A couple weeks ago my fellow Global Liquidity colleagues Kyongsoo Noh and Ben Ford wrote a blog piece on the state of the short-term fixed income markets (Money in Motion – June 2017). Kyongsoo and Ben concluded “With so much front end cash in motion, what strategies will you choose”? Most investors think of money market funds (MMFs) and short duration when it comes to cash and extended cash investing in the short end. The ultrashort category is less known and represents an attractive alternative for clients. Ultrashort has become an extremely popular category, particularly in the active management segment in recent years. Ultrashort assets in mutual funds and ETFs alone have nearly tripled from USD 35.2B as of December 31, 2010 to USD 102.6B as of March 31, 2017 (Exhibit 1). The amount of cash in ultrashort separately managed accounts has also grown significantly. So what is ultrashort?
Morningstar defines ultrashort as portfolios that invest primarily in investment grade U.S. fixed income issues and have durations typically less than one year. That is a broad description that includes active and passive strategies, investment grade (IG) and high yield bonds, fixed and floating bonds, structured and non-structured investments, government and non-government investments, and many combinations in between. This broad universe includes a great deal of room for interpretation and risk. An active strategy consisting of diversified asset classes such as investment grade fixed and floating-rate corporate and structured debt will provide a different experience from a passive strategy focused solely on floating rate corporate bonds. A higher yielding strategy with elevated levels of credit risk will likely have a much different volatility profile than a lower yielding strategy that invests solely in government securities. A higher duration strategy theoretically would be more sensitive to rates rising than a lower duration strategy. Given the wide variety of styles and investment options in this space, making an ultrashort decision is a difficult one.
Many investors and asset managers alike view the ultrashort category as the first step out from cash given the duration parameters. With the Fed expected to raise rates one more time this year and three times next year, ultrashort is also an attractive solution for investors coming down the curve to protect against rising rates. When selecting an asset manager, understand that not all ultrashort strategies are created equal. As with any investment choice, make sure to select an investment manager with an established, successful platform and a deep bench of talent.
Source: Morningstar. Data as of June 30, 2016.