Ultra-Strong. Ultra-Short

Transcription

1 ThinkAdvisor.com august 2013 An Ultra-Strong Case for Ultra-Short Funds August 2013 Investment Advisor

2 OverlookedManagers Pioneer Investments Charles Melchreit makes a strong case for a skeptical space I By John Sullivan Photography by Webb Chappell t s been a tough road in the ultra-short mutual fund space. The category blew up in 2008 along with everything else, and yields proved little better than money market funds in the recovery that followed. We don t cover many of these funds anymore, said Sarah Bush, senior mutual fund analyst with Morningstar. Ultra-shorts were yielding too little and got really small, and we just felt we needed to deploy our resources elsewhere. But when Bush took a second look, she found a surprise. The category has experienced modest inflows really since the beginning of the recovery in 2009, she explained, adding that this includes the massive bond fund outflows seen in June. Floating rate funds were the only other category besides ultra-shorts to zig when all else zagged during that month. The good news may be due to the fact that some of the funds aren t around anymore, or were rolled into other funds and subject to survivorship bias. Whatever the reason, Charles Melchreit sees a strong argument for their inclusion in client portfolios.» I think the industry has learned its lesson and responded appropriately by designing better ultra-short strategies for the investor. Investment Advisor August 2013 ThinkAdvisor.com

3 Overlooked Managers There were some lessons learned from several years ago, said Melchreit, manager of Pioneer Investments Multi-Asset Ultrashort Income Fund (MAFRX). What happened at that point is that ultra-short funds were really directed at grabbing for yield without taking adequate notice of the risks they were incurring. They essentially became overly concentrated in higher-risk, longer-weighted average floating rate mortgage securities. Calling them a one-trick pony at that point in the cycle, they chased yield without properly disclosing the accompanying risk, he claimed. The new generation of ultra-short funds is a little bit different. There is clearly much better disclosure and transparency as far as the risks that are being taken within the fund. We ve seen a lot of funds launched in this space recently, and everyone is very clear with their investors as to where the risks are. He emphasized that they aren t a $1 NAV type of fund (read: money market). Pioneer s ultra-short fund, which Melchreit co-manages with Seth Roman and Jonathan Sharkey, is massively diversified in that it hits a lot of different levers at Pioneer across a lot of different sectors. I don t think that s as unusual now as it once was within this space. We re looking to invest in sectors that are not terribly correlated. Most sectors have some correlation, but we re really trying to take advantage of any imperfect correlations that we can in the short duration space. The fund has a heavy focus on risk management and trying to manage NAV volatility so it doesn t experience massive swings. I think another lesson learned in 2008 is that one has to diversify one s sources of liquidity, particularly in an ultra-short fund that may see significant outflow activity in certain market scenarios. There were a lot of people heading for the exits at the same time [during the economic crisis]. The ultra-short world is now using a lot of different sectors in corporates and mortgages and even bank loans, money market instruments and Cat bonds, all of which appeal to different investors and present for us as an investment manager different pools of liquidity. Meaning if faced with a period of high redemptions, he has a choice of which securities to sell. Great so what role will ultra-short funds therefore play in a client s portfolio? We tell people these are not appropriate strategies for people who need a checkbook, he warned. If people need to be in cash for a month or two because they have some money for a closing on a house or making a tuition payment, this isn t the place to be. Melchreit s previous mention of money market funds brings to mind how they broke the buck, and the alternative products that grew in popularity as a result, namely stable value funds. How do ultra-short funds compare? Noting that a number of products offered low risk but no yield, he believes there is a market for a fund with low interest rate exposure like the aforementioned floating rates funds, but with higher-quality investments. With stable value funds, you won t see the adjustment in the yield that you would see on an ultra-short fund, he said, hence the name stable value. Our ultra-short fund manages very strictly to its benchmark of three-month Libor. A stable value fund, on the other hand, tends to have a longer runway because they re typically investing in two- to five-year securities. Event-linked Bonds Cash & Equivalents 4.6% 4.7% 26.2% Asset Backed Securities Pioneer Multi-Asset Ultrashort Income Fund us.pioneerinvestments.com Ticker: MAFRX Managers: Charles Melchreit, Seth Roman, Jonathan Sharkey Fund Inception: April 29, 2011 Min. initial investment: $1,000 Load (front-end): None Total assets: $1.5 billion Expense ratio: 1.03% Turnover: 101% Returns YTD: 0.17% 1-Year: 1.31% Quarter (Q2): -0.09% 12.1% US Invest. Grade Corp. Data through 3/31/2013 Growth of $10,000 invested 5/1/2011 to 6/30/2013 Top Five Holdings 1. Maryland St Health & Higher Ed Var Rate 2. Loudoun Cnty Va Indl Dev Auth 3. Ford Motor Credit Co 4. Harris Cnty Tex Health Facs De Var Rate 5. Lower Neches Valley Auth Source: Morningstar (as of July 10, 2013) Portfolio Allocation Bank Loans 7.3% Miscellaneous 7.6% U.S. Treasury/ 7.7% Agency Securities 8.7% CMBS 9.9% Non-Agency MBS 11.2% Agency Pass Throughs Pioneer Multi-Asset Ultrashort Income Fund Pioneer Multi-Asset Ultrashort Income Fund Final Value Cumulative Total Return Av. Annual Return $10, % US OE Ultrashort Bond $10, % 0.73% USTREAS CD Sec Mkt 6 Mon $10, % 0.42% August 2013 Investment Advisor

