Third Avenue Focused Credit Fund takes rare step, seeking an orderly liquidation as j

[audreyh1]

Who was it warning about the state of the high yield debt market? This is rather ominous:

Junk Fund's Demise Fuels Concern Over Bond Rout - WSJ

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

Third Avenue said poor bond-market trading conditions made it almost impossible to raise sufficient cash to meet redemption demands from investors without resorting to fire sales of assets.

Securities attorneys said Third Avenue’s decision to wind down the mutual fund without giving investors all their cash back could have significant repercussions for both the company and the mutual-fund industry, which for decades has thrived by promising to allow investors to take a long-term view of the markets while retaining the right to cash out shares at any time.

A scary echo of 2008. Let's hope the repercussions are limited.

Moderators - the title could be shortened to say "Third Avenue HY Bond Fund Suspends Redemptions" or something like that.

 

[haha]

Wow, a very big deal! For almost a year Jeffrey Gundlach has been warning about risks in mutual funds and ETFs that owned junk bonds, for just the reason that sunk Third Avenues Focused Credit Fund. What is supposed to be instant liquidity in the fund, but the underlying investments may be very illiquid as are many low quality bonds. All his flagship funds are out of junk completely.

In many ways, closed end funds are much better vehicles for investing in thinly traded underlying issues. Of course the bids on the fund may suffer, but it cannot be taken advantage of in the way that TA Focused Credit was subjected to a bear raid.

Ha

 

[Mulligan]

Wow, a very big deal! For almost a year Jeffrey Gundlach has been warning about risks in mutual funds and ETFs that owned junk bonds, for just the reason that sunk Third Avenues Focused Credit Fund. What is supposed to be instant liquidity in the fund, but the underlying investments may be very illiquid as are many low quality bonds. All his flagship funds are out of junk completely.

In many ways, closed end funds are much better vehicles for investing in thinly traded underlying issues. Of course the bids on the fund may suffer, but it cannot be taken advantage of in the way that TA Focused Credit was subjected to a bear raid.

Ha

That is a very good point. I have read about this and have read ridiculous comments of buying junk bond funds because they were liquid. As I kept thinking they are really only as liquid as what is inside the fund. Much better to buy the closed in fund and deal with that price swing while keeping the underlying securities intact.
Just about everything I own is illiquid with most only trading a couple hundred shares a week. But they are all investment grade preferred stock issues that are mostly vault stuffers so I don't worry about routs nor will I ever have to sell.


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[audreyh1]

Wow, a very big deal! For almost a year Jeffrey Gundlach has been warning about risks in mutual funds and ETFs that owned junk bonds, for just the reason that sunk Third Avenues Focused Credit Fund. What is supposed to be instant liquidity in the fund, but the underlying investments may be very illiquid as are many low quality bonds. All his flagship funds are out of junk completely.

In many ways, closed end funds are much better vehicles for investing in thinly traded underlying issues. Of course the bids on the fund may suffer, but it cannot be taken advantage of in the way that TA Focused Credit was subjected to a bear raid.

Ha

Yes - I've read quite a few interviews with Gundlach this year with these warnings.

Based on what the fund was holding, it definitely should have been a CEF.

I found the bear raid aspect worrying - a lot of that went on in 2008.

 

[petershk]

Yeah. Ive been avoiding anything close to high yield bonds and even long term treasuries for a while.

It just seems like there's too much yield chasing because of elevated market with low interest rates.

Too many people see 4-6% returns and "need" then too badly.

Nothing really looks that good right now IMO... So maybe the best thing is to take the returns for what they are and wait....

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[Running_Man]

The amount of junk debt that was created as a part of ZIRP was enormous. As Kinder Morgan experience shows, and they are not even junk but one step ahead of junk, when these companies can no longer borrow at historically low rates, the business model no longer works. What CNBC said today was that many high yield funds in order to hold values, were purchasing puts on securities they held to offset the price declines because there was no liquidity to actually sell the securities. Therefore they hold what they can't sell and sell what can be sold (typically the better securities) to meet redemptions. The fear of a giant squeeze they are saying is on everyone's minds in Wall Street Christmas parties. Where is 5 trillion to go when no-one wants it? Fed balance sheet?

 

[Texas Proud]

I just decided to reduce my holdings in junk to a point that keeps me in the Admiral shares... I was going to need the cash soon, so did not want to take any more cap loss...

Sometimes a sector gets hit hard and it is not smart to remain in it... yep, dirty market timing....

 

[audreyh1]

I've avoided junk/high-yield bonds as an asset class - as soon as I realized (in the early 2000s) that they behaved more like equities I realized they wouldn't work for the diversification I was seeking.

But I have some well-diversified bond funds with small exposures to sub-investment grade debt.

Pretty good market sell off today. Is it mostly due to high yield credit concerns? I guess there are a few other things thrown in.

 

[mickeyd]

I've avoided junk/high-yield bonds as an asset class - as soon as I realized they behaved more like equities I realized they wouldn't work for the diversification I was seeking.

