the variable impact of SEC's proposed Liquidity Management Program Bloomberg has
a decent article on the reasoning behind the SEC's liquidity management proposal.
When you sell your fund shares, you're supposed to get the day-end NAV and the fund's supposed to cut you a check within a week. In recent years, funds have seen the challenge of earning
something as greater than the challenge of remaining fully liquid. As a result, more funds have moved into investments that might turn into roach motels: each to get into, impossible to get out of. Those include below investment grade debt, private placements, some derivatives and illiquid investments in general. That's compounded by the move to passive products that maintain near-zero cash levels.
The SEC research found that liquid alts funds face a greater prospect of a liquidity crunch than most, since their investors have a greater tendency to sell en masse. (Data's in the article.)
The SEC proposes requiring that each fund analyze its portfolio, determine the potential magnitude of quick outflows in a crisis and maintain enough "cash or cash-like investments that can be sold within three days" to be able to handle redemption demands without exacerbating a crisis by trying to sell illiquid positions into a market where everyone else is already trying to do the same.
The Investment Company Institute scoffs at the very idea of a challenge to the easy grandeur of the industry they're paid to represent.
Two interesting implications: (1) liquid alt funds might have to become dramatically more liquid but also (2) ETFs might no longer be able to remain fully invested. One additional implication: an ETF and an index fund mimicking the same index might not be permitted to carry the same cash level if the redemption patterns in the ETF don't mirror the redemption patterns in the fund.
Worth pondering, perhaps.
David
New Fund Rules: What You Need To Know 'Specially like this wording:
Funds would also be prohibited from acquiring any asset that couldn’t be sold within seven calendar days if it would mean that such assets would account for more than 15% of their net assets.
Funds would be required to invest a minimum percentage of their net assets in positions that could be converted to cash in three business days.
Hey........good luck with the above in bold.
Have the investment companies abide with some simple rules as noted in the article. The SEC will legally note to them that a violation or failure of the organization to be "liquid" will result in the "nationalization" of the firm, all employees are terminated and all account assets will be automatically converted to 10 year Treasury issues with notification to all account holders; who may them rotate their funds into another investment company on the "chosen one's" list.
Management, please sign on the line following the X _______________________
None of the above is not unlike the special actions taken during the 2008 melt. Many FDIC institutions have since been terminated and the accounts move to bank "X".
The "gov" can guarantee the whole thing. Tis in the best interest of the country in general.
Morningstar channels their inner Bernanke Daisy Maxey, writing for the online version of the WSJ, announced "
Mutual fund's overhaul hits investors with a big tax bill." It's the same "F P A Perennial becomes F P A U.S. Value" story that we warned people about in June. Remember "
F.P.A. Perennial: Time to Go"? Remember: "If you are a current Perennial shareholder, you should
leave now"?
Highlights of the story:
Morningstar channeled Bernanke. Ben was adamant that there were no clear signs of trouble brewing in the years leading up to the 2007 implosion. Dan Culloton of Morningstar seemed equally surprised by Perennial's $39/share payout: “It’s certainly a big, shocking distribution. It exceeded my expectations."
Why? In the parallel case of F P A's conversion of Paramount from small growth to large value, virtually the entire portfolio was liquidated within a few months. Morningstar's own data back in June suggested a $36/share payout. The only reason you'd be surprised is if you weren't paying attention. How could Morningstar not ... oh, right. The fund only has $280 million in AUM!
Wall Street Journal practiced "safe" journalism. Two tenets of that strategy. Talk to Morningstar. Avoid hard questions.
"F P A declined comment". Yep. You could sort of feel the temperature drop after we complained about raising the management fee at Paramount when it was converted from a clone to Perennial to a global absolute value large cap. Since that change, perhaps coincidentally, assets are down nearly
50% and the fund is underwater.
(sigh)
David
New Fund Rules: What You Need To Know Doesn't fire-proofing funds reduce the potential return? Can I still invest in a very risky fund if I want to - knowing that increased risk often leads to increased return over longer periods? Do you really want your emerging markets bond fund or small cap equity fund to be as safe and secure as bank deposits (now yielding less than 1%)? Something in me doesn't like all these new rules.
However, if investors refuse to read the prospectus and excercise common sense in their fund purchases - perhaps this is the only alternative. I'd like instead some type of uniform "risk" label applied to all funds sold to the public. 4 or 5 different risk levels should be adequate. This would also give fund companies an incentive to structure their funds so as to qualify for a lower risk rating. Novice investors, those near retirement, etc. would know in advance which funds represented the higher risk of principal loss over the near term and would be cautioned to avoid these.
Many companies do exactly that. T Rowe Price does an excellent job displaying risk using bar graphs and than elaborates on that risk in their fund commentary. Even here, however, I suspect many ignore those classifications and invest more aggressively than prudent for their circumstances.
AAA
DBLTX Vs. DLFNX I own DLFNX since Sept, 2012. $50 BILLION AUM in DBLTX. That fund oughta be closed. With so much in there, he's driving the market, not investing in it. $50B is nuts. This thread caused me to look once again at the portfolio. DLFNX is 47% in AAA-rated stuff. If I was aiming for a not very risky solid, reliable, tame fund, I guess I found it.
Signed,
----The MFO resident Rank Amateur.
I noticed the quality numbers, too. Still, if 47% is AAA rated, then why is the average quality only BB for the fund? He must own some real junk in there.