4 Overlooked Managers They will give you a credited rate, which does not adjust as quickly, he argued. I would add you have less transparency in how the rate adjusts over time. Not all stable value funds will adjust upward as rates rise. Melchreit noted the fund is modestly defensive going into the second half of the year, in keeping with his comments about managing the strategy for low NAV volatility. The fund runs sleeves in different asset classes that are fairly stable to help with risk mitigation and diversification. In that sense I guess we always run defensively, he quipped. Asked for closing comments, Melchreit urged advisors not to believe the hype and (once again) emphasized the risk management aspect that not only he, but other managers in the space, are sticking to. Very diligent risk management has become deeply embedded within the portfolio management process. I think it s an attractive strategy now for investors, and I don t think they should be dissuaded by some of the bad press that this type of product had several years ago. I think the industry has learned its lesson and responded appropriately by designing better ultra-short strategies for the investor. Editor in Chief John Sullivan can be reached at jsullivan@sbmedia.com. (#77942) Reprinted with permission from Investment Advisor. Copyright 2013 by The National Underwriter Company doing business as Summit Business Media. All Rights Reserved. For more information about reprints from Investment Advisor, visit PARS International Corp. at

5 Past performance does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Performance results reflect any applicable expense waivers in effect during the periods shown. Without such waivers, fund performance would be lower. Waivers may not be in effect for all funds. Certain fee waivers are contractual through a specified period. Otherwise, fee waivers can be rescinded at any time. See the prospectus and financial statements for more information. Call or visit us.pioneerinvestments.com for the most recent month-end performance results. Average annual total return for the Pioneer Multi-Asset Ultrashort Income Fund for the periods ending 9/30/2013: Net Asset Value (NAV) Public Offering Price (POP) YTD Year Life of Fund (since 4/29/2011) NAV results represent the percent change in Net Asset Value per share. POP returns reflect deduction of maximum 2.50% sales charge. All results are historical and assume reinvestment of dividends and capital gains. Expense Ratio for Pioneer Multi-Asset Ultrashort Income Fund (Gross): 0.72% Investors should be aware of the differences between Pioneer Multi-Asset Ultrashort Income Fund (MAFRX) and money market funds before investing: Both funds seek to preserve capital and maintain liquidity. Money market funds generally focus on stability of principal, while MAFRX seeks a balance of stability and income, which may result in increased volatility. Money market funds seek to maintain a net asset value (NAV) of $1.00 per share; the NAV of MAFRX will fluctuate to reflect the market value of the portfolio. The Fund s fees and expenses differ from money market funds; see the prospectus for details. Because MAFRX can invest in more bond sectors than money market funds, it will be exposed to a larger number of risks. Neither money market funds nor this fund is insured or guaranteed by the FDIC or any other government agency, and investors can lose money in each. A Word About Risk: All investments are subject to risk, including the possible loss of principal. Pioneer Multi-Asset Ultrashort Income ( MAUI ) Fund has the ability to invest in a wide variety of debt securities. The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund s operating expenses, you will indirectly bear the operating expenses of investments in any underlying funds. The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and subjects the Fund to magnified losses if an underlying fund s investments decline in value. The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities may become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary concerns decrease, inflation-linked securities will become less attractive and less valuable. The Fund may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the Fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. The Fund may invest in subordinated securities, which may be disproportionately adversely affected by a default or even a perceived decline in creditworthiness of the issuer. The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may be insufficient to meet the issuer s obligations or may be difficult to liquidate. The Fund may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are contingent on the non-occurrence of a pre-defined trigger event, such as a hurricane or an earthquake of a specific magnitude. The Fund may invest in zero coupon bonds and payment-in kind securities, which may be more speculative and fluctuate more in value than other fixed income securities. The accrual of income from these securities are payable as taxable annual dividends to shareholders. Investments in equity securities are subject to price fluctuation. