When IndexUniverse.com Correspondent Cinthia Murphy caught up with Pyxis Capital President Brad Ross at the “Schwab Impact” conference in Chicago this week, he told her that his company is pleased with the timing of the launch of its Pyxis/iBoxx Senior Loan ETF (SNLN). Indeed, such funds are clearly playing a role in satisfying investors' intensifying quest for income in this era of ultra-low bond yields.
Pyxis, the mutual fund arm of private-equity and distressed-debt firm Highland Capital, stayed safely inside of its area of expertise when it launched that ETF earlier this month, its first. After all, Pyxis has been serving up exposure to senior loans in an actively managed mutual fund wrapper for the better part of 10 years.
Looking ahead, Ross said Pyxis, a firm that makes up $3 billion of Highland Capital’s $20 billion in assets under management, is likely to stick close to its knitting as it continues to develop a niche presence in the $1.254 trillion U.S. ETF market .
Murphy:Pyxis Capital is a mutual fund shop and has just launched its first ETF, the Pyxis/iBoxx Senior Loan ETF (SNLN). Can you tell me a little bit about the decision to bring out this ETF now?
Ross : We’ve been involved in the senior floating-rate loan investment world for over a decade. That’s something Pyxis Capital does. That’s one of our specialties. We have one of the older open-end mutual funds, one of the better-performing ones, so for us it was natural to do an ETF. In fact, we’ve had this in registration since late 2008.
Murphy:So you’ve been eyeing the ETF market for a while, but the timing of this launch seems ideal given the rising popularity of senior loans with investors. We’ve been seeing a shift of assets moving from junk bonds into senior loans recently.
Ross : We had hoped to get exemptive relief to have done this sooner, but it just so happens that we think the timing is even better now because what’s happened since 2008 is that the high-yield market had a wonderful run—it’s up something like 115 percent between 2008 and today—and it’s at the top.
But people are stretching for yield. Getting anywhere between 5 to 6 percent in the floating-rate loan space is roughly what the high-yield space is doing now, except that high yield is at the top of the risk spectrum right now. So the loan marketplace is very timely, and it’s something we do well.
Murphy:In other words, the slow pace of the regulatory process wasn’t necessarily all bad for you.
Ross : It took longer than we expected. But this is what we do. We are a distressed-debt firm and a senior-loan firm. It was natural for us to do this, and we wish, frankly, that this ETF had been out two years ago. But the timing is still great, and in fact, it might be better now because people are taking a broader look at this space. We’ve seen a demand for an ETF, but there’s going to be an even greater demand for everyone who has an open-end fund on this as well.
Murphy:It’s also a space where there’s little competition. SNLN only faces the PowerShares Senor Loan Portfolio (BKLN), aside from, I believe, three others, including the iShares Floating Rate Note Fund (FLOT).
Ross : That’s right.
Murphy:What’s the strategy to go head-to-head against a sizable fund like BKLN, which had $1.3 billion in assets last time I checked? That is, other than undercutting it on cost—SNLN is cheaper.
Ross : We would love to have the resources to go toe-to-toe, but we are going to be more opportunistic and do some small, targeted advertising. We are going to do targeted advertising where people like the advisors at Schwab can see it, and other places like Merrill Lynch and others. But so far the response has been so good, we think we’ll have a successful initial launch over the next few months.
Murphy:How does this ETF strategy, which is linked to the Markit iBoxx USD Liquid Leveraged Loan Index, compare with what you offer in mutual fund wrappers?
Ross : The iBoxx index is our beta index; it’s a lower-volatility, more conservative strategy, whereas our open-end is our alpha. So we get a little more risk and a little bit more return in the open-end funds, but this ETF is a bit more conservative in that respect. We are taking the volatility out of it.
Murphy:Looking ahead, how do you see bank loans performing in an environment of economic and policy uncertainty—"fiscal cliff" or no fiscal cliff?
Ross : In 2008, we were highly invested in loans and commercial real estate projects, and we faced just as big a challenge then as anyone else. We’ve worked through those loans to give us the performance we wanted in our products. But going forward, we think that everything in this system points to a stable loan market, whether it’s commercial loans or domestic loans, housing loans. We think we’re in a stable environment right now; in fact, more stable than it’s been in a long time. The outlook is good.
Murphy:Does Pyxis have other ETFs on the drawing board?
Ross : We may look at other ETF products in the future, but we want to stick with something that we do really well.
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