[Third Avenue liquidates its high-yield bond fund]

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ag1
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[Third Avenue liquidates its high-yield bond fund]

Post by ag1 » Thu Dec 10, 2015 2:19 pm

http://www.wsj.com/articles/as-high-yie ... 1449767526

This is a third avenue credit focused fund that just announced that it will stop all redemptions on its mutual fund. Now the fund will be liquidated and the remaining shareholders will be paid as and when the fund receives cash. This may take years.

I did not know that this could even be done in mutual funds. I had heard of this happening in hedge funds in the financial crisis but I don't think mutual funds did this even then. I am not an investor in this fund but what about vanguard mutual funds -? Can they also put these redemption restrictions if markets are distressed.

thanks
Ag

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JoMoney
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Re: Mutual fund stops redemptions - now in liquidation

Post by JoMoney » Thu Dec 10, 2015 3:51 pm

Mutual Funds were impacted in the crisis too, most notably the "Reserve Primary Fund", which was a money market.
It took several years for investors to get their money back from that debacle.
https://en.wikipedia.org/wiki/Reserve_Primary_Fund

Vanguard puts in their prospectus some rules about some circumstances:
https://personal.vanguard.com/pub/Pdf/p ... 2210105033
Emergency circumstances.
Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.
I would not doubt that there could be other circumstances that they'd rather not even put in print that could require a longer period.
They also have an option of distributing the underlying assets rather than selling them.
If the markets themselves get really messed up (i.e. no liquidity) it can be difficult to assess what the value is.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Mutual fund stops redemptions - now in liquidation

Post by nisiprius » Thu Dec 10, 2015 4:02 pm

I didn't think they could do it, either. I thought they were required to redeem, that is to make the book entry saying they owe you $X, but were allowed something like 7 business days to pay the $X (as the Vanguard language mentions).

I thought they had the right to redeem "in kind."

I didn't think they were allowed to suspend redemptions. Obviously I thought wrong.

Maybe this has to do with the new rules the SEC just put into place to take care of situations with mass redemptions in bond funds with illiquid assets.
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Re: Mutual fund stops redemptions - now in liquidation

Post by nisiprius » Thu Dec 10, 2015 4:07 pm

Bloomberg seems to have more details. Here's the gobbledegook:
The Investment Company Act of 1940 requires mutual funds to stand ready to redeem their shares at net asset value on a daily basis. Suspending such redemptions would normally require an explicit authorization from the SEC, securities attorneys said.

Instead of paying out cash, Third Avenue is meeting the law’s requirement by redeeming the fund’s shares for interests in a trust that will hold the focused credit fund’s assets, primarily high yield bonds and corporate bank loans. This technique could eliminate the need to get an SEC order authorizing a suspension of redemptions, said Jay Baris, the chair of Morrison & Foerster’s investment management practice.
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Swedroe gets the last laugh...Third Ave Fund Implodes

Post by matjen » Thu Dec 10, 2015 4:13 pm

[Thread merged into here, see below. --admin LadyGeek]

Although this isn't one of Third Ave's equity funds, their active management approach was a complete failure. Larry has written a couple articles on them and actually debated the CEO David Barse on Bloomberg a couple months back.

High-yield debt fund blocks investors from pulling out their money

http://on.wsj.com/1lS6GiE
The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year. It comes amid redemption requests at the fund and reduced liquidity in some parts of the bond market...This year through Wednesday, the fund posted a 27% loss, the worst performance among high-yield funds, according to Morningstar Inc.
Boglehead threads on Larry's debate with the CEO.

viewtopic.php?f=10&t=178231

viewtopic.php?t=175567
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Re: Mutual fund stops redemptions - now in liquidation

Post by nisiprius » Thu Dec 10, 2015 4:33 pm

Image
Wow.

OK, this was apparently a special extra-junky junk bond fund... but let's see what people were saying about it.

