December 10, 2019

Ultra-Short Obligation Funds Wrap Up Their Third Consecutive Year of Impressive Net Inflows

by Pat Keon, CFA.

Lipper’s Ultra-Short Obligation Funds (USO) peer group (including both mutual funds and ETFs) had net positive flows of $977 million for the fund-flows trading week ended Wednesday, December 4. This was the group’s ninth-straight weekly net inflow. The USO group’s hot streak extends well beyond the fourth quarter of 2019, as since the end of 2017 they’ve taken in net new money in 94 out of 101 weeks for a total net intake of $72.1 billion. To put this run in perspective, it has driven the USO group to more than double in size as it has grown from $105.7 billion in assets under management at the end of 2017 to its current $212.4 billion. Barring a significant reversal of fortune, the group will record its second highest annual net inflow ever (it is currently up $30.7 billion for the year to date), trailing only the $59.7 billion net positive flow it posted last year. The group’s third best annual net inflow was $25.1 billion in 2017.

Ultra-short funds are a low-risk investment. They are not subject to the same level of interest rate risk as funds with longer effective maturities (the USO peer group has a maximum allowable effective maturity of one year) and they are required to invest the lion’s share of their assets in investment grade debt. The peer group started to attract net new money in 2016 as the Federal Reserve started to raise interest rates for the first time in almost a decade, or prior to the global financial crisis. The Fed eased into this new policy (with only one rate increase each at the end of 2015 and 2016) but escalated the frequency of rate hikes in 2017 and 2018, with three and four increases, respectively. As per the table below, the net inflows for the peer group mirrors the Fed’s actions as more interest rate increases equate to more net new money. Investor demand has remained strong for USO funds in 2019 despite the Fed reducing rates three times this year thanks to the narrowing of the yield curve. The one-year/10-year Treasury spread has gone from 160 basis points (bps) at the end of 2016 to 18 bps as of the end of November. As the yields narrow, investors can make almost as much money from holding shorter-term maturity funds (instead of longer-term maturity funds) with significantly less risk.

The USO peer group has taken in $10.7 billion in net new money so far during Q4, which is its best quarterly net inflow in 2019. The largest individual net inflows during the fourth quarter belong to Morgan Stanley Institutional Fund Trust Ultra-Short Income Portfolio (+$1.6 billion), Lord Abbett Ultra Short Bond Fund (+$1.5 billion), and JPMorgan Ultra-Short Income ETF (JPST, +$1.2 billion).


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