Putnam Investments has joined a short but growing list of firms offering a new twist on the traditional money market fund.
The Putnam Short Duration Income Fund Ticker:(PSDTX) is designed as a hybrid product combining features of traditional money market funds and ultra-short duration bond funds.
The basic idea is to offer some of the yield but less volatility than ultrashort bond funds, as well as the liquidity of a money market fund — without the money market fund restrictions, such as maintaining a stable net asset value.
“We will combine the asset selection from the money market group as well as the nonmoney market group by going just beyond the [money market regulations] boundary,” said Michael Salm, Putnam's co-head of fixed income and lead portfolio manager on the new fund.
Mr. Salm said that during periods of higher volatility, it is unlikely the fund will be able keep pace with ultrashort funds, but that during periods of lower volatility the fund should be able to generate yields of between 40 and 60 basis points above traditional money market funds.
“In today's environment, investors are demanding higher yields, but at the same time, are understandably concerned about market risk,” said Robert Reynolds, president and chief executive of Putnam, a $122 billion asset management firm.
“It is a far more compelling investment vehicle than today's money market fund, filling a definite need in the market, and we expect that it will continue to be a powerful offering for years to come,” he said.
Yields of near zero have hampered the $2 trillion money market fund category, which has been losing assets at a pace of 6.5% annually over the past three years.
Meanwhile, the newly popular ultrashort bond fund category, which totals just $41 billion, has been gaining assets at an average annualized pace of 36% over the past three years.
“I applaud Putnam, because it's clear they want to be a first mover in the trend toward moving away from stable NAVs in money funds,” said Brandon Semilof, director of StoneCastle Partners LLC, a $3 billion asset management firm that specializes in community banking and Treasury bond management.
“It looks like a mutual fund and smells like a mutual fund, but it relieves pressure on the manager from having to maintain a stable NAV,” he added. “Putnam is removing the risk of breaking the buck because the pricing of the NAV will reflect the accurate price of the securities that make up the fund.”
RELATED ITEM The 10 largest mutual fund firms
While these so-called money market-plus funds are expected to grow in popularity, it is also important to note that they should not be confused with traditional money market funds.
For instance, in going beyond the rules of a money market fund, the managers are free to use derivative instruments and are not limited to investing in only the highest-quality securities.
But with yields on the safest securities hugging the floor, and investors demanding liquidity in money market funds, Mr. Semilof said the only realistic option is a hybrid product.
The biggest challenge right now for money fund managers, he explained, is that the funds will hold investments with maturities of up to 24 months, but investors might want to redeem asset today.
That scenario, combined with pressure to generate yield, increases the risk of a fund breaking the buck, as the Primary Reserve Fund did in 2008.
“I think this is clearly the direction that regulators want the industry to go, because they don't want to be in a position again, like they were in 2008, where the government had to backstop money market funds,” Mr. Semilof said. “With a variable NAV you won't see a mad dash where people want to get out before a fund breaks the buck.”
The new Putnam fund will invest in fixed-income securities composed of short-duration, investment-grade money market funds, among other fixed-income securities. Some of those securities will include certificates of deposits, commercial paper, time deposits, repurchase agreements and U.S. government securities, including Treasury bonds.
The fund also will invest in asset-backed securities, investment-grade corporate bonds and sovereign debt.
It will be benchmarked to the BofA Merrill Lynch U.S. Treasury Bill Index.
“Our goal is not to be the top-yielding fund in the ultrashort category,” Mr. Salm said. “What we're trying to offer is something that recognizes the investor's liquidity preference.”
