For many investors, the term “ultra-short” fund would bring in memories of a not-too-pleasant period at the peak of the 2008 economic downturn when their plans of pocketing high returns on very short term investments saw them incurring heavy losses. Once seen as a lucrative alternative to money-market funds, ultra-short funds which invest in high quality bonds maturing within two year fell out of favor with investors almost overnight, following the collapse of the mortgage-backed securities most of these funds held.
But with the money-market options coming under a series of regulatory changes over the recent years, and with more restrictions on the cards, investors are on the lookout for better investment options. This is what prompted BlackRock (NYSE:BLK) to team up with Legg Mason to present ultra-short funds in a new avatar.  These funds mimic money-market funds by investing in bonds maturing within the year (shorter than those that form normal ultra-short funds), and also seek to incorporate the proposed regulatory change of a floating net asset value (NAV) for money-market funds.
We are in the process of updating our $267 price estimate for BlackRock’s stock to include the impact of a recently announced acquisition (see BlackRock Expands Its Asian Real Estate Presence With MGPA Deal).
Despite being reduced to a fraction of its original size in the aftermath of the global recession, the global ultra-short fund industry had a good $280 billion in assets under management at the end of 2012.  BlackRock’s share of this figure is negligible given that the company’s only ultra-short fund offering – the BlackRock Ultra-Short Obligations Fund (BBUSX) – was launched last November and has just $25 million in assets. 
As the largest asset manager in the world, BlackRock cannot afford to overlook the potential demand for such funds – especially since the company has been pushing alternative investment products over the recent years. Add to this the growing concerns among investors about money-market investment options drying up amid tight regulatory changes, and the ultra-short funds present themselves as the most likely alternative. With some tweaks of course.
The biggest advantage of a money-market fund is that investors can expect good returns by staying invested for just a few months. To truly replace them, ultra-short funds would need to invest in bonds which mature within a year. And this is what the fund proposed by BlackRock jointly with Legg Mason last month would do. To blur the difference with money-market funds further, the ultra-short fund will also do away with the standard practice of measuring performance using a fixed NAV – preferring a floating NAV instead. Money-market funds are expected to be forced to shift to a floating NAV too in the near future.
While an experiment from BlackRock, the proposed fund has the potential to significantly boost the size of the company’s assets under management for alternative investment funds over the coming years. An impact on the increase in assets on the firm’s total share value can be understood by making changes to the chart above.Notes:
- BlackRock Has Alternative to Money Funds: Credit Markets, Bloomberg, May 16 2013 [↩] [↩]
- BBUSX Quote, Morningstar [↩]