2009: Third Avenue Focused Credit Fund
I think this is a fantastic vehicle for individual investors investing in the credit space.
August, 2014, Zacks: 3 High-Yield Bond Funds to Buy Now
The funds below carry a Zacks Mutual Fund Rank #1 (Strong Buy)... Third Avenue Focused Credit Investor
2015 (U.S. News): Home > Investing > Best Mutual Funds > Fund Category: High Yield Bond > Third Avenue Focused Credit Fund Yes, that's right. They have a chart showing the dramatic plunge but the still include it in "Best Mutual Funds."
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Re: Swedroe gets the last laugh...Third Ave Fund Implodes

Post by powermega » Thu Dec 10, 2015 4:33 pm

I was just reading about this and came here to post something about this. I feel bad for the investors in the fund. It would be terrible to get trapped in a fund like that.
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Re: Mutual fund stops redemptions - now in liquidation

Post by dkturner » Thu Dec 10, 2015 5:01 pm

Looks like the bottom line is that open ended mutual funds have daily liquidity - until something "unexpected" comes along that makes daily liquidity inconvenient. This would have been a contraversial statement prior to 2008, but nobody who dabbles in equities, or "equity like" securities should be surprised after 2008. I wonder if Third Avenue approached the SEC prior to taking this action? Unless I'm mistaken a few isolated trash can fires (think Lehman Brothers CMOs) like this preceded the unpleasantness of 2008-2009. Let's hope this isn't deja vu all over again.

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Re: Mutual fund stops redemptions - now in liquidation

Post by afan » Thu Dec 10, 2015 5:13 pm

I am sure they went over their options with an army of lawyers. I am sure they are already being sued.

The dodge seems transparent. You don't get money, you get, in effect, shares in another mutual fund. How much will they get paid for tunning the new "trust?" You gotta love them.
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Re: Mutual fund stops redemptions - now in liquidation

Post by Geologist » Thu Dec 10, 2015 6:54 pm

Vanguard and other fund families have lines of credit to handle redemption demands. Either Third Avenue doesn't have such a line or doesn't want to use it for whatever reason.

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Re: Mutual fund stops redemptions - now in liquidation

Post by jhfenton » Thu Dec 10, 2015 7:48 pm

nisiprius wrote: OK, this was apparently a special extra-junky junk bond fund... but let's see what people were saying about it.
Thanks for the quick research. That this has happened to a respected boutique firm like Third Avenue makes it more remarkable.

It seems that a strategy like this is not well-suited to an open-ended mutual fund. There's just no "safe" way to invest $3B in illiquid, distressed securities and provide unlimited daily liquidity to all of the shareholders. (It'll be interesting to see how the SEC's fund liquidity rules shake out.)

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Re: Mutual fund stops redemptions - now in liquidation

Post by skepticalobserver » Thu Dec 10, 2015 7:54 pm

Did this news break after the market close? .

I'd watch the overnight markets to see if there's a reaction. Friday is not a good day for bad news, if you get my drift.

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Re: Swedroe gets the last laugh...Third Ave Fund Implodes

Post by Rainier » Thu Dec 10, 2015 7:56 pm

I owned this and others back in the day.

This should have more than a few replies. This is going to move the market in a major way.

All other Third Ave funds will do the same thing, this is contagious for a fund.

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Re: Mutual fund stops redemptions - now in liquidation

Post by Rainier » Thu Dec 10, 2015 8:08 pm

This is wildly contagious and I predict at a minimum all other 3rd Ave funds are done.

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Re: Mutual fund stops redemptions - now in liquidation

Post by fabdog » Thu Dec 10, 2015 8:11 pm

This is wildly contagious and I predict at a minimum all other 3rd Ave funds are done.
I'd be interested in your thoughts on why this liquidation of the high yield fund where they were into very illiquid bonds would transfers into the other funds they have which hold stocks?

Mike

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Re: Mutual fund stops redemptions - now in liquidation

Post by Rainier » Thu Dec 10, 2015 8:17 pm

fabdog wrote:
This is wildly contagious and I predict at a minimum all other 3rd Ave funds are done.
I'd be interested in your thoughts on why this liquidation of the high yield fund where they were into very illiquid bonds would transfers into the other funds they have which hold stocks?