But I have some well-diversified bond funds with small exposures to sub-investment grade debt.

Pretty good market sell off today. Is it mostly due to high yield credit concerns? I guess there are a few other things thrown in.

+1

You and I must have the same Wealth Manager~ me.

 

[petershk]

Audrey: I believe so. I'm not necessarily a huge Carl Icahn fan but he summarizes his view here:
http://www.cnbc.com/2015/12/11/carl...-yield-bonds-market-is-a-keg-of-dynamite.html

I think what he is seeing is that the underlying terms that risky companies got were too low relative to other options but that companies like Blackrock have been pushing high yield ETFs because investors see the increased yield (e.g. JNK has over 6%) and don't see the risk of underlying companies defaulting/interest rates going up and suddenly there is no liquidity when investors try to get out of those ETFs.

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[audreyh1]

Article about the fund's history and steps taken by M* Third Avenue Focused Credit Abruptly Shuttered

 

[Mulligan]

Third Avenue Focused Credit Fund takes rare step, seeking an orderly liquidat...

Yeah. Ive been avoiding anything close to high yield bonds and even long term treasuries for a while.

It just seems like there's too much yield chasing because of elevated market with low interest rates.

Too many people see 4-6% returns and "need" then too badly.

Nothing really looks that good right now IMO... So maybe the best thing is to take the returns for what they are and wait....

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I chased yield by pretty much having everything I own in 6-7% yielding mostly preferred utility stocks... Everything has held up well this year, in fact 12 of my 13 are up on the year in addition to the nice dividends. The 13th is down 2 cents from my purchase not counting the dividends. I love these snoozefest yielders and safe as one can expect. For example today...2 up, 2 down, and 9 unchanged.


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[petershk]

I chased yield by pretty much having everything I own in 6-7% yielding mostly preferred utility stocks... Everything has held up well this year, in fact 12 of my 13 are up on the year in addition to the nice dividends. The 13th is down 2 cents from my purchase not counting the dividends. I love these snoozefest yielders and safe as one can expect. For example today...2 up, 2 down, and 9 unchanged.


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I don't really know much about preferred utilities but having almost everything I own in any one thing would scare the crap out of me . My gut reaction is... If it's 5-7% risk free yield, why isn't everyone in it? To me the answer must either be... Few people know/understand or the risk is actually in line with the yield.

My guess would be the latter although like I said... I am ignorant here so could be something else.

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[Mulligan]

I don't really know much about preferred utilities but having almost everything I own in any one thing would scare the crap out of me . My gut reaction is... If it's 5-7% risk free yield, why isn't everyone in it? To me the answer must either be... Few people know/understand or the risk is actually in line with the yield.

My guess would be the latter although like I said... I am ignorant here so could be something else.

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The last real safe monopoly....No T&D utility has ever not paid a preferred dividend...ever....Some issues I own are 50 years old...investment grade rating... Yes, very comfortable cashing my quarterly dividend... Higher yield does not always mean higher risk...higher level capital structure...Guaranteed ROE by law= automatic dividend deposit on a quarterly basis. Not the fast track to wealth, but I will take it 6-7% at a time....


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[Coolius]

I don't really know much about preferred utilities but having almost everything I own in any one thing would scare the crap out of me . My gut reaction is... If it's 5-7% risk free yield, why isn't everyone in it? To me the answer must either be... Few people know/understand or the risk is actually in line with the yield.

My guess would be the latter although like I said... I am ignorant here so could be something else.

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The sector of Utility Preferred Stocks is usually not well known, and generally avoided by those unable or unwilling to pursue the often extensive DD that uncovers their benefits.

There is a thread in this forum titled " preferred stocks...", you might want to check it out.

An example: A Preferred Stock of strong investment grade utilities may trade on the OTC or "pink sheets" because the parent is not willing to pay the costs necessary to list on other exchanges, Some folks will not touch anything on those sheets - and that's their opportunity cost.

So, I would submit the utility preferreds Mulligan describes fall into the misunderstood category. But in a sense, that is good for those of us who invest in such vehicles as we get little volatility and can quietly enjoy the income stream.

Today, one of my holdings, a Utility Preferred from Gulf Power, went ex dividend with a payment of $1.41/share. The stock did not move at all from the previous closing price - no trades, price unchanged, volume zero. Now, that's what I like.

 

[Mulligan]

The sector of Utility Preferred Stocks is usually not well known, and generally avoided by those unable or unwilling to pursue the often extensive DD that uncovers their benefits.

There is a thread in this forum titled " preferred stocks...", you might want to check it out.

An example: A Preferred Stock of strong investment grade utilities may trade on the OTC or "pink sheets" because the parent is not willing to pay the costs necessary to list on other exchanges, Some folks will not touch anything on those sheets - and that's their opportunity cost.

So, I would submit the utility preferreds Mulligan describes fall into the misunderstood category. But in a sense, that is good for those of us who invest in such vehicles as we get little volatility and can quietly enjoy the income stream.

