Just days after the collapse of Third Avenue Management LLC’s junk bond fund the Focused Credit Fund (TFCVX), the company’s CEO David M. Barse is out, says the Wall Street Journal. The news comes following Barse’s announcement that redemptions to the high yield mutual fund’s investors would be frozen. The media outlet says that Barse was fired and is not allowed to reenter the building.
This week, the Massachusetts Securities Division issued a subpoena saying that it was probing the fund closure and liquidation strategy. Secretary of the Commonwealth William F. Galvin, says he wants to find out to what extent the state’s investors have been affected by this “unprecedented decision.” It was on December 9 that they were sent a letter announcing that the redemptions would be stopped and the assets that were left would be liquidated.
This is an unusual move for a mutual fund. Such funds typically have to abide by tight regulations that mandate that investors be provided liquidity daily.
The reasons for the changed policy are investor net withdrawals and heavy losses in the underlying investments. There is also speculation that the large position that the Focused Credit Fund had taken in what are known as Level 3 assets, which are securities that trade so infrequently it’s hard to know exact prices, were becoming an issue. It reportedly got to the point that Level 3 assets in the portfolios went from 15% of what was held to about 25%, which regulators typically consider too high.
The New York Times reports that the decision to prevent investors from getting their money back has caused concern among the market, which have been getting ready for the Federal Reserve’s anticipated interest rate increase. The fear is that the Focused Credit Fund’s demise is not an isolated incident, and other mutual funds holding a significant number of junk bonds, emerging market debt, and leveraged debt may find themselves in the same predicament.
Some are also worried that leveraged hedge funds may be next. Financial advisers in communication with Third Avenue have said that they were not given much of a heads up about the fund’s redemption freeze.
Bloomberg reports that at the time of the fund’s shutdown announcement, the Focused Credit Fund was holding $788.5 million in assets-a much lower figure than the $3.5 billion it held in June 2014. In the wake of the ousting of Barse, the company’s management committee will reportedly fill the void.
Unfortunately, the entire junk bond market is failing once again, not unlike what happened in ’07 and ’08 leading up to the financial crisis. Also, the NY Times in its recent article named two high yield bond funds that have seen even more of an investor outflow than the focused credit fund in 2015 and are very exposed to high risk bonds with very low credit ratings. They are the:
— The Ivy Income Fund, with a CCC credit designation, and 48% of its assets in securities with a CCC rating or worse. The $6 billion fund lost $1.8 billion so far this year.
– The American Funds, with 30% of its portfolio in similar, low rated bonds. The $16.9 billion high-yield fund experienced $1.3 billion in investor redemptions in 2015.
Third Avenue maintains that by freezing redemptions it has investors’ best interests at heart. The company announced that in the next year investors would be receiving a number distributions but did not clearly stipulate when they would be made whole.
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Third Avenue Parts with CEO Barse as Fund Liquidates, WSJ Says, Bloomberg, December 13, 2015
Illiquid assets at failed Third Avenue junk fund underscore SEC concerns, Reuters, December 14, 2015