Mike
Because, it's contagious. Has nothing to do with the holdings in the other funds. When you put up gates you are done in the fund world. This happens with hedge funds all the time, but this is incredibly rare in the open end mutual fund world.

Mostly though, the Third Avenue name is tainted now. Everyone will want out of the other funds. If the holdings are liquid enough, maybe no big deal.

Looks like they took down their archived letters from the website

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Re: Mutual fund stops redemptions - now in liquidation

Post by skepticalobserver » Thu Dec 10, 2015 8:27 pm

Auction rate securities redux?

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Re: Swedroe gets the last laugh...Third Ave Fund Implodes

Post by cfs » Thu Dec 10, 2015 8:31 pm

~ Member of the Active Retired Force since 2014 ~

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Re: Mutual fund stops redemptions - now in liquidation

Post by Rainier » Thu Dec 10, 2015 8:43 pm

skepticalobserver wrote:Auction rate securities redux?
BSC started this in 2007 with gates. Many new Bogleads don't remember back that far. High yield will crash very hard tomorrow and Third Ave management is done.

Only saving grace is if investors realize FCF held very illiquid securities not held by other funds.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by LadyGeek » Thu Dec 10, 2015 8:58 pm

I merged matjen's thread into here, which is in the Investing - Theory, News & General forum. I retitled the thread. Although I didn't use "Swedroe gets the last laugh...Third Ave Fund Implodes" matjen gets credit for creativity.

The OP can change the thread title by editing the Subject: line in Post #1

If the WSJ paywall is enforced, you can find the article via google: Junk Fund’s Demise Fuels Concern Over Bond Rout - Google Search
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Re: Mutual fund stops redemptions - now in liquidation

Post by jhfenton » Thu Dec 10, 2015 9:27 pm

skepticalobserver wrote:Did this news break after the market close? .

I'd watch the overnight markets to see if there's a reaction. Friday is not a good day for bad news, if you get my drift.
It broke this afternoon. ag1 started the first thread on here at 2:19. The market did dip about that time, but I don't know if it contributed.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by Peculiar_Investor » Thu Dec 10, 2015 10:05 pm

Bloomberg has an article available, Third Avenue Blocks Redemptions From Credit Fund Amid Losses - Bloomberg Business, if you cannot get behind the WSJ paywall.
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Re: Mutual fund stops redemptions - now in liquidation

Post by Johno » Thu Dec 10, 2015 10:22 pm

jhfenton wrote:
skepticalobserver wrote:Did this news break after the market close? .

I'd watch the overnight markets to see if there's a reaction. Friday is not a good day for bad news, if you get my drift.
It broke this afternoon. ag1 started the first thread on here at 2:19. The market did dip about that time, but I don't know if it contributed.
The letter on their website announcing the freeze is dated Dec 9, though the first media articles seem to have only appeared today Dec 10 during market hours. Some of those articles also note that the announcement was made yesterday.

This fund would seem close to the extreme in terms of illiquid stuff (~90% below single B or unrated, as in ratings removed on distressed debt) offered in a 'wrapper' of ostensible daily liquidity. But whether it's an outlier or 'canary in the coal mine' remains to be seen. Likewise the beating even 'regular' junk has been taking tends to make US stocks look more over extended; junk is getting to where it seems to predict recession fairly soon, but maybe it recovers rather than stocks and the general economy following where junk points at the moment.

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So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by bogleenigma » Thu Dec 10, 2015 10:41 pm

[Thread merged into here, see below (next page) --admin LadyGeek]

I have approximately 20% of my bond allocation in Vanguard's High Yield Fund. I see this article today about Third Avenue imploding. How do you think this is going to affect my fund at Vanguard?

http://www.bloomberg.com/news/articles/ ... ter-losses

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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by stratton » Thu Dec 10, 2015 10:55 pm

Call Vanguard and ask.

They aren't similar funds. Distressed credit and being actively involved in the actual bankruptcy procedures through "debtor in process" (DIP) funding is not something Vanguard is going to engage in.

