JPMorgan Comments on "Alt-Cash"
J.P. Morgan Securities' latest "Short Duration Strategy Weekly" contains a brief "Ultrashort and short-term bond fund update." They explain, "Ultrashort and short-term bond funds are one subsector of the non 2a-7 space that have received a relatively increased amount of attention post-MMF reform. These "alt-cash" vehicles are comprised of ETFs and open-ended mutual funds that invest primarily in high grade fixed income securities maturing anywhere between 6 moths to 3.5 years – well beyond what most consider to be the traditional money market arena. We consider a fund to be ultrashort if its average portfolio duration is between 0.5-1.5 years. Funds with average portfolio durations of 1.5-3.5 years are grouped into the short-term bond category. Furthermore, within each category, we have identified four prevalent investing strategies – government, conservative credit, credit, and multi-sector.... On average, these varying fund strategies can generate returns that outperform MMFs." The segment adds, "Obviously, fund profiles with broader and riskier strategies tend to offer higher returns than their counterparts, but also more risk.... In addition to being exposed to potential negative returns, there are other drawbacks of ultrashort and short-term bond funds versus MMFs. As liquidity vehicles, MMFs offer daily liquidity while these funds typically settle between 1 to 3 days. Additionally, ultrashort and short-term NAVs can be much more volatile compared to MMFs depending on market conditions and the securities they own. While MMF reform initially generated interest in this sector, the scale to which money entered was small relative to the $1tn+ swath of cash that left prime money funds. Moreover, post-reform interest is modest and looks to have leveled off.... While short duration funds and ETFs may continue to grow, we suspect SMAs will continue to be the leading non-MMF cash alternative for institutional money given the greater flexibility for investors to customize portfolio composition and liquidity."
