As you know, in 2011 we reduced our liquid Money Market Fund (Cash) positions from 5% to 2% in most of our portfolios. We then allocated the 3% balance to the Ridgeworth U.S. Government Ultra-Short Bond Fund (SIGVX). We are using this as a cash alternative because of its extremely conservative mandate, ultra-short maturity bonds, and commitment to capital preservation. This change was in response to the almost complete lack of yield earned on idle cash in this environment. Add to that the increased regulation on Money Market Funds, and it could be a long time before we ever return to a decent yield on cash.
Thus far, we are very pleased with the Ridgeworth U.S. Government Ultra-Short Bond Fund, as it has returned 0.92% this year, and we’re only half way through. You won’t get close to that in a Money Market Fund, and you’d have to lock up your money for four to five years in a CD to achieve a comparable rate of return.
For our clients who are taking consistent distributions from their portfolio (primarily retirees), we generally keep a significant cash reserve on top of the Ridgeworth U.S. Government Ultra-Short Bond Fund. In an effort to get more “bang” for our retired clients’ buck, we have decided on two additional cash alternatives. Obviously we would only place a portion of the cash reserves in these two funds, as we always need some money in completely liquid cash to distribute directly to our clients. Our active cash management allows us to accept minimal share price fluctuation with these new positions. The two cash alternative funds we have been researching extensively are: PIMCO Enhanced Short Maturity Strategy (MINT) and FPA New Income (FPNIX).
The PIMCO Enhanced Short Maturity Strategy Fund is an actively managed Exchange Traded Fund (ETF) that aims to preserve capital while offering more attractive yields than investors earn from Money Market Funds. The fund invests in similar high quality short-term instruments as money markets, but offers a potential yield premium and total return advantage, as it can own longer maturity bonds and a broader universe of investment-grade fixed income securities.
The FPA New Income Fund aims to generate a positive absolute return through a combination of income and capital appreciation. The fund employs a total return strategy using investments in fixed income securities that focus on income, appreciation and capital preservation. Market opportunity will dictate emphasis across these three areas. From the fund’s own literature, they quote as their investment philosophy, “We do not like to lose money!” It doesn’t get any more straight-forward than that. They value principal preservation above all else. This is what we look for in a cash alternative.
We will be implementing these changes over the next 12 to 18 months, as we replenish the cash reserves. Again, these changes will only apply to clients taking consistent distributions from their portfolios. Please feel free to contact me should you have any additional questions on this subject.
And finally, the debt crisis in Europe has once again heated up and is unfortunately having a negative impact on global markets. It will be some time before they get this worked out, but it’s important to keep a long-term perspective and block out the constant doom-and-gloom in the media. Domestically we are continuing to make progress with our economic recovery, although it has been slower than all of us would like. Keep in mind the Financial Crisis of 2008-2009 was the equivalent of a magnitude 9.5 earthquake, and it’s only natural that we are still experiencing significant aftershocks while we work to rebuild our foundation.
-Mike Minter, CFP®, CFS®