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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by saltycaper » Thu Dec 10, 2015 10:56 pm

acura301 wrote:I have approximately 20% of my bond allocation in Vanguard's High Yield Fund. I see this article today about Third Avenue imploding. How do you think this is going to affect my fund at Vanguard?
Since the credit quality for Vanguard's high-yield fund is much, much higher, I doubt Third Avenue's fund collapse will have a significant impact; however, high yield hasn't been doing so great lately, and what that portends for the junk bond market in general over the near-to-intermediate term, who knows. The liquidity issue for corporate bonds does concern me a little, even for investment-grade funds, some of which were not around during the beginning of the Great Financial Crisis. I do have it in my mind that my corporate bond fund holdings are designated as part of my asset allocation that could not be tapped in a market downturn. I trust, perhaps naively, but trust nonetheless, that the investment grade funds would not be liquidated, and that only sellers might suffer losses below NAV.
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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by lack_ey » Thu Dec 10, 2015 11:00 pm

According to a lazy perusal of Morningstar data Third Avenue Focused Credit was 89% sub-B credit (latest data as of 7/31), while Vanguard High-Yield Corporate was 92% B-and-higher credit (latest data as of 9/30, the rest sub-B). Different markets.

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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by gwrvmd » Thu Dec 10, 2015 11:32 pm

It is not going to effect Vanguards High Yield Fund specifically but it is a reminder that high yield bonds are high yield because they are risky.......Gordon
Disciple of John Neff

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Re: Mutual fund stops redemptions - now in liquidation

Post by JoMoney » Fri Dec 11, 2015 12:47 am

...This fund would seem close to the extreme in terms of illiquid stuff (~90% below single B or unrated, as in ratings removed on distressed debt) offered in a 'wrapper' of ostensible daily liquidity...
I wonder if it was always like that, or if that's just what it degraded to at this point.
Funds with 'active' management may be persuaded to sell their liquid assets and hold onto riskier/less-liquid stuff when money starts flowing out, believing that they won't get full value if forced to sell to sell the ill-liquid stuff. People who get out early may benefit disproportionately where those who held on find themselves holding a bag of junk with a risk profile that just gets junkier the longer they wait.
A possible advantage to an index fund, is there shouldn't be anybody trying to 'manage' what's held in the fund, if someone sells there should be a proportionate amount of all the funds assets being liquidated without changing the overall profile - which may not be the case in a managed fund.
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Re: Mutual fund stops redemptions - now in liquidation

Post by dkturner » Fri Dec 11, 2015 7:47 am

JoMoney wrote:
...This fund would seem close to the extreme in terms of illiquid stuff (~90% below single B or unrated, as in ratings removed on distressed debt) offered in a 'wrapper' of ostensible daily liquidity...
I wonder if it was always like that, or if that's just what it degraded to at this point.
Funds with 'active' management may be persuaded to sell their liquid assets and hold onto riskier/less-liquid stuff when money starts flowing out, believing that they won't get full value if forced to sell to sell the ill-liquid stuff. People who get out early may benefit disproportionately where those who held on find themselves holding a bag of junk with a risk profile that just gets junkier the longer they wait.
A possible advantage to an index fund, is there shouldn't be anybody trying to 'manage' what's held in the fund, if someone sells there should be a proportionate amount of all the funds assets being liquidated without changing the overall profile - which may not be the case in a managed fund.
The Third Avenue fund was a junk bond fund started in 2009 when junk bonds were historically cheap.

I would submit that under similar circumstances the manager of a junk bond index fund would depart from the indexing strategy and sell whatever was most liquid. As I recall even Vanguard's investment grade bond index funds give their managers plenty of wiggle room with respect to tracking their index. Indexing bonds in a different kettle of fish from indexing equities, because even high quality bonds have much less liquidity than mid to lower quality equities.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by matjen » Fri Dec 11, 2015 7:58 am

LadyGeek thank you for giving me creativity points. Much appreciated!

The WSJ has another article on Third Ave. Pay wall shouldn't be an issue since I am providing the "share" link from WSJ.

