ActiveETFs | InFocus

Date Launched: January 29, 2010

Links: Website, Prospectus

Investment Strategy:

(GMMB: 52.13 0.00%) is an Active ETF that invests at least 80% of its assets (under normal conditions) in municipal debt securities that provide income exempt from federal taxes. The fund aims to invest in a broad range of maturities with issuer and geographical diversification, in order to achieve a high level of tax-free current income and greater risk-adjusted returns than its benchmark – the Barclays 3-15 Year Municipal Bond Index. The dollar-weighted average maturity of GMMB is expected to be between 3-10 years, though it may invest in securities of all maturities. McDonnell achieves the funds objectives by using a total return strategy involving yield curve positioning as well as sector and security selection. These decisions are arrived at using fundamental credit analysis and also taking into account momentum factors. The strategy allows the fund to have a low dependence on adjusting the portfolio in anticipation of future interest rate changes. The fund invests primarily in investment grade securities but may invest up to 100% in cash equivalents in times of market stress.

Portfolio Managers:

GMMB is sub-advised by McDonnell Investment Management which manages more than $13 billion in assets and they provide day-to-day portfolio management services for the fund. Overall responsibility for managing the fund lies with Michael Kamradt, the Chief Investment Officer at McDonnell, who coordinates the portfolio management and trading operations. He has more than 30 years in industry experience, having worked previously at Van Kampen Management and JP Morgan.

The fund is managed not by just one portfolio manager but by teams, as individuals focus on a particular sector or maturity range.  The team for tax-exempt bonds consists of:

Steve Wlodarski – Managing Director, Municipal Portfolio Management

James Grabovac – Vice President, Senior Portfolio Manager

Dawn Daggy-Mangerson – Vice President, Senior Portfolio Manager

Lawrence Jones – Portfolio Manager

Past Performance –

1. The prospectus highlights the performance of a “Municipal Composite” which represents 17 accounts managed by McDonnell with objectives, policies, strategies and risks similar to GMMB. The composite underperformed the Barclays Capital 3-15 Muni Index in the 1-yr period, but managed the same return in the 3-yr period. However, since inception (Sep, 05), the composite underperformed the benchmark by 14 basis points.

The Numbers:

Expense Ratio – Capped at 0.35% until at least January 31, 2011 (by contractual agreements with the manager), and 0.58% after that.

Average Bid-Ask Ratio – n/a

Average Volume – n/a

What’s special about it?

1. GMMB considers “pre-refunded bonds” or escrowed to maturity municipal securities to be investment grade securities by default, regardless of what ratings they have.

2. Despite aiming to achieve tax-free income, the fund is allowed to invest up to 20% of assets in US$ denominated taxable debt securities, which could be US government/agency debt, corporate debt, or mortgage-backed and asset-backed securities and even ETFs.

3. It may also invest up to 20% of its assets in high-yield securities or those rated below BB+.

4. GMMB is allowed to invest in derivatives like futures and swaps but they may only be used for risk management purpose and not to increase leverage.

Analysis:

Positives –

- GMMB does outline a comprehensive management strategy involving yield curve positioning and momentum analysis aside for just pure fundamental analysis. These strategies could work particularly well in a market where the currently steep yield curve will undergo a definite flattening in the future and where markets are still quite momentum driven.

Negatives –

- GMMB definitely allows its portfolio managers more flexibility in managing assets than does PIMCO’s MUNI. With allocations for high-yield securities, corporate debt, mortgage and asset-backed securities, and also derivatives, the fund could easily take on a riskier tilt though that same quality may help it beat its benchmark handily.

- Aside from being second to market, McDonnell’s lower profile compared to PIMCO may hinder GMMB attracting investors. McDonnell manages $13 billion all together – in comparison, PIMCO manages $940 billion.

Disclosure: No position in GMMB.
 
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