Today, one of my holdings, a Utility Preferred from Gulf Power, went ex dividend with a payment of $1.41/share. The stock did not move at all from the previous closing price - no trades, price unchanged, volume zero. Now, that's what I like.

You made me curious Coolius so I looked...Out of my 5 biggest preferred Ute holdings 8 shares total traded between the combined 5 issues....People dumping them left and right today!


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[marko]

I'm feeling a bit alone here. I have 8% of my holdings in PRHYX (TRPrice High Yield Fund). While I am monitoring it closely of late, I have no immediate plan to drop it.

Ten years ago the price was 6.90. As of today, it is 6.26 with a fairly consistent yield of about 6.5% (~.48 cents/share) over those 10 years, even through the 2008-11 time frame.

Strategically, I'm less concerned about the NAV than the income so I'm considering this a long term hold for me.

 

[Mulligan]

I think I am going to fall over from a heart attack... A person who buys a yield fund for income, not worried about NAV? I finally found one!
Just because you made that statement alone, makes me think that this fund is properly suited in your total portfolio. You understand "process" congratulations. Those are too aggressive for me, because I confess to being a "whats my portfolio worth today",peaker . So that is why I go the way I do as they rarely change in price to any degree.


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[marko]

I think I am going to fall over from a heart attack... A person who buys a yield fund for income, not worried about NAV? I finally found one!
Just because you made that statement alone, makes me think that this fund is properly suited in your total portfolio. You understand "process" congratulations. Those are too aggressive for me, because I confess to being a "whats my portfolio worth today",peaker . So that is why I go the way I do as they rarely change in price to any degree.


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Well, I didn't say I wasn't worried about NAV but it is just "less of a concern" than the income.

Plus is it only 8% of my holdings...a risk I'm willing to let ride long term considering that the fairly steady income covers about 15% of my living expenses.

I too am a daily 'peeker' but as noted, the price has held fairly steady over the past 10 years...can't lose sleep over 6.9 in 2005 down to 6.2 today (It did drop to $4.5 during the recession and I bought more then, netting me about 8-9% annually on those shares)

I AM monitoring it seeing as the most recent few monthlies have dropped just a bit but I've seen it do that before; it's a well managed fund with a M* Gold rating.

Nothing's for sure but you do your best, eh? One can play 'what if' until madness.

 

[audreyh1]

I guess if you're an income investor you can ride this stuff out. I've avoided the high yield asset class since 2002 when it became clear that their behavior was equity-like, thus not providing any diversification against equities. So they aren't part of my AA.

Some of my diversified bond funds hold a small amount.

 

[marko]

I guess if you're an income investor you can ride this stuff out. I've avoided the high yield asset class since 2002 when it became clear that their behavior was equity-like, thus not providing any diversification against equities. So they aren't part of my AA.

Some of my diversified bond funds hold a small amount.

Yeah, but I don't consider myself an income investor.

I view it as some weird 'both ends and the middle' approach where I have a certain set of funds that create income and another set for growth.

I'm fortunate that my income/dividends/cap gains (plus SS) cover living expenses and I'm able to let some others run for growth (no growth this year!)

 

[Mulligan]

I guess if you're an income investor you can ride this stuff out. I've avoided the high yield asset class since 2002 when it became clear that their behavior was equity-like, thus not providing any diversification against equities. So they aren't part of my AA.

Some of my diversified bond funds hold a small amount.

That ultimately is the truth, Audrey. Though my issues may be technically considered "high income", the volatility is considerably less in my issues than the equity market in general. But, if you plotted the returns over the past few decades they in turn would not have kept up with the market in yearly returns. That is the price one pays for safety.
More psychological and theoretical than anything...but...if for some crazy reason my issues dropped in half overnight, I would have all my money back in less than 6 years even if price never moved up again. If that happened to the S&P 500 it would take about 36 years. My assumption being just reinvestment of dividends which is what I do.


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[gcgang]

Third Avenue Focused Credit Closes - Barron's

Barrons article on the closing. Seems to conclude this is the fairest way to (eventually) get shareholders best value, and Third Ave is all about the value.

Seems since founder Marty Whitman stepped back, this little fund company has basically sucked.

 

[mathjak107]

total bond market funds can have the same issues . many like vanguard hold quite a lot of ill-liquid stuff.

As SEC Rolls Out Liquidity Risk Plan, Here Are The Bond Funds That May Be Most Vulnerable In A Meltdown | Zero Hedge

 

[MichaelB]

total bond market funds can have the same issues . many like vanguard hold quite a lot of ill-liquid stuff.

As SEC Rolls Out Liquidity Risk Plan, Here Are The Bond Funds That May Be Most Vulnerable In A Meltdown | Zero Hedge

According to the detail in the link, Vanguard Total Bond Market has 5% in holdings that "might be difficult to sell in 7 days". That doesn't seem like much, especially compared with Loomis Sayles or Dodge and Cox.