Junk Fund’s Demise Fuels Concern Over Bond Rout
Third Avenue Focused Credit Fund takes rare step, seeking an orderly liquidation as junk-bond market swoons
http://on.wsj.com/1TDYbCS
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.

While hedge-funds have occasionally prevented investors from taking out their money, such a move is uncommon for a mutual fund.
and
Third Avenue is the first mutual-fund to halt redemptions without obtaining an SEC order authorizing the move, according to a person familiar with the matter.

The firm took the unprecedented step because it needed to act quickly to preserve its remaining assets, said Third Avenue Chief Executive David Barse.
Obtaining “relief from the SEC is a time-consuming process, and time was not on our side,” he said.
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Re: [Third Avenue liquidates its high-yield bond fund]

Post by lhl12 » Fri Dec 11, 2015 8:14 am

Liquidity is a funny thing.

There are countless examples of markets with high apparent liquidity and tight bid-ask spreads that then become illiquid.

By pooling their assets together in mutual funds (of all varieties), investors give themselves greater liquidity under certain circumstances. As long as the cooperative effect of pooling continues to operate as intended, then withdrawing investors can get their money quickly - with no reduction in price.

However when the liquidity of the underlying assets begins to deteriorate, then the fiction of daily liquidity at the fund level comes under pressure, as in this case. If the forced selling (caused by redemptions) in an illiquid market begins to have a meaningful impact on price, then a run on the bank can occur, causing a damaging spiral down in pricing. Suspending redemptions allows for an orderly liquidation that likely produces greater value for all investors - especially those who haven't submitted redemption notices and would otherwise be hurt more by being last in line.

There is an element of willing suspension of disbelief (or, more cynically -- mass hallucination) that occurs in all mutual funds. Under most circumstances it operates as intended, but in difficult circumstances you get what is going on at Third Avenue.

This liquidity and gating risk that has come back to bite Third Avenue fund holders is a risk to Vanguard fund holders as well -- including at the largest, most liquid of all Vanguard funds. It is much less likely to occur at, for example, the 500 Index Fund, but the risk is non-zero. The reason that mutual fund prospectus language exists, covering exactly these sorts of situations, is because they have occurred in the past and will occur again in the future. Vanguard is probably less at risk than almost any other mutual fund complex, but is not immune.
Last edited by lhl12 on Fri Dec 11, 2015 9:10 am, edited 1 time in total.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by skepticalobserver » Fri Dec 11, 2015 8:41 am

lhl12 wrote:Liquidity is a funny thing.
It certainly is. In this regard the reliability of duration is contingent on the liquidity of the debt instrument. When the bid/ask spread is a mile wide the trade can result in a nasty price that's way out of line with duration.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by larryswedroe » Fri Dec 11, 2015 8:47 am

Ih112
Very good and important post. Having run a bank's funding operation and the funding of the largest mortgage company in country I learned how important liquidity was and to always be prepared for the worst--paying up for liquidity in good times so you had it when you needed it.

And it's a risk far too many investors ignore as it doesn't appear to be a problem until it is and then it can show up in a really bad way, with market impact costs jumping dramatically.

While no one knows what will happen the financial crisis and ensuing new capital rules for banks has led to dramatic drops in liquidity of all but the safest and most liquid bonds, US Treasuries. This closure could lead to a panic of withdrawals from all high yield funds and there is not going to be liquidity in the market. And this is occurring as defaults are rising, especially in the energy sector, the largest borrower I think of high yield debt, and the significant weakening of credit terms that has occurred in recent years.

Just another reminder of why IMO investors should limit their bond holdings to the safest bonds.

Larry

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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by am » Fri Dec 11, 2015 9:00 am

Someone said call Vanguard and ask? They can't even answer basic questions at times...
Last edited by am on Fri Dec 11, 2015 10:06 am, edited 1 time in total.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by alpenglow » Fri Dec 11, 2015 9:10 am

nisiprius wrote:special extra-junky junk bond fund
Want to talk about reaching for yield - yikes.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by Rainier » Fri Dec 11, 2015 9:13 am

What is the historical failure rate of funds with the word "focused" in them?

