Scott Burns: Talking ETFs with PIMCO. Hi there, I'm Scott Burns, Morningstar's director of ETF research, coming to you live from Morningstar's premiere ETF Invest Conference. Joining me today is Don Suskind, director of ETF product management with PIMCO.
Don, thanks for joining me.
Don Suskind: Pleasure. Good to be here.
Burns: So Don, your PIMCO is actually kind of one of the new kids on the block in the ETF space, and of course, you're known as one of the largest asset managers in the mutual fund space. What prompted PIMCO to look at the ETF wrapper and vehicle and move into that product?
Suskind: Well, the main thing we want to provide is access, investor access to what we're doing. We know that people are interested in PIMCO's views on the market, and we also know that people have strong preferences for the benefits of the ETF vehicle, whether its tax preference or if they want to get the same expense ratio as everyone in the fund or if it's the convenience of trading a listed security. Really, there is a set of investors that love ETFs, and we want to make PIMCO available to those folks through the ETF.
Burns: Well, that's great. And you guys have actually had for such an early start, a very successful start, namely in the active ETF space, and when we look at active ETF fund flows, although we're seeing traction in a lot of different products, there is one real standout, and that's your short duration active product with the ticker, MINT.
What do you think is really behind the success of MINT, which has gotten as big as $1 billion, I think, over the past few months, maybe its $800 million, but it's big, let's just call it that?
Suskind: Yes, I think it's a combination of things. I think PIMCO has a cash management expertise that underlies all of our investing strategies, so our cash desk oversees at any point in time, $200 billion to $300 billion worth of cash. So what MINT is, is an essentially an appendage to that discipline and that capability. And it again provides access to anyone with a cash allocation that maybe is frustrated with what they're getting on their money market funds and wants to take a little bit of additional risk maybe outside the money market universe and access an experienced manager that has a cash equivalent and cash management expertise.
Burns: Is MINT the money market killer?
Suskind: Well, it could be. That would be great if it was. I think there is always going to be a place for money market investments. We don't recommend MINT for somebody who needs cash overnight or immediate, next day and next week liquidity. Hopefully, people think of their allocation is in a tiering approach, so you have immediate cash needs and that's not what MINT is appropriate for.
Then you have non-immediate, maybe weeks or months or even longer out where you are tactically or strategically sitting on some allocation to cash, maybe you're out of the markets, maybe you have a specific expense in the future for institutional clients, they have a whole range of reasons why they may be in and out of cash for sometime longer than the horizon of their money market investment.
Burns: And I know when you guys launched MINT, you came in and talked to the research team and myself about it, and one of your chief concerns was, who should be using MINT? And really in particular from a dollars-invested perspective, I mean, MINT isn't really for all applications, is it?
Suskind: No, it's not for the immediate cash needs. So, if you need cash immediately, that's not for MINT. And if you have a five-year liability, if you are reserving for a college education, 15-20 years from now, you could probably afford to take more risk on what's available on MINT.
Burns: Well, I mean more from the perspective of when you're taking the transaction cost of an ETF, if that's going on, MINT isn't really appropriate for somebody who is looking to park $2,000, right?
Suskind: Yes, it's going to depend on each individual investor what their transaction costs are. Some people don't pay commission, some people do. So, I think to your point you want to look at the expected return as a function of yield and how that compares to the transaction costs round trip.
Burns: Right. Across your other product line I know your active muni bond – I took a look at the assets recently and they've been growing nicely, a nice business. So is that fund progressing as you would like or expect or has it been positive, negative?
Suskind: There are two muni funds, they are relatively new and like you said they've been growing nicely. The important thing with the municipal bond category is that – in our view – is that you really want to be specific on what issuers you own and what is the revenue stream that supports that issuer's ability to repay. And so state issuers, the tax revenues are uncertain; there are budget issues at the state level. We really with an actively managed portfolio can focus on the bonds that we think are good credit quality.
The other approach to buying or another approach to buying the muni market is to buy individual bonds. That can present some concentration risk. Or to take the index, and if you own a cap-weighted index then you're essentially taking your largest exposure to the most indebted issuer, which is not generally what you want to do.
Burns: No for sure. Now stepping away from that specifically, given kind of what I'd call the success of your foray into the ETF market a little bit, I know you can't really talk about what's on the hopper for legal reasons, but maybe you can talk about your product development process a little bit. How is it that you guys are looking at areas of opportunity for future launches whether active or passive?
Suskind: I'll split into those two categories, with active and passive. So with active, with ETFs we disclose the whole portfolio to anybody that wants to see it. It's on a public website. So that has a lot of advantages for investors who really want to know what's in their portfolio. We also need to protect investor return potential for the investors in our funds. So for certain strategies, it wouldn't be appropriate to show the market what's happening within a portfolio.
Burns: So, you're just telling me Total Return in an active ETF, we're just not going to see that... I know I ask you this every time I talk to you.
Suskind: In its current form, never say never, but some of the trading strategies that we run, it wouldn't be fair to our investors to show the whole market what we're doing with their investment.
Burns: Sorry for interrupting.
Suskind: No, no, that's fine. Maybe some day, you never know. On the index side, we're very focused on providing indexes that are stable and scalable and that we think are appropriate tools for investors. So with fixed income, because of our background as an active manager, we have specific views on where it's appropriate to have differentiated exposure in the fixed income marketplace. And so, if you look at our TIPS strategies for example, we split up the curve into short-term TIPS, long-term TIPS, and a broad exposure, and that avails investors the opportunity of tactically getting exposure to inflation versus Treasuries in different environments.
Burns: Were you kind of surprised when you first looked at the TIPS that the curve hadn't been broken up yet?
Suskind: Yes, I don't know if we were surprised as excited by the opportunity. We're going through a phase, and we've been going through a phase, where there is greater granularity coming out in fixed income with ETFs, and certainly that's been the trend with equities, too, over time. So where there are opportunities like that, we and others want to make those more granular exposures available to investors, providing there is a real value to having that granularity.
Burns: Yes, really expanding the investor toolkit. That's one thing I've always been kind of amazed by is that we spent all this time slicing and dicing our equity holdings even in the most strategic/asset allocation portfolio, then yet fixed income is getting maybe intermediate bond and a TIPS allocation and that's it and may be some cash money market or something.
So I always wondered why haven't we put more time into the fixed income side, and I do think in today's risk environment and actually given where the population is going in terms of retirement that we're going to start seeing a lot more slicing and dicing in the fixed income world, and it looks like you guys agree.
Suskind: Well, it's the type of things we've done in our active portfolios for a long time. So to the extent the expertise, the knowledge and the ability to discern between different sectors becomes more mainstream, then certainly those tools will be useful.
Burns: Well Don, congratulations to you and your team on what has so far been a very successful launch, and thanks for joining us.
Suskind: My pleasure, thank you.
Burns: And I'm Scott Burns with Morningstar. Thanks for watching.