Disgusted by fiscal year end mark-to-market in ANFLX (Response from Angel Oak posted inside) I was fortunate enough to get a follow-up reply from Angel Oak to this email:
May I ask one more question? How disruptive to the fund’s daily operations is the large outflow of assets that have occurred over the past four months? As of 9/30/15, the fund’s assets stood at $421MM. As of today, they stand at $323MM (per Morningstar). Has that resulted in the fund selling more of its liquid holdings and left the fund with a greater risk of illiquidity? How close is ANFLX to a Third Avenue fund situation?
Thanks again for your feedback.
Mike Edwards
Angel Oak's response follows:
That’s a great question, Mike. Fortunately the spreads on our bonds hadn’t widened out when we started seeing redemptions, so it wasn’t difficult to meet them organically. There was no forced selling of bonds like you saw in some hedge funds last year.
Back in the beginning of the fourth quarter, we also saw the signs that credit markets could get even choppier than they were in July and August, which initially effected high yield due to oil selling off. When we saw those signs, we got conservative in our cash management. As of 12/31 we held roughly a ~17% position in cash. We raised this by minimizing our CMBS position, which we fortunately were able to do before spreads really started widening in that space. In terms of how we are on liquidity, we basically traded very liquid CMBS for cash, so it’s roughly a net zero sum trade off.
I am happy to say we are nowhere close to where Third Avenue found themselves last year. While we are a credit fund, we invest in considerably different areas than where Third Avenue traded. Third Ave basically was reaching into deeply distressed areas of credit where it could take a lot of time for the trades to come to fruition. Unfortunately for them, when they started seeing redemptions, they could only sell what the street would buy – i.e., their liquid positions. They were left with roughly 7 illiquid positions including deeply distressed restructuring deals which were trading at pennies on the dollar. An interesting tidbit, In typical wall street shark fashion rival traders at hedge funds were shorting a lot of their positions because they knew they were going to see redemptions and would be forced to sell quickly at incredibly wide levels given their mutual fund/daily liquid structure. It’s definitely a cautionary tale that the market has witnessed – they were really doing a hedge fund trade in a 40act fund. Returns were great for a time, but when things got bad it was evident why a less liquid vehicle is important for those types of distressed trades that take a long time to see the result of an investment.
To contrast what we do to Third Ave, most of the bonds we buy have embedded credit enhancement or aka principal protection. On our CLOs, we have roughly 8-15% credit enhancement, depending on the deal, meaning we could see 8-15% losses annually before we saw a dollar in principal loss – we believe that gives us a lot of insulation from credit events. To give you an idea, historical default rates in CLOs are around 4% and during the crisis they peaked at 9%, so in short we can say with fairly relative certainty that these are money good bonds. Unfortunately they can see some mark-to-market volatility like yesterday.
Disgusted by fiscal year end mark-to-market in ANFLX (Response from Angel Oak posted inside)
Anyone buying junks After today will be up to around 6% in the junk corps with 84% in the junk munis and the rest in cash. Would like to sell some of the munis to get heavier in the corps if the market cooperates by working higher. Then again, the worst may be yet to come in the corps if the *experts* are correct. And as we know, the *experts* are never wrong.
Edit: Make that 8% junk corps.
Today is looking like the
5th consecutive day of gains in the junk corporates (and no, HYG and JNK don't tell the story) Quite a divergence from equities. Some of the better open end are down less than 1% for the year. Not exactly the crash we have been lead to believe that is occurring in that sector. Will be interesting to see if the cash market gains continue after the Fed meeting. Will be lightening up on the munis. My meager 8% exposure to the corps may have to be increased quite a bit.
Chuck Jaffe: What Fund Managers Say About Your Money Isn’t Always What They Mean Sorry, Chuck ... but you're no Jason Zweig. His 2015 "Devil's Dictionary of Finance" is a must-read. This was a thinly-veiled homage to that at best. Useful, sure -- but clearly trying to horn in on his work.
Chuck Jaffe: What Fund Managers Say About Your Money Isn’t Always What They Mean FYI: The inauspicious start to the year coincides with the time when mutual fund managers are writing their annual notes to shareholders. Now a manager must explain average or mediocre results from 201
5, as well as allay the rising fears shareholders have after 2016’s rocky start.
Yet too often there’s a difference between what fund managers say and what they mean. Knowing the catch phrases and double-talk can help you determine if your manager has courage in their methods and convictions, or are spewing sewage.