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by Rainier » Fri Dec 11, 2015 9:33 am

Here is the letter on their website: http://thirdave.com/wp-content/uploads/ ... 2-2015.pdf

None of the NAVs have been updated since 12/9 across all funds.

Conference call at 11am today.

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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by cfs » Fri Dec 11, 2015 9:38 am

Discussion in progress

Already discussed on this conversation Tell me it ain't so Joe . . . or liquidation time
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Re: [Third Avenue liquidates its high-yield bond fund]

Post by SpringMan » Fri Dec 11, 2015 9:41 am

At one time, before becoming a Boglehead, I owned Third Avenue Value fund, TAVFX. Marty Whitman was considered a star manager. Fortunately, I dumped TAVFX before it went totally south. I don't know how much Marty Whitman had to do with the Third Avenue High yield Fund in question, he is 91 years old, but if he did it is a pity to see him go out on such a sour note.
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Re: So how is the liquidation in Third Avenue going to affect Vanguard's High Yield Fund?

Post by nisiprius » Fri Dec 11, 2015 10:15 am

It's a reminder about high yield in general. I would not be surprised if the SEC actually had this specific fund in mind when they proposed new rules for bond funds that deal in less-liquid issues. But I don't think there's any real comparison. This wasn't just any old junk bond fund, this was a hazmat bond fund. "Focused credit" is apparently a euphemism for "bad credit."

Currently, nothing's been happening to Vanguard High Yield that would make investors run for the exits and create a "run-on-the-fund"-like situation. I'll just re-post Lack_ey's nicely labeled chart. The green line is the Barclay's Aggregate index, essentially the same as Vanguard Total Bond, and this chart shows at a glance both why Third Avenue Focused Credit is different from Vanguard, and why some investors (not me!) might choose to accept the extra risk of "high yield" bonds.

Image

And the reason for the difference is obvious. The interesting thing to me is that even before the crash, the extra risk wasn't being compensated with all that much extra reward.

Portfolios, VWEHX, Vanguard Corporate High Yield vs TFCVX, Third Avenue Focussed Credit

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Last edited by nisiprius on Fri Dec 11, 2015 10:28 am, edited 3 times in total.
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Taylor Larimore
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High Yield Bonds?

Post by Taylor Larimore » Fri Dec 11, 2015 10:26 am

acura301 wrote:I have approximately 20% of my bond allocation in Vanguard High Yield Fund. I see this article today about Third Avenue imploding. How do you think this is going to affect my fund at Vanguard?
acura301:

Bonds are for safety. Stocks are for high returns. For this reason, I am not a fan of Hi-Yield bonds which are neither.

Best wishes.
Taylor
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nisiprius
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Re: [Third Avenue liquidates its high-yield bond fund]

Post by nisiprius » Fri Dec 11, 2015 10:34 am

I'll duplicate what I just posted in another thread. The "interesting" thing is that compared to Vanguard High-Yield Corporate, the much higher risk in the Third Avenue fund--obvious before the crash in the form of credit quality--did not result in very much higher return. And when the risk showed up, it showed up with a vengeance.

Portfolios, VWEHX, Vanguard Corporate High Yield vs TFCVX, Third Avenue Focussed Credit
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Comparing facts

Post by Taylor Larimore » Fri Dec 11, 2015 10:44 am

Nisiprius:

Your side-by-side displays are great!

Thank you and best wishes.
Taylor
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Re: [Third Avenue liquidates its high-yield bond fund]

Post by nisiprius » Fri Dec 11, 2015 11:04 am

"Was it always that way?" I don't think this is a case of a mainstream "high-yield" bond fund with style drift. I think the name "focused credit" is intended to be understood as a euphemism for "cleverly selected 'deep value' choices that are cheap because everyone else thinks they're basket cases." In fact, reading the blogger quoted below, I get the impression that in some circles, the unqualified word "credit" means "really bad credit." Maybe some of the cognoscenti can confirm that guess.

