This month, Bond Fund Intelligence speaks with Steven Brown and Kris Dorr, Portfolio Managers for Guggenheim Limited Duration Fund (GILHX) and Guggenheim Enhanced Short Duration ETF (GSY). We discuss issues in the ultra-short space, as well as Guggenheim's recent growth. Our Q&A follows. (Note: This "profile" is reprinted from the May issue of BFI. Contact us if you'd like to see the full issue or if you'd like to see our new Bond Fund Portfolio Holdings "beta" product, which ships to subscribers Monday.)
BFI: Tell us about your history. Dorr: Guggenheim has been in the short-term market for close to a decade. We began with BulletShares, which is a suite of targeted maturity corporate and high-yield corporate bond ETFs. Then we entered in the ultra-short market in 2011 with GSY, which was originally a Claymore fund. Regarding my history, I spent most of my career in the short duration space, beginning with institutional and retail money market funds and ultimately focusing on separately managed accounts in the 1-to-3, 1-to-5 year space. I joined Guggenheim in 2011 specifically to work on GSY and also to focus on short duration and cash management.
Brown: I joined Guggenheim in 2010.... There are four distinct investment teams within Guggenheim, that's how we’ve broken down the investment management function. I originally started on the team that effectively does the credit underwriting and trading of the individual securities, then I moved into portfolio management a few years later and been working on GSY since 2012. [I've been] listed on the Limited Duration prospectus from the fund's inception in December 2013.
BFI: Tell us about the short-term lineup. Brown: If you think about the ultra-short, we have our ETF, GSY. We also have a number of internally managed cash management vehicles that are not publically marketed that I also work on. GSY's benchmark is the T-bill index, so we're generally trying to keep about a 0.25 year duration or so in the portfolio. Then we can get into portfolio construction and positioning. But suffice to say, we are firmly in the ultra-short category and we take limited credit risk in that product.
All of the products really focus on the firm's view of looking at client objectives and constraints, then tailoring a product, not just in line with the benchmark or making minor shifts to a benchmark, but really starting from scratch and thinking about what types of securities make sense for a given strategy. Often times, securities that fall outside of the index that will even make their way into the ultra-short bond ETF, GSY.
When you go a little bit further out the curve, from a duration standpoint at least, we have our mutual fund, the Limited Duration fund. The benchmark is the 1-to-3 year 'Agg', so if you want to compare the Limited Duration fund to GSY it is going to take a little bit more duration and a little bit more credit risk, [with] a little higher allocation to ... structured credit. But really corporate credit and structured credit are the hallmarks of the firm, and the asset classes that we feel have the best expertise in.... It just so happens that structured credit in particular continues to be the asset class that we think, really across the capital structure, has the best relative value, and risk-adjusted future returns given where spreads are in the market and our outlook for the Fed and for interest rates. Further out the curve, we have an intermediate-term bond fund (Total Return Bond, GIBIX) that I also work with that's benchmarked to the Agg in that 4-6 year duration range.
BFI: How's the reception been as of late? Brown: Limited Duration launched in December 2013. As is typical with a new product launch, it takes a little while to make traction in the market. We had three sister mutual funds with completely different strategies that we had launched two years prior to that and tried to complete our fixed-income suite of mutual funds really across the credit continuum and across the duration spectrum. Limited Duration has had positive net flows in each of the 41 months since its inception. We went over $1 billion in January of this year, and we’ve seen substantial growth. We've had about more than $600 million of inflows year-to-date which brings the fund to more than $1.5 billion. We think we have a lot of opportunity to expand the product and to take the inflows given the opportunities that we see within primarily within senior investment-grade structure credit and, to a lesser extent, investment-grade corporates.
We think the short-duration space is going to continue to gain traction as a whole within the market, as an interesting place for people to park their money with somewhat limited mark-to-market risk but potential upside and now actual yield given where LIBOR and the overnight rate have gone. So we think the space as a whole is prime to grow over the next couple of years as we get further into the Fed tightening cycle. Dorr <b:>`_: I that's applicable to GSY as well. In the ETF space, we're the third largest actively managed ultra-short ETF. So we've experienced some nice growth in this fund as well, having gone over $1 billion.
BFI: What can and can't you buy? Dorr: We do not do any options or futures. But like a money market fund, GSY is a '40-Act' fund, so we adhere to the same diversification requirements. Unlike a money market fund, we have greater flexibility with respect to security type, security maturity, and security selection, allowing for diversification across a broader spectrum of sectors. We also differ from a money market fund in terms of liquidity and credit requirements. While GSY maintains an abundant level of liquidity, and we do purchase Tier 2 commercial paper in addition to other short-term vehicles to maintain a very high level of liquidity, so we have the ability to hold a diversified portfolio of varying maturities while keeping an average duration of less than one year. As far as credit is concerned, the other differential is that we have the ability to do 10% of this portfolio in high-yield securities. At this time, we're not really invested there because we feel high yield is fully valued. But we do have that ability to invest in those types of securities.
BFI: Did you take advantage of the LIBOR spike in the fall? Brown: As LIBOR has increased, and will continue to increase throughout this tightening cycle, that is going to be quite positive for floating rate asset classes.... We continue to expect that spreads will tighten.... We think that the technical flows behind wanting to be in shorter-duration or wanting to be in floating rate products will continue throughout this cycle, which is positive for the direction of spreads. Dorr: We did take advantage of the spike in SIFMA by adding some short municipal dailies and weeklies.
BFI: Tell us about your investor base. Dorr: We see a number of investment advisors coming into the fund. They may use the fund as an alternative to low yielding money market funds to enhance income or when they have a shift in investment strategy. As an example, a manager may be concerned about longer-term bond funds selling off, or shift out of equities when they're overvalued. Brown <b:>`_: We are [seeing institutional interest too] <b:>`_. We're being added to platforms and being asked to take meetings with research analysts.... For Limited Duration, obviously their interest is in the space as a whole <b:>`_.
BFI: How about the outlook for the Fed? Brown: Our precision around the number of hikes this year and next year is somewhat less meaningful for these products, because broadly speaking we think these products will benefit ... given their credit quality and being substantially floating rate securities.... Our specific projections for what the Fed is going to do for the remainder of the year is likely two more interest rate hikes.... Our base case is a little bit higher than the market, but either scenario ... should be good for both of these products and for the space.
BFI: Any thoughts on the future? Dorr: Right now in the money market space the bulk of the assets are in government funds, yet investors want to attain more yield, while staying in very high quality and very short products. A fund such as GSY, that is strategically constructed to balance yield, credit and duration risk, can help investors achieve those goals. That is why I think that the ultra-short space has a lot of room to grow.
Brown: Particularly within Limited Duration and just looking at this peer group, away from broader fund flows in and out of the category, the fund has had very good performance. It's just passed its 3-year track record and has 5 stars from Morningstar. So we have a lot of the marketing points behind us.... We think that will continue to lead to flows. We've seen almost 100% growth in the fund really in the last 9 months or so.
