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 Third Avenue's decision this week to block redemptions and liquidate
a fund with $789 million in assets jolted Wall Street and caught the
attention of the U.S. Securities and Exchange Commission.
"We are in communication with representatives of the fund and are
currently monitoring the situation," an SEC spokesperson said.
The junk bond market is already reeling from a meltdown in the
energy sector as oil prices fall below $40 a barrel.
Retail investors were expected to extend their run of withdrawals
from junk bond funds, while creating opportunities for hedge funds
and insurance companies that might have more ability to stomach the
fallout.
"Liquidity is bad," said Gershon Distenfeld, portfolio manager of
AllianceBernstein's $5.8 billion High Income Fund. "It is marginally
worse than it was a month ago, but much of the decline in liquidity
has been much steeper since the (2008) credit crisis."
Pain was also being felt by hedge fund managers.
Stone Lion Capital Partners LP, a manager of $1.3 billion that
specializes in distressed debt, has suspended redemptions in one of
its funds after "substantial redemption requests," the firm said in
a statement on Friday.
LionEye Capital, a $1.5 billion event-driven hedge fund, is closing
its doors at the end of December after suffering double digit losses
and heavy redemptions this year, two people familiar with the matter
said.
Most of the trading in the junk bond market is being done by
exchange-traded funds, Distenfeld said.
"There's not a lot of cash bond trading on deals of $2 million to $3
million and up," he added. "It's not zero. There's some trading, but
it's too costly to trade big size."
Meanwhile, several junk bond fund managers interviewed by Reuters
sought to distance themselves from the Third Avenue fund. They
acknowledged plenty of retail investors will read the headlines and
pull money from junk funds.
"The headlines get too much for them and they tend to sell at the
absolute worst time," said Greg Hopper, who runs the $1.1 billion
Aberdeen Global High Income Fund. The fund's total return this year
of minus 6.86 percent is lagging 94 percent of peers, according to
Morningstar. Investor withdrawals have helped cut the size of his
fund nearly in half this year.
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Third Avenue's fund had nearly half its assets in below "B" rated
debt, compared to the peer average of just 12 percent, according to
Morningstar Inc data.
Still, "There's never just one cockroach," DoubleLine Capital Chief
Executive Officer Jeffrey Gundlach said. "People are too long credit
and the credit is melting down and the stock market is whistling
through the graveyard. It is so similar to 2007, it’s scary."
"Investors should look closely at what they are holding in fixed
income and should certainly look closely at their credit exposure in
high yield funds," Todd Rosenbluth, director of mutual fund and ETF
research for S&P Capital IQ. "There are concerns that junk bond
defaults will rise, and they will rise modestly in the next year,
from a historically low level now."
Hopper said in recent months he has sold investments in the emerging
markets of Ethiopia and Mozambique to boost his fund's liquidity.
"They represented investments that were reasonably liquid, but had a
risk of becoming less liquid," Hopper said.
Shares of fund companies such as Franklin Templeton parent Franklin
Resources Inc have also taken a beating amid growing worries about
the junk bond fund market. The company's stock closed down 6 percent
to $36.18 in Friday trade.
The popular Franklin High Income Fund, down 9.12 percent this year,
is underperforming 98 percent of peers. The $5 billion fund has been
hurt by wrong-footed energy bets and heavy redemptions, according to
Lipper Inc.
(Reporting By Tim McLaughlin; Additional reporting by Ross Kerber in
Boston; Jennifer Ablan, Richard Satran and Trevor Hunnicutt in New
York; and Lisa Lambert in Washington; Editing by Tom Brown)
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