short-dated securities and financials have produced good returns over the past three years
Over the past three years, outperforming money markets funds have had consistent exposure to short-dated securities and financials.
The BiscayneAmericas Daily Liquidity fund was ranked first in its sector, according to Standard & Poor's. It has achieved returns of 23.99% over a three-year period and 6.38% over one year.
Dario Pedrjo, senior manager of the portfolio, prefers a mixture of a least 10% US Treasuries or equivalent. He only invests in dollar obligations of sovereign issuers or good quality Latin American financial institutions. Duration of one year or less is held by the fund.
Pedrjo said: 'The short duration and emphasis on sovereign/financial institutions has contributed greatly to our success. These limitations mimic what most conservative fixed income investors prefer to invest in and greatly contribute to low volatility.
'Our investment parameters have never changed. Due to the type of obligations we restrict ourselves to, we use a macroeconomic approach for the sovereign issuers and balance sheet analysis for the financial institutions.'
Pedrjo noted the fund has also benefited from the globalisation of the banking sector in Latin America.
Today, most banking institutions in the region are owned by large international banking groups such as Citibank, Banco Santander and HSBC. This has helped instill a higher sense of solidity and safeness in the region's banking sector.
Similarly, there has been a general improvement in the credit-worthiness of most sovereigns in the region. They have achieved a much broader audience of investors and this has helped reduce the overall volatility of the asset class.
Biscayne Americas Daily Liquidity has not had any down periods throughout the past three years. Average bond maturity is low and volatility is less than longer-term bonds from the same issuers.
The fund ranked second in the sector is Butterfield Liquid Reserve, with a three-year return of 19.88% and 6.51% over one-year. David Ware, the fund's manager, invests mainly in short-dated and floating-rate securities, as well as the corporate bonds of financials. The portfolio has had relatively low volatility throughout the three-year period due to the nature of the product.
Ian Coulman, Butterfield's chief investment officer, said: 'The fund has taken advantage of the shape of the yield curve on the shorter end by picking short-dated fixed coupon paper with up to two years maturity.
'As interest rates declined throughout the period, there was an increase in investments in short-dated fixed-coupon paper. When interest rates rose, the fund invested more in securities with longer duration.'
Coulman said the fund was also invested in floating paper, which added value for credits investing in securities ranging from AAA to A.
Since the portfolio's launch, Coulman has employed the same investment strategy: a top-down perspective that follows the yield curve but allows him to look at relative values in sectors. The fund has had an overweight position in financials throughout most of the past three years as Coulman believes these offered the most attractive spreads for the period.
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