background? Melchreit: In 2006, I joined Pioneer to manage short-term and core fixed in-come funds while functioning as sector manager for MBS and ABS sectors. At this time, I lead the Investment Grade Portfolio Management group, which has responsibility for governments, money markets, investment grade corporates, and MBS/ABS.
BFI: What prompted the launch of the Multi-Asset Ultrashort Income Fund? Melchreit: The fund was launched on April 29, 2011. We saw interest from several institutional investors who had a "long expected holding period" cash position and faced the hard choice to invest in money markets, short-term income funds, or floating rate funds. Money market funds sought to maintain a stable NAV (net asset value) of $1.00, but lacked the ability to generate meaningful income in the low interest rate environment at that time. Short Term Income funds offered more potential income than a money market but their longer duration introduced additional interest rate and other risks. Finally, the floating rate fund alternative provided income and sought protection from rising rates. But since they were primarily in-vested in bank loans, they were subject to below investment grade credit risk ... and additional volatility.
In response to that need, we sought to develop a strategy that would "thread the needle" between the available short duration strategies in the market. Our portfolio construction process was designed to balance the twin objectives of pursuing a meaningful yield advantage to benchmark rates like T-bills or LIBOR and of doing so with less NAV volatility than short- and intermediate-term bond funds. The fund seeks enhanced income versus money market accounts. However, the Fund's NAV can fluctuate, so it's oriented toward longer-term investors. It is not a money market fund.
BFI: What is your investment strategy? Melchreit: The fund seeks to deliver attractive risk-adjusted returns relative to the BofA Merrill Lynch US Dollar 3- Month LIBOR Index. We seek to achieve this outperformance by investing in a multi-layered and diversified range of floating rate and short duration fixed income assets, with different sources of risk. The portfolio managers structure the portfolio with [an] approach that seeks to enable the portfolio to invest in potentially higher yielding but less liquid securities, while providing investors a strategy with a higher credit profile and liquidity.
The first layer is composed primarily of securities that provide high liquidity, including money market securities, U.S. Treasury bills, and agency notes. The second layer includes intermediate holdings that offer modestly lower liquidity, but may add incremental yield. These may include corporate bonds, agency mortgages, asset-backed securities and municipal bonds. The third layer is comprised of "core" holdings that generally offer lower liquidity, but afford the strategy's portfolio managers the best opportunity to add yield and alpha to the portfolio. Within each asset class and structure, Pioneer generally seeks to invest in senior securities. We believe this tiered construction can provide the opportunity to pursue higher yields while maintaining high credit quality and sufficient liquidity to accommodate significant flows in and out of the portfolio.
BFI: How does it differ from others in the space? Melchreit: Pioneer offers several key differentiators. The strategy uses a broad and diversified opportunity set to increase alpha potential. Pioneer's ability to invest across a broad range of U.S. dollar fixed income asset classes, sectors, credit ratings, and security structures, enables the strategy to pursue returns while diversifying risk. We believe Pioneer provides core competency in both structured and corporate credit. [We've] established a long, successful record as a credit manager, distinguishing itself in strong, bottom-up security selection and avoidance of high-risk sectors and securities. We have focused on downside risk protection and have sought to defend against permanent impairment of capital.... We seek to invest in higher quality sectors of the respective asset classes that we think are likely to offer stronger protection against ratings downgrades or permanent impairment of capital.
BFI: Tell us about the portfolio management team. Melchreit: In our view, management by a cohesive team is critical to the portfolio's success. I co-manage the strategy along with Seth Roman and Jonathan Sharkey. The portfolio management team is supported by a tightly knit, highly experienced group of central credit research analysts and structured research portfolio managers. The European-based teams of experienced credit and equity analysts represent additional resources available to the team. The portfolio management team shares responsibility for the management of the fund, but each member brings a complementary set of skills to the security selection and asset allocation process. I oversee Pioneer's structured credit research process.... Seth Roman has responsibility for Pioneer Investment's Money Market strategies and Jonathan Sharkey is responsible for managing bank loan securities in institutional strategies and bank prime rate portfolios including two closed-end funds. In Pioneer's organizational structure, there is no distinction between the liquidity side and fixed income side -- we see liquidity and risk as a continuum that is best managed in a single group.
BFI: What does the fund buy? Melchreit: The strategy's investment universe includes, but is not limited to, money market instruments, U.S. government securities, agency MBS, investment grade corporates, municipal bonds, asset backed securities, non-agency MBS, CMBS, high yield corporate bonds, bank loans, Yankee securities and event-linked (catastrophe) bonds. BFI: How has it been received? Melchreit: The fund received an excellent reception from investors and their advisors. It clearly solved an income need for many investors.... Fund investors have included small retail investors, high net worth individuals, family offices, nonprofits, and corporate treasurers.
BFI: Are you seeing interest from money fund or other investors? Melchreit: Some investors have been motivated by concerns about rising rates driven by Fed tightening. Others have told us that they were interested in protection against inflation -- because they did not think the Fed would tighten soon enough -- and they viewed an ultra-short fund as the best solution. Among investors without a particular rate view, we have seen individuals using the fund either as a long-term strategic allocation or as a medium-term allocation while waiting for entry points into other asset classes. So, the bottom line is that we are seeing interest from all sides, including both "low risk" investors looking to take incremental risk for a potential yield pickup and "medium risk" investors looking to dial back duration risk without giving up too much yield.
BFI: What impact will rising rates have on the portfolio? Melchreit: The fund seeks to maintain low duration in an effort to help manage portfolio volatility. Given the ultra-short nature of this strategy, we do not seek to add value through active management of duration. As a result, we will not manage the fund differently through various interest rate environments. We believe that a consistent, disciplined investment process can yield the competitive results over the long term, and therefore the portfolio management team does not expect to deviate from the established process.
BFI: What is your outlook for ultra-short? Melchreit: Following the aftermath of the financial crisis, financial markets have been in an environment of below average interest rates.... Given the portfolio's recent exposure to floating rate securities, we believe these moves should lead to greater potential income for fund shareholders. Hence the broader ultra-short space is potentially a match for investors with a constructive economic outlook. Conversely, we do not think that the attractiveness of this space is predicated on rising rate expectations. Should rates remain exceptionally low, we think the potential yield pickup in funds like Pioneer's Multi-Asset Ultrashort Income Fund could provide an income boost to investors at time when income is hard to find.
