Ultra-short bond funds have added $2.6 billion since July 31, after a cumulative outflow of $900 million in the first seven months of the year, according to data compiled by Bloomberg.
New Entry
Morgan Stanley’s Institutional Fund Trust Ultra-Short Income Portfolio, the only new offering this year in Crane’s conservative ultra-short funds category, has lured $711 million since its introduction in April.
Lauren Bellmare, a Morgan Stanley spokeswoman, declined to comment on the fund. In a note on its website detailing the offering, the firm says “a conservative ultra-short bond fund offers a compelling strategy that seeks to deliver current income while maintaining a focus on preserving capital and liquidity.”
Fitch warned investors in an Oct. 10 note to look before they leap into short-term bond funds from money-market offerings, because yields on the former are higher for a reason.
One advantage of the bond alternatives is that they don’t subject investors to some of the unappealing new restrictions on prime money funds, including measures to slow client outflows during times of stress. But they entail other risks that money-fund investors traditionally haven’t had to consider -- such as the potential for losses when interest rates rise.
‘Very Different’
“These ultra-short funds are all very different and there is not even a clear definition of what a short-term bond fund is,” Gregory Fayvilevich, a Fitch analyst, said in an interview. “Investors are used to money funds being very tightly regulated and clearly defined by the SEC rules of what they can and can’t do.”
Pacific Investment Management Co., which oversees about $1.6 trillion, is among companies benefiting from demand for short-term bond funds. Assets in its Short Asset Investment Fund have doubled this year to $1.1 billion.
Yet Jerome Schneider the firm’s head of short-term portfolio management, said investors must consider funds’ track record in addition to things like yield differentials.