Jon Mondillo, portfolio manager and head of municipal trading at Alpine Funds, said the two municipal mutual funds he manages have starkly different strategies but both benefitted from heavy inflows amid money market reform and an outcry for yield in 2016.
Mondillo positioned both funds conservatively heading into 2016 – he shortened duration and maintained liquidity after the 2015 rate hike – and will continue to operate cautiously and conservatively heading into 2017.
The Alpine Ultra Short Municipal Income Fund totaling just under $1.2 billion grew by 20% since March and is focused on low volatility and tax-exempt income. More than 80% of the portfolio is maturing in less than six months.
"With what happened with money market fund reform, we saw a lot of those funds close up and we saw quite big inflows into that fund," Mondillo said in a Dec. 14 interview.
The A shares of the fund had year-to-date monthly performance of 0.29%, and annualized total returns of 0.30%, 0.31%, and 0.35% over one, three and five years. The I shares returned 0.52% monthly as of Nov. 30, and had average annualized total returns of 0.55%, 0.56%, and 0.58% over the same periods, according to the firm's website. The Bloomberg Barclay's 1-Year Municipal Bond Index returned 0.10% year to date as of Nov. 30, and average annualized total returns of 0.09%, 0.45%, and 0.62% over one, three, and five years.
The SEC approved a rule in October that requires funds to create liquidity risk management programs that are approved and monitored by their boards. Most funds will be required to comply with the liquidity risk management program requirements by Dec. 1, 2018, though funds with less than $1 billion in net assets will have until June 1, 2019.
Steady inflows arrived into the ultra short fund as a result of the money market fund reform, according to Mondillo.
"We think it's a direct result of people that had basically got shut out of one fund looking for an ultra short duration," he said.
The short fund has a weighted average maturity of 57 days, has 25% invested in daily cash alternatives, over 50% in weekly liquidity, and a floating net asset value.
Mondillo's Alpine High-Yield Managed Duration Municipal Bond Fund totaling $180 million is focused on two-to-seven years in the high-yield tax-exempt space. Since March, year to date the fund has more than doubled in size, indicative of the inflows to municipal mutual funds this year, according to Mondillo.
The high-yield fund saw inflows due to the availability of attractive yields and its short duration – on the low side of two to seven years, with an average duration of just under 3.89 years.
"I think in the belly and long end, which is what we focus on in the high yield space, it's been the technicals driving the market," Mondillo said. "We have seen nothing but inflows."
Over a third of the high yield fund matures in less than a year, 50% is invested in highly liquid assets, and Mondillo keeps north of 10% in cash alternatives and liquidity.
"As people start to shorten up in duration, people were looking for attractive yields in an anemic environment," he said, adding that the fund has a distribution yield of 2.96%.
Year to date as of Nov. 30, the A shares of the high-yield fund returned 1.68%, with one and three-year average annual total returns of 2.23% and 3.95%. The I shares returned 1.92% monthly performance as of Nov. 30, as well as average annualized total returns of 2.49% and 4.20% respectively.
The Bloomberg Barclay's High-Yield Muni Bond Index returned 1.59% year to date monthly performance as of Nov. 30, while it returned 1.74% and 5.28% on the one-year and three-year periods.
Mondillo said inflows also stemmed from uncertainty over where to park money in the first half of 2016.
"Both funds are very different strategies, but both saw inflows," the portfolio manager said.
"We see ourselves as a low volatility fund and alternative to short duration or a money market fund alternative," Mondillo said. "The history of the fund tends to see inflows during volatile periods in the market place."
In the three prior tightening cycles, the one and three-year maturities were the only two spots on the curve that managed to eke out total return, which is where his two funds are positioned to focus, Mondillo said.