Random Googling accidentally landed me on a September, 2010 SEC filing showing an update in the prospectus, and the paragraph I notice is:
Mr. Lapointe joined Third Avenue in 2009. With his arrival, the firm launched the Third Avenue Focused Credit Fund to invest in high-yield debt, bank debt, convertible securities, debtor-in-possession securities, distressed situations and debt-for-equity reorganizations.
I also think the glowing account of the fund, posted in 2009 in a blog dedicated to "distressed debt investing," makes the nature of this fund clear. I'm nesting the quotes to make it clear that the blogger is quoting Third Avenue directly and at length. Boldface is mine. Third Avenue Focused Credit Fund
a distressed credit investment blogger wrote:As many are aware, Third Avenue launched the Third Avenue Focused Credit Fund earlier this year. I think this is a fantastic vehicle for individual investors investing in the credit space. Their commentary this quarter is also full of gems. Here are some quotes / paragraphs I particularly enjoyed:
a Third Avenue fund commentary author wrote:INVESTMENT OBJECTIVE AND FUND STRATEGY

The genesis for the Fund was driven by a market opportunity in credit that Third Avenue had not seen since the early 1990s. As our colleagues have written about in the other Third Avenue Funds Shareholder Letters, debt became a bigger focus in 2008 and early 2009. Indeed, due to our history and credit heritage, Third Avenue has always had a proclivity to invest in credit and special situations. However, what was occurring in the credit markets were, as Marty Whitman so aptly put it, “investments of a lifetime.” Similarly, it was clear that you, our shareholders, were making inquiries about a credit only product. We believed that a differentiated credit fund with daily liquidity where the Fund Manager would pick the best investments across the bank loan, high-yield bond and busted convertible bond universe was the best structure. Clients also wanted some exposure to distressed investments, given the higher default rates and Third Avenue’s twenty-three year track record of distressed investing.

We designed the Fund to be differentiated from other credit and high-yield mutual funds in the following ways:

1) The Fund utilizes a value-oriented investment process that relies on extremely thorough and intensive fundamental research;

2) We focus our capital on our highest conviction ideas based upon our fundamental credit research – the Fund will normally have 50-70 investments;

3) The Fund has an opportunistic mandate that can invest in any part of the credit spectrum;

a. Bank loans, high-yield bonds, busted converts or distressed securities;
b. Invest in the security with the best upside potential versus downside risk;

4) The investment team must identify an event or catalyst to drive value and the security price higher.
Last edited by nisiprius on Fri Dec 11, 2015 11:23 am, edited 2 times in total.
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Re: [Third Avenue liquidates its high-yield bond fund]

Post by larryswedroe » Fri Dec 11, 2015 11:15 am

Yes there is a big difference as Vanguard fund is mostly the two levels just below investment grade while the Third Avenue fund is junk.

With that said, when you get liquidity problems and flights to quality they all go down, just the junk goes down more, but often there is then little discrimination. And the more liquid ones get sold first, putting even more pressure on them. Just depends how much of a problem liquidity becomes, and what's the level of redemptions that exacerbates the problem. Don't confuse the "unlikely" with the impossible--a mistake far too many make

Larry

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by in_reality » Fri Dec 11, 2015 11:21 am

What would have happened had the fund been run as a CEF instead? I assume those who wanted out would have had to sell at a discount while those who remained would seen their NAV drop but would have been receiving the same dividends.

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by cfs » Fri Dec 11, 2015 11:26 am

Larry is right (again).

I can't remember how many times I have read this quote from our shipmate Larry: "Take the risk on the equity side"

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Re: [Third Avenue liquidates its high-yield bond fund]

Post by Rainier » Fri Dec 11, 2015 11:27 am

in_reality wrote:What would have happened had the fund been run as a CEF instead? I assume those who wanted out would have had to sell at a discount while those who remained would seen their NAV drop but would have been receiving the same dividends.
NAV is NAV, the market price would get hammered not the NAV of a CEF

NAV doesn't care if people are selling. You trade CEFs, you don't redeem them.

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