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates rise, the value of fixed income securities falls. The Fund may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or decrease more than other fixed income securities. Mortgage-backed securities are also subject to pre-payments. Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt homeowners to refinance their mortgages. High yield bonds possess greater price volatility, illiquidity, and possibility of default. There may be insufficient or illiquid collateral securing the floating rate loans held within the Fund. This may reduce the future redemption or recovery value of such loans. The Fund may have disadvantaged access to confidential information that could be used to assess a loan issuer, as Pioneer normally seeks to avoid receiving material, non-public information. Pioneer Multi-Asset Ultrashort Income Fund is not a money market fund. There is no assurance that these and other strategies used by the Fund or underlying funds will be successful. These risks may increase share price volatility. Please see the prospectus for a more complete discussion of the Fund s risks. Top ten holdings for Pioneer Multi-Asset Ultrashort Income Fund as of 9/30/2013: Federal National Mortgage Association, Floating Rate 1.0% Federal Home Loan Banks, Floating Rate Note, 0.5% Note, 3/4/14 4/24/14 Permanent University Fund, Floating Rate Note, 0.7% Harris County Health Facilities Development Corp., 0.4% 7/1/37 Floating Rate Note, 12/1/41 Maryland Health & Higher Educational Facilities 0.7% Federal National Mortgage Association, Floating Rate 0.4% Authority, Floating Rate Note, 7/1/36 Note, 10/25/13 Connecticut State Health & Educational Facility 0.6% Federal National Mortgage Association, Floating Rate 0.4% Authority, Floating Rate Note, 7/1/36 Note, 6/23/14 Ford Motor Credit Co LLC, 0.0% 0.5% British Telecommunications Plc, Floating Rate Note, 0.4% 12/20/13

6 Top sectors for Pioneer Multi-Asset Ultrashort Income Fund as of 9/30/2013: Asset Backed Securities 24.1% U.S. Treasury/Agency Securities 6.7% US Invest. Grade Corp. 14.5% Int l Invest.-Grade Bonds 6.1% Agency Pass Throughs 11.9% Event-linked Bonds 4.8% Non-Agency MBS 9.9% Municipal Bonds 3.8% Bank Loans 8.5% Other 2.6% CMBS 7.1% The portfolio is actively managed and current holdings may be different. US OE Ultrashort Bond Morningstar Category Ultrashort-bond portfolios invest primarily in investment-grade U.S. fixed-income issues and have durations typically of less than one year. This category can include corporate or government ultrashort bond portfolios, but it excludes international, convertible, multisector, and high-yield bond portfolios. Because of their focus on bonds with very short durations, these portfolios offer minimal interest-rate sensitivity and therefore low risk and total return potential. USTREAS CD Sec Mkt 6 Mon The index measures the performance of the average dealer bid rate on negotiable certificates of deposit available on the secondary market with maturity of 6 months. Indices and Morningstar categories are unmanaged and their returns assume reinvestment of dividends, and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index or a Morningstar category. The views expressed by the portfolio manager in this article are his own and are subject to change at any time. These views do not necessarily reflect the views of Pioneer or others in the Pioneer organization. These views should not be relied upon as investment advice, as securities recommendations or as an indication of trading intent on behalf of any Pioneer investment product. Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional. Before investing, consider the product s investment objectives, risk, charges and expenses. Contact your advisor or Pioneer Investments for a prospectus or summary prospectus for the Pioneer fund(s) covered in this material. It contains complete information on the risks, fees and charges associated with an investment in the fund. You should read it carefully. Securities offered through Pioneer Funds Distributor, Inc. Investment Product 60 State Street -Not FDIC Insured Boston, MA May lose value us.pioneerinvestments.com -No bank guarantee Underwriter of Pioneer mutual funds, Member SIPC FOR PUBLIC USE