Today, two more highly successful actively-managed ETFs celebrate their first anniversary – the iShares Diversified Alternatives Trust (ALT) and the Enhanced Short Maturity Fund (MINT) from PIMCO. Both funds were launched on November 16th, 2009 at a time when the Active ETF space was just starting to gain media and investor attention. ALT is iShares’ only actively-managed ETF, while MINT was PIMCO’s first Active ETF after which they have brought 3 more active products to market.
PIMCO Enhanced Short Maturity Fund (MINT)
MINT is essentially a money-market alternative that looks to deliver returns that are better than money-market funds through investments in short duration investment-grade debt. The average portfolio duration does not exceed 1 year under normal circumstances. The fund is actively-managed by portfolio manager Jerome Schneider who’s an Executive Vice President and heads up the money market and funding desk at PIMCO. The investment process is driven by PIMCO’s top-down secular outlook and also bottom-up strategies which drive the security selection process. The fund tries to add value over its benchmark which is the Citigroup 3-Month Treasury Bill Index.
As of the date of writing, only 9% of the fund was in government securities, whereas 70% of the fund was in corporate bonds, another 11% in the mortgage sector and even some in emerging markets. The effective duration of the fund is 0.66. In terms of performance, MINT has turned in very impressive performance relative to its benchmark. Since inception, the fund had returned 1.70% as of Oct 31, 2010 compared to the index which returned a measly 0.11%.
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MINT is PIMCO’s most successful actively-managed ETF but has quite a volatile asset base dependent on general market conditions and how much market participants are allocating to cash. As such, MINT’s asset base varies inversely with the stock market. When the market does poorly and fear is in the air, cash allocations increase and investors seek out MINT as a safe haven. MINT’s assets peaked at such a time back in May 2010 when its assets crossed $800 million at one point. Once the market resumed its ramp-up, MINT’s assets dropped back down to $330 million in July. At the end of October, the fund had $440 million in assets.
MINT carries a net expense ratio of 0.35%, after a contractually agreed upon fee waiver of 0.04% effective until October 31, 2011. This is more than other passive money-market ETFs such as the iShares Barclays Short Treasury Bond Fund (SHV) which charges 0.15%. However, the outperformance displayed by MINT over SHV more than makes up for the expense premium charged.
iShares Diversified Alternatives Trust (ALT)
ALT is a fund that provides investors with what many would call hedge fund-like strategies. The fund seeks to achieve absolute returns with low correlation to traditional asset classes by taking both long and short positions. It follows 3 distinct relative value strategies that profit from mispricing in 4 different asset classes – fixed income, equities, currencies and commodities. The fund targets an annual portfolio return volatility of 6-8%. The 3 main strategies utilized are Yields and Futures Curve Arbitrage, Technical Momentum/Reversal and Fundamental Relative Value.
On the date of writing, some of the prominent positions that ALT held were long futures positions on 10 year US Treasuries, on the FTSE 100 Index and on other European stock indices. The fund was short futures on 10 year Australian, Japanese and Canadian government bonds and also on the S&P500 and TSX60 indices. In currencies, ALT was long the AUD, GBP and JPY while being short CAD, CHF and EUR, with all positions being held through forwards. In terms of performance, the fund has been able to return 1.72% since inception and 2.83% year-to-date. ALT does not have an established benchmark.
ALT has been very consistent in slowly building up its asset base. In March 2010, ALT only had $9 million in assets but has gathered $15-20 million every month, ending October with $107 million in assets and crossing the significant $100 million mark. The fund has been able to provide relatively stable and uncorrelated returns, as set out in the fund’s investment objective. This should be attractive to some investors because uncorrelated assets are hard to find in today’s markets.
The fund has an expense ratio of 0.95%, which puts it on the upper end of the expense scale. But given the type of relative value strategies investors are able to access and the relatively uncorrelated and low beta returns that the fund delivers, the expense may be justified.
Disclosure: No positions in above-mentioned names.
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