Credit Qs on PBHG's annual report (31 Mar 04)

Nords

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(My apologies if you've seen this on other boards; there haven't been many answers.)

Any speculation on why a mutual fund has given up its line of credit?

PBHG's annual report (http://www.pbhgfunds.com/materials/prospectus/pdf/annualReport.pdf, 134 pages, 1.7 Mb) has a couple interesting snippets buried in the four-point font. I don't understand the significance (if any) of what I noticed.

First, the IRA Capital Preservation Fund (PBCPX) is a stable value fund with a 12-month holding period. "Short-timers" are subject to a 2% redemption fee. The fund charged $796,336 in redemption fees last year (p. 113), which implies that $39.8M of this $1.4B fund was redeemed before the 12-month period. IOW, nearly 3% of the fund was yanked out last year despite early-redemption penalties. Admittedly 12 months is a long time, people have lots of reasons for cashing out early, and there's been plenty of scandal in the last year-- but this isn't exactly a day-trader's go-go fund. A 2% fee is a big deal when the fund's ER is 1.3% and it has an annual total return of 3.38%. So is the number of redemptions cause for alarm? Is this business as usual or is it the equivalent of a run on the PBHG bank? Should the remaining shareholders be in this fund, or should they be bolting to the exits before trading is suspended?!?

Second, the company used to have a line of credit. Footnote #8 (on p. 124) says that each fund can borrow up to its individual limits from a $150M line of credit, and then it adds "Prior to June 4, 2003 the line of credit available was $250M." Next, buried at the bottom of p. 125 under note 13 "Subsequent Events", is the short statement "Effective June 3, 2004 the line of credit will be discontinued."

You would think that banks would love to extend lines of credit to mutual-fund companies. The company doesn't usually borrow against the credit line (unless there's lots of redemptions?) and the bank gets to charge fees just for making credit available. So why would a fund company initially drop by 40% and then "discontinue" its line of credit? Is it because the fund company's new management has sworn off all future debt? Or is it because no bank in the country would touch PBHG's credit rating with a 10-foot pole? And if that's the case, how bad do things have to be for this to occur? Is PBHG heading for bankruptcy court? Is this Heartland Funds all over again?

If I was a typical PBCPX shareholder then I doubt that these pieces of data would help me to sleep at night...
 
Hi Nords. I think you need to change your reading
material :)

John Galt
 
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