What has been behind the recent quadrupling of assets in PIMCO’s Enhanced Short Maturity (NYSEARCA:MINT), the largest actively-managed ETF on the market? Just based on the back of MINT, the month of May saw the entire Active ETF sector in the US doubling the amount of assets under management, which really says more about how concentrated the success has been in the still relatively new actively-managed ETF arena. The Enhanced Short Maturity stood at about $773 million on May 31, 2010 and just in the past week it now exceeds $800 million in assets. So what has been behind the stellar performance from this Active ETF? Are we just looking at pure money flowing into a money-market ETF or is there some good active performance to support this?
If you look at the make up of MINT you’ll see it is essentially a money-market alternative for investors who are looking to stash away their excess cash and who do not want to subject their money to the miniscule return offered by treasuries and money-market funds. With an effective holdings maturity of just 0.84 years, the liquidity in the portfolio is likely very high. And this notion of being a money-market alternative is supported by how the assets managed have varied with respect to the market performance. Looking at the table below, you can see the trends in AUM versus the market performance since March. (Click to enlarge)
In the month of March and April, when the S&P500 was on a rampage, the assets managed by MINT peaked out at the end of March and actually decreased in the month of April, as the market itself peaked out. This is generally in line with contrarian expectations which would point towards the lowest cash allocations in portfolios just when the market is peaking, as everyone tries to chase the bull. And then came May, when the S&P500 fell by more than 8% and investors fled to the safety of the US dollar and non-risky assets. That set the stage for MINT’s explosive growth as investors looked for places to park their cash, while not willing to settle for traditional money-market returns. In that sort of a scenario, any vehicle that purports to seek greater returns than money-market funds while still providing ample liquidity, will seem quite attractive – and that’s exactly what MINT does.
Just Hope or Real Outperformance?
Given what MINT promises, the next question naturally is, has it delivered? Is all this money flowing into the fund just in hope of better performance than what any money-market fund could give them or are they seeing some real outperformance?
The MINT portfolio is managed by Jerome Schneider, an EVP at PIMCO’s Newport Beach office who joined PIMCO in 2008. As of writing, the fund had 473 holdings and invested only in investment grade securities while staying away from derivatives usage. A large portion of those holdings are invested in investment grade credit as well as government securities. The fund is benchmarked against the Citigroup 3-month Treasury Bill Index. From performance numbers on the fund’s website, MINT has outperformed the index by 38 bps year-to-date. If you were invested in the index, you would have earned a measly 2 bps while an investment in MINT would have returned you 41 bps.
To put this visually, I charted the MINT price performance against a comparable index – the SPDR Barclays Capital 1-3 Month T-Bill ETF (NYSEARCA:BIL), and the outperformance is quite clear. So, the investors putting their faith in MINT are not being taken for a ride.
Will Assets Track Market Sentiment?
Granted that PIMCO is doing a good job of delivering on its investment objective, but given how the assets under MINT have fluctuated inversely with the market, it begs the question: is MINT’s attractiveness to investors destined to be linked with market sentiment? In other words, will assets managed by MINT drop back to previous levels once we see the next upward bounce in the market and investors dive right back into making riskier bets?
The answer to that question will not be obvious until we’ve gone through a few such cycles. There is little doubt that in large part, the investor interest in MINT will depend a lot on their interest in holding cash. The outperformance will no doubt impress investors while they are in it, but when markets get on a role again, there are very few investors that will settle for a 41 bps return. By virtue of the asset class that MINT operates in, it will be hard for it to maintain its appeal to investors continuously. But then again, no asset class or investment category holds the top seat through every market cycle, and PIMCO’s MINT shouldn’t pin its hopes on doing so either.
Disclosure: No positions in above-mentioned names.
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