What should you do with short term cash? How do you invest if interest rates rise? What’s your fixed-income strategy? These are the kinds of questions that I wrestle with from clients and from the investment advisor who stares back at me from the bathroom mirror.
The one thing that Clear View strives to do is find ways to protect client money in our MarketFlex portfolios. Throughout the day there are countless pitches for new and exciting products and commentary from plenty of smart portfolio managers received in our email inbox.
It’s a balancing act trying to determine how best to meet the dual expectations of clients – both spoken and unspoken – for higher income yields with no additional risk. The realities of our times are pretty clear: With interest rates so low on quality fixed-income investments, we have to look at alternatives for improving yield.
There’s no doubt that there’s more room for interest rates to rise than fall. When I was a mortgage banker, I’d have this type of conversation with plenty of my clients looking for advice on when to lock a rate. Here, the conversation and the response is pretty much the same though the client’s end-goal is different. Then, clients wanted lower rates for the mortgages. Now, clients want higher yields for their own income.
Investing is a balancing act. What we try to do is balance the trade-offs from investing in different asset classes. And right now, it’s awfully tough to have these conversations with clients who see the writing on the wall and intuitively feel – correctly, too – that interest rates will rise sooner or later and to invest in fixed income now is likely to produce an adverse outcome – at least in the shorter term.
So what’s a well-intentioned advisor to do? Well, we still believe in the CORE-EXPLORE / CORE-SATELLITE approach of our MarketFlex portfolios. Generally, this means keeping a solid portion of a portfolio allocated to all major asset classes. Then we use peripheral positions as satellites revolving around the core to explore tactical opportunities and hedges.
Since there has not been a lot of reward to be long on the maturity curve for fixed-income investments as of late (and for the past couple of years really), we’ve tended to fill the gap with bond and fixed-income ETFs which have skewed toward the shorter term. And to help boost yield we’ve looked at alternate classes that produce regular and sometimes inflation-adjusted income such as Master Limited Partnerships, dividend-paying stocks and the like.
For those who participate in our MarketFlex programs, they’ll recognize that we rely on PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) as an alternative to money market funds. While this ETF is relatively new, it is managed by a well-respected industry team including veteran Bill Gross of PIMCO Total Return fame, a fund found in many 401k plans.
MINT is an actively-managed exchange traded fund capitalizing on price differentials between various short-term corporate and government fixed-income and bond securities. With a duration of less than one, it is designed to be less sensitive to increases in interest rates compared to, say, a fund filled with government bonds that mature in more than ten years.
We are confident that this is still a good choice for the short-term space. Though it is not a money market, it offers a very good return for being a bit out there on the risk curve.
But like any other coach, we have to be aware of what’s out there on the horizon. So another short-term bond ETF that we’ll be looking at is a new offering from BlackRock’s iShares. According to its prospectus, the iShares Short Maturity Bond ETF (NYSEArca: NEAR) seeks to maximize current income through diversified exposure to short-term bonds at a cost of 0.25% which is about 0.10% less than its PIMCO competitor MINT.
So we expect to keep an eye on this offering and see if it offers sufficient compelling value to use it in our lineup or replace our current go-to in this space. We shall see but the key factors will be not just expenses but other performance measures, too. Namely, these focus on how much volume will trade and the spread between the bid-ask prices.