PIMCO Source – Best Fixed Income (Cash) ETF Manager

The partnership that Source has developed with PIMCO since 2011 has been highly successful. Over that period, the 10 fixed income ETFs they have created have attracted over EUR4bn in assets. Of these, six are actively managed, including the three Fixed Income cash ETFs, which have approximately EUR2.5bn in assets. 

“It didn’t make sense to go passive when we could leverage the active management skills of PIMCO, and use their edge to deliver alpha to investors,” says Fabrizio Palmucci (pictured), Fixed Income Specialist at Source. “The approach we took with PIMCO was to build something that made sense for cash allocations. We saw the interest rate environment falling and concluded that few passive strategies would likely be used by investors.”

The result is a series of ETFs, in sterling, US dollars and euros. They include: 

• PIMCO Euro Short Maturity Source UCITS ETF 

• PIMCO Sterling Short Maturity Source UCITS ETF

• PIMCO US Dollar Short Maturity Source UCITS ETF.

Howard Chan is PIMCO’s ETF product manager in EMEA. He notes that the three cash management ETFs were launched in response to investor demand as they looked for a better way to generate returns on cash as policy makers continued to lower interest rates to near zero levels. 

“These funds are becoming even more compelling in regions like Europe where rates have actually become negative. It’s a bit of a dilemma for investors; they’ve never faced such a situation. The traditional ways to invest cash were through either deposits or money market funds,” says Chan. “This approach involved taking little to no risk, but that paradigm has now changed. Today, if investors want to avoid capital erosion, they have to take some risk.   

“Consequently, we’ve seen larger institutions start amending their guidelines to allow for ETFs because they realise that, with their existing conservative guidelines, they’re going to have capital erosion in their portfolios.”

These three cash ETFs provide a new way to take measured risk and generate positive yield on cash investments.

Over a cycle, the funds are designed, depending on the currency, to outperform cash by 50 to 75 basis points. Over the last three years, EONIA has returned about 13 basis points. “Through our active management and ability to identify opportunities within Europe, we’ve been able to return 105 basis points after fees. That’s an attractive boost to return over typical cash rates,” confirms Chan. 

Only investment grade bonds are bought in the three ETFs. PIMCO looks to generate alpha by taking advantage of market dislocations. 

“Over the last five years, traditional cash investors have bought money market funds and this has pushed money market yields down to near zero, creating a yield distortion between money market eligible securities and those with slightly longer maturity. That’s where active management can really help because if you have good security selection, you can pick up additional yield and deliver a better return on cash,” comments Chan.

On a daily basis, the team constantly evaluates new short-term investment opportunities and where opportunities arise, performs switch trades, buying cheap securities that have a good yield while harvesting gains on those that have reached its return expectations. “This makes sure the portfolio not only benefits from good yield but also capital appreciation,” adds Chan.

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