PIMCO USD Short Mat Source ETF (LSE:MINT) - ETF price

ETF Report

PIMCO US Dollar Short Maturity Source UCITS ETF MINT



For the past three years, manager Jerome Schneider has kept the fund's duration on the low end of its conservative range of less than one year. He has anticipated volatility on the short end of the U.S. yield curve throughout the period, still believing that the market isn't sufficiently pricing in the probability of future hikes in the Federal Reserve's target rate. The fund's duration hovered at a low of around 0.3 years from early 2015 until mid-2017, when Schneider began to lengthen it somewhat. That figure got closer to 0.5 years from late 2017 through early 2018, before he cut it back down to 0.3 years in August. As corporate spreads tightened in 2016 and 2017, Schneider got more cautious on the credit-risk front, cutting the fund’s corporate stake to a recent low of 43% in April 2018, down from nearly two thirds of the portfolio at the beginning of 2017. Then, when spreads on short-dated corporates widened in early 2018 as demand from foreign investors dropped, Schneider took advantage of improved valuations to top up that stake (it reached 54% by the end of August). The fund's combined asset-backed stake declined modestly to around 10%, driven mainly by a reduction in the fund's AAA collateralised-loan-obligation holdings. The fund avoids high-yield fare and typically limits its emerging-markets exposure to 5% (4.8% as of August 2018). Recently, that stake included the short-term debt of select quasi-sovereign Chinese companies and Indian banks. This exposure, and others to non-U.S. developed-markets issuers, is U.S.-dollar-denominated.

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The fund charges 0.35% per year, which is one of the pricier levies charged by similar ultrashort bond ETFs. Compared with open-end peers, however, MINT's price tag appears to be a good deal for investors who have access to a range of rebate-free share classes in this category, which charge 0.72%, on average, earning the fund a Positive Price Pillar rating.

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The ETF is actively managed by PIMCO Global Advisors Limited. It invests primarily in a mix of investment-grade US-dollar-denominated government and corporate bonds with short maturity (that is, up to three years, but mostly up to one). The ETF may also invest in instruments such as emerging-markets, mortgage-backed, or municipal debt, provided they are US-dollar-denominated and investment-grade-rated. The average duration of the ETF will vary in relation to the portfolio composition chosen by the fund manager at any given time. However, the objective is to keep it below one year. PIMCO Source discloses the daily composition of the ETF portfolio, including a breakdown by asset type, maturity, country exposure, and credit rating, on its website. PIMCO Source ETFs do not engage in securities lending.

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PIMCO US Dollar Short Maturity Source UCITS ETF MINT benefits from the same high-caliber team and resources as its open-end sibling PIMCO GIS US Short-Term, as well as a similarly strong, albeit more constrained, process focused on capital preservation. Cheaper fees here boost this fund's Morningstar Analyst Rating to Gold.

Jerome Schneider has managed this fund since its 2011 launch. Aside from a rare departure in July 2018, the core team supporting him--four experienced specialists focused on areas including credit, derivatives, and nondollar rates--has mostly remained stable under his watch. The team works closely with other sector and country specialists who focus on shorter maturities and draws on the firm's army of corporate-credit and securitised analysts. 

The team has the expertise to employ a wider range of tactics than many of its competitors. But while that can translate to a bit more risk at PIMCO GIS US Short-Term, Schneider follows a buttoned-up process here. Unlike its sibling, this fund doesn't use derivatives and won't take currency risk. It also avoids high-yield corporate debt and typically caps exposure to emerging markets at 5%.

Those constraints don't tie Schneider's hands, though. Notwithstanding the fund's focus on liquidity and minimising volatility, he'll take measured risks when their rewards appear commensurate. The fund benefited from his decision to shorten its duration in advance of a series of federal-funds target-rate hikes beginning in December 2015, for instance, and took advantage of mispricings among short-dated corporates ahead of money market reform implementation in October 2016. While Schneider lightened up on corporate credit risk in 2017, he took advantage of price dislocations to increase that stake modestly in 2018 (up to 55% as of August).