Regards,
Ted
http://www.marketwatch.com/story/what-fund-managers-say-about-your-money-isnt-always-what-they-mean-2016-01-27/print
Disgusted by fiscal year end mark-to-market in ANFLX (Response from Angel Oak posted inside) I should have monitored their AUM, perhaps it was sending us a clue: $421MM on 9/30/15. It is now $327MM. A drop of 22% in less than four months for a bond fund!
Disgusted by fiscal year end mark-to-market in ANFLX (Response from Angel Oak posted inside)
Announcing Morningstar’s 2015 Fund Managers Of The Year
John Mauldin: Mutual Funds Could Pop The Silicon Valley Bubble
John Mauldin: Mutual Funds Could Pop The Silicon Valley Bubble I've been following Theranos for awhile now, as its technology has the opportunity to be uniquely disruptive to the delivery of healthcare services both inside a hospital/clinic environment and outside as well.
The technology does have a 'black-box" quality to it, as it hasn't gone through routine peer review testing, but is relying instead on the FDA for this verification. This has a local flavor for me, as the Cleveland Clinic stepped forward to establish a partnership with Theranos, with the Clinic doing this testing and verification external to the FDA.
If this turns out to truly be a viable technology and the company goes public, it may be the most anticipated IPO in years.
Here is a reasonable recap of the company:
https://www.washingtonpost.com/news/to-your-health/wp/2015/10/16/a-comprehensive-guide-to-theranos-troubles-and-what-it-means-for-you/press
How To Purge Your 401(k) Of Toxic Funds
AQR Style Premia Alternative & AQR Style Premia Alternative LV Funds closing 3/31/16
fairholme allocation and focused income fund news
AQR Style Premia Alternative & AQR Style Premia Alternative LV Funds closing 3/31/16
Does New U.S. Rule Favor Mutual Funds vs. Insurers' Annuities? Just as regulations are refinements of a law, Congress can "refine" its laws, like Dodd Frank, but it has to do so explicitly with new laws. Here's a NYTimes article from a year ago describing that approach:
In New Congress, Wall St. Pushes to Undermine Dodd-Frank Reform (Jan 1
5, 201
5)
Lawmakers approved by a vote of 250 to 175, with just eight Democrats in support, a broad measure to impose a variety of new restrictions on federal regulators, like stricter cost-benefit analyses and an expansion of judicial review. ...
House members also took up a narrower measure that would slow enforcement of Dodd-Frank requirements and weaken other regulations on financial services companies.
In the case of the DOL regulations, I believe their based on relatively ancient (197
5?) laws, so tinkering with the statutes by Congress seems much less likely.
Fund Managers Who Called Oil Debacle Say They'll Stay Away For Years The article is ridiculous. Tanaka has only about $17 million with a 2.45% expense ratio, while Polen, Jensen, and Destra (another teeny one) never owned any energy stocks. And the reference to Doll's Nuveen fund...he wasn't even part of Nuveen until the 2013 referenced date. This is such poor journalistic research. They could have at least attempted to find a major fund/manager who has actually made big changes.
John Mauldin: Mutual Funds Could Pop The Silicon Valley Bubble Superficial article as typical of financial writers that mixes facts with fantasy. Unicorns are under threat but nothing to do with mutual funds or their valuation practices.
1. Mutual funds amongst money from Russian "mobs" and Chinese transfers made Unicorns possible.
See my earlier post explaining how unicorn valuations come about
http://www.mutualfundobserver.com/discuss/discussion/25268/the-story-of-unicornsThe late stage funding arrangements have very little to do with valuations but rather the terms of the funding.
2. The mark-to-market that mutual funds have done have very little correlation with the valuation of companies which is determined by the next funding event or IPO. Because each funding round has its own terms including liquidation preferences, a new round can come in at an even higher valuation than before if the terms are right. This may lead to earlier round investors having to take a write-off on their investments to mark to market as they go down the pecking order of preferences or get diluted with new shares issued.
3. Unicorns are facing potential down rounds recently but this has nothing to do with mutual funds investing in them. It is all about the exit potential with IPOs becoming dimmer and the perception that the era of free money with increasing rates is coming to an end to raise even more funds.
If Theranos, the $9B unicorn health care darling of Silicon Valley (and the media darling because of the photogenic founder) which has over-promised and under-delivered, falls down in its own hubris, it will bring down many unicorns more than anything else. It has no mutual fund investors.
