Third Avenue had no exit plan in place

Third Avenue had no exit plan in place
After peaking way back in 2014 and declining ever since, the high-yield bond market finally has made national news over the past week with the very high profile blow up of the Third Avenue Focused Credit Fund.
DEC 17, 2015
This was not some fly-by-night little fund or fund family. It's a small, mainstream mutual fund family, and the fund itself had more than $3 billion in assets in 2014. Last week, after massive withdrawals, the fund announced it was closing and that shareholders could not redeem their shares for cash anytime soon. Third Avenue was going to conduct an "orderly" liquidation. Good luck with that. Over the past 20 years, my peers and I have often discussed this exact scenario. What happens when there is a mass exodus in an illiquid asset class like junk bonds? If Third Avenue was a closed end fund or exchange traded fund, sellers would simply drive the price lower and lower until sufficient buyers came in, presumably when the share price of the closed end fund or ETF was significantly below the value of the underlying assets in the fund. In other words, they would trade at a discount to the net asset value of the fund. In Third Avenue's case, it is an open ended fund that issues more and more shares to meet investor demand. When redemptions swell, the manager chooses what to sell and when. And it's unlikely that securities are sold on a pro rata basis. As 10 fund's assets collapsed, my sense is that the fund manager sold most or all of the bonds that were easier to sell, i.e., liquid, hoping that he could stem the tide and high-yield bonds would stabilize or even bounce. When the liquidations never ceased, the fund was probably left with only garbage instead of the well diversified portfolio it had weeks, months or quarters earlier. In other words, at the detriment of the shareholders who stuck by the fund, they were left with illiquid crap. This raises a whole series of questions regarding the fund manager's and fund company's fiduciary responsibility to its shareholders. Clearly, they had absolutely no plan for a mass exodus, like disaster planning for many firms in my space. How could they allow the fund manager to sell the better quality bonds and turn the fund into a heap of dung? How could they penalize investors like this? While I am sure they will hide behind the nonsensical legalese of the prospectus, this is a travesty. Paul Schatz is president of Heritage Capital.

Latest News

AI is changing how investors research, not who they trust
AI is changing how investors research, not who they trust

While AI has become a go-to research tool for affluent investors, new HSBC research suggests human advisors remain the deciding voice when investment decisions are made.

Supreme Court blocks Trump's bid to fire Fed Governor Lisa Cook
Supreme Court blocks Trump's bid to fire Fed Governor Lisa Cook

A 5-4 ruling preserves the Federal Reserve's independence for now, but the legal fight over presidential removal power is far from settled.

Morgan Stanley boosts returns on client cash, analyst says
Morgan Stanley boosts returns on client cash, analyst says

For years, large firms have been facing penalties and questions from regulators over interest rates for clients’ cash accounts.

Volatility has been roiling the markets. But advisors have got the tools to deal with it
Volatility has been roiling the markets. But advisors have got the tools to deal with it

Market volatility can be stressful, but it also represents opportunity for advisors and their clients.

JPMorgan's succession clock is ticking — and this time, insiders say it's real
JPMorgan's succession clock is ticking — and this time, insiders say it's real

After years of mixed signals and shifting timelines from Jamie Dimon, Wall Street sources suggest the race to lead JPMorgan Chase has entered its decisive stretch.

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income

SPONSORED Why direct indexing stopped being optional

Direct indexing is on pace to outgrow ETFs and mutual funds. Northern Trust's Ken Lassner explains why the advisors who get it wish they had started sooner.