The fund has delivered strong returns versus distinct open-end and exchange-traded fund competitors, even though its less-adventurous profile has caused it to miss out on some of its open-end sibling’s gains. The fund has also kept a lid on volatility, and its relatively cheap fees provide another advantage.

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Fundamental View

The skilled team of short-term specialists and vast network of global fixed-income experts that support this fund warrant a Positive People Pillar rating. The fund is managed by Jerome Schneider, who was named the 2015 Morningstar Fixed-Income Fund Manager of the Year. Schneider joined PIMCO in 2008 from Bear Stearns, where he had a background in credit- and mortgage-related funding transactions. He took over leadership of PIMCO's short-term desk when his predecessor Paul McCulley left the firm in 2010.

Aside from the departure of Scott Berman in July 2018, the core team focusing on short-term debt markets (0-18 months) has remained stable under Schneider, and each member has well over a decade of industry experience. That includes Andrew Wittkop, who focuses on rates and derivatives; Nate Chiaverini on corporate credit; Bill Martinez on nondollar rates; and Tony Crescenzi on Fed policy. While PIMCO searches for Berman's replacement, this team, supported by the addition of two junior members in the past year, has the expertise to pick up any slack. The core group also leans on PIMCO's extensive global investment team of traders, analysts, and macroeconomic experts. In addition to running dedicated short-duration portfolios, the team manages billions of dollars across a range of short-term assets for other PIMCO strategies.

Similar to its open-end sibling PIMCO GIS US Short-Term, this ultrashort bond ETF's aims are modest: Provide slightly better-than-cash returns while preserving capital. Given its conservative mandate, Schneider's chief focus is on maintaining a high degree of liquidity and minimising volatility. To that end, the fund emphasises high-quality issues and takes very little interest-rate risk. The portfolio's duration is typically less than one year, and Schneider avoids structured fare with volatile cash flows that could cause its duration to extend.

From there, Schneider and his team make use of PIMCO's vast resources to identify mispricings among sectors and markets at the short end of the yield curve. Like its PIMCO siblings, the team uses a mix of macroeconomic forecasting and bottom-up analysis to make interest-rate, yield-curve, sector, and issue-level decisions. Allocations to short-dated U.S. government debt, corporate bonds, and high-quality asset-backed securities are routine here.

While MINT benefits from the same team and many of the same process elements as its open-end sibling, supporting a Positive Process Pillar rating, its approach is relatively restrained. Because it doesn't use derivatives, the team adjusts this fund’s duration by altering the composition of its individual holdings. At its most bearish, the fund's duration can't get much shorter than 0.3 years, whereas PIMCO GIS US Short-Term's duration has been as low as zero thanks to its ability to implement short rate exposures via derivatives. MINT also avoids currency risk and high-yield corporate debt, and it typically caps exposure to emerging-markets debt at 5%.

As expected, that reduced flexibility has caused MINT's returns--which rank favourably compared with the broader USD diversified bond short-term Morningstar Category and ETF universe—to lag its more-adventurous sibling's, but it has also kept a lid on volatility. That profile may appeal to the most risk-averse investors.

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JPMorgan USD Ultra-Short Income, launched in February 2018, is a like-for-like alternative in terms of investment strategy and style (that is, it is also an actively managed ETF). This ETF comes with a much lower ongoing charge of 0.18%.

Alternatively, there are ETFs that offer exposure to the short-dated US-dollar-denominated bond market, whether government or corporate. However, these ETFs typically track indexes with duration above one year.

The closest analog to MINT is the mutual fund PIMCO GIS US Short-Term, also run by Jerome Schneider. On average, the latter fund has produced about 10 basis points of annualised outperformance versus MINT over the trailing four years through August 2018, despite a higher expense ratio of 0.85%. That fund also takes on minimal interest-rate risk but has the flexibility to take on greater exposure to credit-sensitive sectors--including corporate high-yield and emerging-markets bonds--plus a modest amount of currency risk. That riskier profile has generated better returns over the long term but with moderately higher volatility.

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