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As investors hunt for yield, many are turning to actively managed exchange-traded funds focused on bonds, like Pimco’s Enhanced Short Maturity Active ETF . The fund, which has a 5.6% 30-day SEC yield, is a “a first-rate ultrashort ETF,” Morningstar senior analyst Paul Olmsted wrote in August. Trading under the ticker symbol MINT, the ETF holds fixed income securities with durations of no more than one year. It is outperforming its peers, ranking in the top quartile for year-to-date total returns, according to Morningstar . So far this year, the ETF has a total return of 5.59%, Morningstar says. It has an expense ratio of 0.35%. Nearly 45% of the portfolio is composed of investment grade corporate credit, while 34% is securitized assets. It has $10.2 billion total net assets. MINT YTD mountain MINT’s year-to-date performance Jerome Schneider, Pimco’s head of short-term portfolio management and funding, said as people are moving cash off the sidelines, MINT is the next incremental step beyond the money market landscape. In addition, investors are finally coming back into fixed income after ignoring bonds. “There has been a decisive view of how to get back into fixed income, not just because of higher rates and yields, but to do so in a meaningful way that allows you to benefit from the structural liquidity premiums by being in an ultrashort strategy like MINT,” said Schneider, who is the lead portfolio manager of the ETF. In fact, investors flooded into the fund in October, making it the actively managed bond ETF with the highest inflows last month, according to FactSet. Overall, October was the best month ever for inflows into active fixed income funds, a State Street Global Advisors analysis found. “The active fixed income flows in October were mainly driven by ultra-short duration strategies that seek to deliver income and stability, synonymous with the trends we saw in bond sector flows … where short duration government bonds (yielding over 5%) were sought,” Matthew Bartolini, head of State Street’s SPDR Americas Research wrote in a note earlier this month. However, MINT has seen some outflows in November, which Schneider said may have been model driven or a reaction to the Federal Reserve again leaving rates unchanged early in the month. In total, the fund saw $1.3 billion in inflows so far this year, according to FactSet. With the new year around the corner — and along with it, the anticipated end of the Fed’s hiking cycle — the Pimco fund is perfectly positioned to outperform, Schneider said. “Historically, the inflection point for making such a move out of Treasury bills and money market funds into a short-term and ultrashort strategy is exactly the point in time where you’re approaching the crescendo … of a Fed hiking sequence,” he said. “Then we find a structural opportunity for the next 24 to 36 months to outperform traditional benchmark rates and T-bill rates.” The team’s approach Schneider, who has been in the business for 28 years, credits the fund’s outperformance to a number of factors. One is the management team’s approach, by a seasoned group of instituional investors focusing on different aspects of the market, like corporate credit and structured products, Schneider said. They also look at the funding side of the balance sheet to get insights on where you can borrow money versus repurchase agreements. “It’s not just a fact of like, here’s an asset, here’s the highest yield and you invest in it. You also want to know the point of reference of where somebody else is willing to lend you money. And if you don’t know that, then you’re only operating with half the equation,” he said. The ETF also has a little bit more liquidity than its competition, which has allowed the team to be opportunistic about buying when issuers come to market, Schneider said. “We think about a core amount of liquidity within the strategy, backed by Treasury bills, overnight repurchase agreements backed by Treasurys — that’s an essential element to liquidity management,” he said. In addition, there are other self-liquidating asset classes such as non-financial commercial paper and some corporate bonds. The fund also holds high-quality, asset-backed securities, like prime credit card asset-backed debt and prime auto loans, Schneider said. “Those offer a diversifying factor beyond typical cash management strategies, and have provided a nice balanced diversification to portfolio construction this year,” he explained. Opportunity for future outperformance The Federal Reserve is expected to hold interest rates higher for longer after it ends its hiking campaign, although it is unclear for how long. Investors can capture that higher yield on the short end of the yield curve, Schneider said. “We’re doing that by [holding] shorter-dated assets, managing interest-rate exposure, but also through structural ways of owning, like floating-rate notes, which actually benefit not only investors in a rising rate environment, but actually benefit in creating outperformance in a declining rate environment as well, because there’s a latency to the distributions that ended up happening,” he explained. If there is a harder landing than the market expects, Schneider and his team will recalibrate some interest-rate exposure to take advantage of a little bit of capital appreciation, he said. “Structurally speaking, you’re going to see those distributions linger a little bit longer than you would typically find in a money market fund,” said Schneider, who’s been at Pimco since 2015 after a career at Bear Stearns. “There’s uncertainty in the market but here’s the structural opportunity that allows those cash investors to be more active and mindful with how they’re deploying cash,” he said.
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