The Securities and Exchange Commission recently said it is looking into the use of derivatives by mutual funds, exchange-traded funds and other investment firms, concerned that the financial instruments and the risks they pose are not fully understood by market participants. Many investors might be surprised to learn the extent to which derivatives, including options, swaps and futures, are used by mutual funds.
The review is likely to focus on the over-the-counter market, especially for interest-rate and credit-default swaps, which are used by firms including BlackRock Inc., Allianz SE's Pimco, and Western Asset Management Co., a unit of Legg Mason Inc., said Michael Herbst, an analyst at Morningstar Inc. Over-the-counter derivatives are traded privately rather than through commodity exchanges, which are regulated by the Commodity Futures Trading Commission.
Those three managers are some of the biggest users of derivatives, Mr. Herbst said. "A wide range might use them a bit more sparingly." Among the reasons for using them, he said, would be gain or magnify exposure to markets or interest rates, and to hedge against risk in a portfolio.
Some investors may be surprised to learn that many core bond mutual funds use derivatives extensively. Among them are Pimco Total Return Fund (trading symbol PTTAX) and BlackRock Total Return Fund I (MDHQX) and II (BCBAX), Mr. Herbst said. In addition, Western Asset Management Core (WACSX) and Western Asset Core Plus (WAPSX) funds have used them in the past, but probably do so a little less today, he said.
Western Asset Management confirmed that its Core and Core Plus funds are using derivatives less. The asset manager discloses all of its holdings in its annual reports, a spokeswoman said.
BlackRock declined to comment on its funds' use of derivatives, and Pimco didn't respond to a request for comment.
Absolute-return and commodity funds also make use of derivatives.
Eric Jacobson, director of fixed-income research at Morningstar, said use of mortgage derivatives by funds has made a comeback since the 2008 crisis. Interest-only and inverse interest-only mortgage securities, which can be lucrative but volatile, are reappearing. Putnam Income (PINCX), Putnam U.S. Government Income (PGSIX) and Putnam American Government Income (PAGVX) funds had "bold allocations" to IO and inverse-IO securities as of the end of March, he said.
No comments:
Post a Comment