High-Yield Bonds Look Attractive A section from blog of Steve Blumenthal, CEO of CGM Capital Management Group, Oct 2
On My Radar: Defaults Will Breach the Historical High Next Year – The Fed is the “Wild Card”http://www.cmgwealth.com/ri/on-my-radar-defaults-will-breach-the-historical-high-next-year-the-fed-is-the-wild-card/High Yield – Rising DefaultsEdward Altman, the New York University professor who developed the Z-Score method for predicting bankruptcies, says “defaults will breach the historical high next year and the Fed is the “wild card” that has the power to determine how quickly the current credit cycle ends.” (Bloomberg)
“We have blamed the wider Junk Bond spreads on Energy issuers, but last week there was a buyer’s strike. If this continues, you can say goodbye to easy financing for M&A which will remove one large pillar of support from stock prices”. (361 Capital)
* Altice on Friday sold $4.8 billion of junk bonds to fund its $10 billion purchase of Cablevision Systems Corp., according to S&P Capital IQ LCD. When the deal was shopped earlier this month, Altice expected to sell $6.3 billion of debt, investors said. A 10-year bond was priced to yield 10.875%, compared with yields as low as 9.75% that were suggested by bankers initially, according to S&P Capital IQ.
* Olin on Friday sold $1.2 billion of bonds to pay for its pending acquisition of Dow Chemical Co.’s chlorine-products unit. Earlier in the month, Olin was expected to sell $1.5 billion of bonds, fund managers and analysts said. The annual interest rate on Olin’s 10-year bonds sold Friday was 10%, up from 7% expected earlier in the month, according to S&P Capital IQ.
* Companies have announced $3.2 trillion of M&A this year, according to Dealogic, emboldened to merge by cheap debt and the long stock rally that began after the financial crisis. That puts 2015 on pace to rival 2007 as the biggest year ever for takeovers. Issuance of junk bonds backing M&A deals hit a year-to-date record of $77 billion through Friday, according to data from Dealogic.* A souring of investors on junk bonds could limit the availability of financing for deals that require a lot of borrowing. Banks have been under pressure from federal regulators to reduce their loans to such companies, and a pinch in the bond market could leave those deals struggling for financing. (WSJ)
* After investors snapped up more than $37.5 billion of bonds issued by junk-rated energy companies in the first six months of 2015, just $5.9 billion has been raised since then, according to data compiled by Bloomberg. (Bloomberg)
* Junk-bond investors are bracing for a surge in corporate defaults that would exceed the most pessimistic forecast from credit raters as the Federal Reserve contemplates its first interest-rate increase since 2006.* A measure of distress in the market is suggesting investors have priced in a default rate of 4.8 percent during the next 12 months, according to Martin Fridson, a money manager at Lehmann Livian Fridson Advisors LLC. That’s almost two percentage points higher than the pace being projected for June next year by Standard & Poor’s, the world’s biggest credit rater, as concern mounts that energy companies that loaded up on cheap debt are going to struggle to refinance. “Unless there is a miraculous turnaround in oil prices there is likely to be a lot of defaults,” Fridson said. “The rating agencies’ approach isn’t capturing the fact that a large part of the economy is far out of step with the overall picture of the mark” (Bloomberg)
* On HY fair valuation from Martin Fridson this week: Now that the sector has sold off sharply, it’s finally at fair value, finds Fridson, chief investment officer at Lehmann Livian Fridson Advisors. He uses a model that includes current economic and market conditions to judge valuations. (Barrons)
* Note that fair value can move to significantly undervalued as happened in 1991, 2002 and 2008. Recessions are a bear (no pun intended).
* The S&P U.S. High-Yield Corporate Bond Index posted a yield to maturity of 7.51% on Tuesday, up from a recent low of 6.21% in late February. Morningstar data shows that the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has lost 3.6% in the past six months.
Remain tactical with your HY exposure. We are seeing liquidity issues in the market. [...] Corrections create the next great opportunity. As prices decline, yields move higher. Defaults are only a bad thing if you sit on the bus as it falls over the ledge. It will be higher defaults and declining prices and higher yields that will bring us returns like those achieved after the prior crisis.@AndyJ @EdmondWell, I hope you two get your signals straight this year about who is going to send the memo re. positive "Oct-Dec seasonality." Last year, Q4, Mr. Junk Bond Market didn't get it. :)
New Fund Rules: What You Need To Know
A Tortoise Wins the Stock-Fund Race (POLRX)
DBLTX Vs. DLFNX I own DLFNX since Sept, 2012. $50 BILLION AUM in DBLTX. That fund oughta be closed. With so much in there, he's driving the market, not investing in it. $50B is nuts. This thread caused me to look once again at the portfolio. DLFNX is 47% in AAA-rated stuff. If I was aiming for a not very risky solid, reliable, tame fund, I guess I found it.
Signed,
----The MFO resident Rank Amateur.
Meaning of US 10 year at 1.98% "I actually don’t know of anything other than U3 [the official unemployment rate] that would make you want to tighten. All the price indicators (including wages) scream weakness, as do all the other labor market indicators. If we didn’t have the unemployment number, nobody would see a reason to hike.”-Paul Krugman, Econ professor, Graduate Center of the City University of New York, op-ed columnist for The New York Times, Nobelist.
Wow! I'm worried that I agree with this guy. Then again he had a 50/50 chance of being correct.
