In his column this week, Algo-Chain’s Allan Lane reminds us that timing is all in moving from risk on to risk off…
It was with interest that I recently picked up some chatter regarding JP Morgan's family of ultra-short duration fixed income ETFs. Did those in the know, know something that I didn't? In a world of double-digit returns, I guess they must have, why else would anyone take an interest in low yielding money market investments.
If you are an investment manager, we live in the strangest of times. At Algo-Chain we have completed our monthly deep dive of the stats coming from our Model Portfolio benchmarking platform, and the mid-year performance numbers are simply eye watering. Both in GBP and in EUR, our league tables see many portfolios returning 15 per cent or more year-to-date. It seems we might have just lived through the strongest six-month rally in a generation or so.
The last time we had such a strong run was in 2007 when the accusation of over exuberance was levelled at a number of Wall Street firms. For those of you too busy investing in themed based tech investments, did I forget to mention that on the back of the constant barracking from the US President Donald Trump, the Federal Reserve is under pressure to make one or more rate cuts to presumably help stimulate the US economy? To many of us sitting on the side-lines, this simply doesn't add up.
If ever there was a time for investors to rehearse their fire drill, that time is now. Enter stage left, JGST, JEST and JPST, the tickers that JP Morgan hopes will become synonymous with a structural shift in the market as risky assets get switched for safe haven investments. I have always had somewhat of a fascination with money market ETFs, and I am still waiting for the first issuer to launch one with the ticker SWAN (ETF providers please note that this ticker seems to be still available in Europe). From the outside, these money market ETFs look like the embodiment of calm but look under the surface and you'll find all manner of activity.
Coming with a management fee of 0.18 per cent, these ETFs are actively managed and look to provide a low but reliably steady return. For example, in the case of the GBP denominated ETF, this fund currently comprises 133 securities, across the various types of bonds, 48 per cent corporate, 28 per cent Money Market etc to deliver an annual yield of approximately 0.7 per cent. Nearly 80 per cent of the bonds come with an A rating and above and the average rating is A+.
Back in 2006 when I worked in BGI's Global Macro Fixed Income team, Pimco's General Bond fund was the big kid on the block. Every day, I, along with everyone else on the desk would log onto our Bloomberg terminals to see how large the fund had grown to. Invariably the number was north of USD250 billion, a feat that the team at JP Morgan are surely looking to emulate with their suite of Money Market ETFs. Need we say more, from the firm that managed to come out of the 2008 global financial crisis almost unscathed, their entry into the ETF arena does strike me as a masterclass in business strategy.
A lot can still go wrong, as Harold McMillan once reminded us, events my dear boy... with the bases loaded, an increasingly large number of investors now face the tricky decision of when to rotate out of risky assets? As returns in June demonstrate, move too early and you could be down 5 per cent as compared to your competitor, but this time there can be no excuses. It's time to do one’s homework, many investment managers need to have completed their due diligence on which safe haven ETFs pass muster, and what better place to start than using some short duration fixed income funds to hold back the oncoming bout of market turbulence.
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