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Business/Finance See other Business/Finance Articles Title: Largest Mutual Fund Failure Since 2008 … Here’s What it Means Largest Mutual Fund Failure Since 2008 … Here’s What it Means Mike Larson | Friday, December 11, 2015 at 4:18 pm The junk bond market has been bleeding for more than a year, with prices falling and yields rising. And while the carnage started in the energy sector, it has gradually spread throughout the high-risk bond and leveraged-credit markets. Now, the troubles have claimed a major mutual fund victim — the Third Avenue Focused Credit Fund (TFCIX). The fund was chock full of junk bonds, stocks, warrants, loans and preferred shares, and those securities have been plunging in value. It had lost almost 27% of its value year-to-date, as you can see in this chart … Shocking losses … Selling its relatively illiquid holdings into a falling market could have caused the losses to get even worse. So Third Avenue Management decided to slam the gates shut on withdrawals from the $789 million fund. This is shocking, folks. I say that because it’s an extremely rare move for an open-ended mutual fund. No mutual fund has ever halted redemptions without an order from the Securities and Exchange Commission authorizing it to do so. In fact, we haven’t seen a fund failure even remotely like this since the credit crisis in 2008. That’s when a money market fund called the Primary Reserve Fund “broke the buck.” There’s no telling how long it will take for fund investors to get all their money back. But one thing is clear: So much money flooded into junk bond funds in a desperate search for yield over the past few years … and losses are so widespread that every single one of the 30 largest high-yield bond funds is showing losses for 2015. That means even more investor withdrawals are likely in this asset class, hitting the junk bond market even harder. An extremely rare move for an open-ended mutual fund … So what are the consequences for you, and the markets in general? First, if you own junk bond funds or ETFs, you’re probably losing money on them. There’s nothing you can do about the past. But you can insulate yourself against further losses by selling down your holdings now. At some point, the risk-reward in owning junk bonds will make sense for fresh investments. Yields will rise high enough, and prices will drop low enough, to make riskier bonds too attractive to ignore. But I don’t think we’re there yet. Second, what happens in the higher-risk corners of the debt market won’t stay contained there. It sure as heck didn’t in 2007-09, or in other major turns in the credit cycle. As debt market liquidity dries up and prices fall, it will put more pressure on companies that need cheap debt to survive and thrive. It will also cause banks to tighten lending standards on new loans, because they’ll have a tougher time unloading some of their risk on investors. This is all bad news for publicly traded hedge fund, private equity and money management firms. It’s also bad news for foreign banks, many of which are already reeling from economic problems in South America, Asia, and Europe. Finally, it’s a key reason why the broader financial sector has lagged the market rally … and why financial stocks in general look relatively vulnerable to me. If you own these kinds of names, sell. Third, this makes it even more important for you to maintain a much higher level of cash reserves than you have for the past six-plus years. It also underscores why you should consider using downside hedges to protect against losses in vulnerable sectors like financials. In my Interest Rate Speculator service, I’m a bit more aggressive and looking to generate by targeting troubled shares. Fourth, understand that many investors have been “hiding” in other sectors they believe aren’t as vulnerable to the credit problems. That includes sectors like technology, especially the infamous “FANG” stocks. But if tighter lending standards, a flattening yield curve, and weak foreign growth weigh more heavily on the domestic economy, it’s going to pressure even those previously resilient kinds of names. So if you haven’t taken some profits on those stocks, or pared down your overall market exposure, this is a good time to do so. Bottom line: You simply can’t ignore the credit markets if you want to be a successful investor. The first major gating of a mutual fund since the credit crisis in 2008 shows that the problems are getting worse out there, and further illustrates why taking protective action is warranted. So what do you think about this latest mutual fund disaster? Are you holding junk bond mutual funds or ETFs, and if so, how are you reacting to the Third Avenue news? What does this say about the broader stock market? Do you believe the problems will stay bottled up in energy and commodity stocks, or is this a sign you need to dump other stocks as well? Let me know here at the website. Poster Comment: This is a big bust and the markets will react accordingly. Get ready. I hope you all have your golden parachutes ready. Post Comment Private Reply Ignore Thread Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: BTP Holdings (#0)
Sad information for those foolish enough to "invest" in this garbage.
“The most dangerous man to any government is the man who is able to think things out... without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” ~ H. L. Mencken
Junk bonds and ETFs are in the same boat. ;) "When bad men combine, the good must associate; else they will fall, one by one." Edmund Burke
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