Cash allocation has drawn a lot of attention over recent years. Since 2015, bond funds with an average duration of less than 1 year have grown by a compounded annual growth rate of 36%. Comparatively, bond funds with average durations of 1 to 2 years grew by nearly 9%.
Note: Data includes Short Government, Short-Term Bond, Ultrashort Bond
Sources: Morningstar, FUSE Research
According to the FUSE’s October 2018 Product Usage: The Advisor View, over 21% of surveyed advisors anticipate increasing their short-duration allocations, marking the third highest allocation increase among all asset classes. In addition, Ultrashort Bond mutual funds and ETFs were the best-selling category over the past 12 months and the third during 2018.
This momentum is likely due to the Money Market Reform in 2016, a flat yield curve, and recent uncertainty around interest rates. However, there are several other reasons why investors may be choosing shorter-term bond funds. Money market funds offering unattractive yields, the return of market volatility, and institutional investors seeking alternative cash vehicles are additional factors driving growth. These sensitivities have impacted money market funds, which have only grown 3% compounded annually since 2015. Investors have found if they take on additional risk, they can generate alpha from their cash by allocating more to short duration bond funds. If one successfully executed this during 2018, nearly 1% (or 83 bps on average) of alpha could have been generated compared to money market funds.
Managers and distribution teams should be aware of cyclical behaviors of this nature when dealing with broker/dealers, wealth managers, and TAMPs, especially as 2019 holds several events and market conditions surrounded by uncertainty. In addition, since cash is critical to any portfolio or program, discussing it can unconventionally uncover a distributor’s investment philosophy. Yet, the ultimate goal is to place a short duration product within advisory programs, platforms, or proprietary funds as a cash supplement or alternative.