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Charles, I don't watch charts daily where I make my decisions. I do see prices daily because every night around 6:30-7 PM I see my total portfolio updates (Both Fidelity and Schwab allow you to aggregate all funds/accounts from several brokers. Once a week write down my favorite funds for several categories which is around 30 funds. The rest of the time, I'm just watching and since investing is my passion for decades I read, watch, listen daily. I may hold funds for weeks and months and sometimes years. Since 2000 I have my system of best risk/reward funds. It goes like this, identity best rusk/reward funds, select the top 3-5 funds and keep switching within this list. It's more complicated than that but that's the basics. Example: I held PIMIX from 2010 to 2018, it did so well I couldn't find anything better.
Then, I retired and have enough, so now I mainly investing in bond funds and several times annually trade stock/ETF/CEF/whatever when I see a great trade. Example: PCI is one of the best CEFs (managed by the PIMIX team and where Ivascyn has most of his money). I don't like CEFs volatility which can be much higher. Last Wed I traded it for around 30 minutes and made 5%, see (link) and the last post When markets are unreasonable with a screaming value I may buy for short term to make a quick trade. When I see that bonds+stocks don't make sense + very high VIX + panic I sell everything. My main 4 goals are: 1) We need to make just 4.5% annually to cover LT costs+inflation for our portfolio to last for 4-5 decades. 2) I still want to make at least 6% annually with the lowest Standard Deviation (under 3) and without ever losing 3% from any last top and be positive annually. I no longer care to maximize performance but to keep our standard of living 3) Use mainly bonds OEFs with the flexibility to trade more often by using momentum and trends 4) May use sometimes faster trades of other funds(stocks,CEFs, gold and more).
A crisis in credit markets deepened on Sunday as a cluster of funds that own mortgage bonds sought to sell billions in assets to meet investor redemptions, sparking pleas for government intervention.
The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund on Sunday, according to people with knowledge of the sales. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings. The fund plunged 17% on Friday, bringing its total decline for the week to 31%.
“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”
The best way to obtain favorable prices is to offer a wider range of securities for bid, Szilagyi said. He declined to discuss the amount of securities the fund put up for sale.
from the headlines this morning - "The Federal Reserve is providing the fuel for this morning's reversal, announcing that it will purchase Treasuries and mortgage-backed securities "in amounts needed," along with plans to buy corporate bonds and municipal securities and a lending program to support small-and-medium sized businesses'
"The Federal Reserve is providing the fuel for this morning's reversal, announcing that it will purchase Treasuries and mortgage-backed securities "in amounts needed," along with plans to buy corporate bonds and municipal securities and a lending program to support small-and-medium sized businesses'
>>> Many of these pieces of support is what has been in place in Europe from the ECB.......the "whatever it takes", especially from several years ago; with backstopping corporate bonds, etc.
For what it is worth I think the issue with IOFIX is they were forced to sell thinly traded bonds at any price to meet redemptions after they exhausted their line of credit ( I seem to remember $200 million??)
Since these bonds probably sell "by appointment" and I think by phone anybody they called knew they were in trouble and offered low ball prices seeing if they would bite. They had not choice
Once they sold at those low ball levels, there is a price and more of the portfolio gets "marked to market" and the NAV is automatically that much lower, even if the bonds in the fund are really worth much more.
With corporate bonds that mature, like in ZEOIX, the mangers will tell you just to hang on and bonds that mature will mature at par in a few months or so, raising the NAV by that much. I don't know the duration of IOFIX, but if the mortgages mature in 10 to 15 years it will be a long time before they hit "par". Many homeowners may also have enough equity to refinance but that would be a redemption at par and would just reduce the interest payment. but "raise" the NAV.
I didn't really understand the fund when I bought it and although my loss in IOFAX pales in comparison to other parts of my portfolio, the blow-up of this fund feels like a firecracker going off in my hand. Why did I buy something inherently explosive and then hold it while the fuse was lit? With everything else plummeting, I missed the early 9% decline when I had time to get out. Dumb #*@&!
@BenWP - try not to beat yourself up too much. I struggle with the same thing at times. In my case when something blows up like this my initial response is to search for WTF just happened before I immediately stomp on the 'sell' brake. Also in the case of mutual funds we all know that it's an 'end of the day' moment. Do you or don't you? It's never easy especially with what you consider to be solid funds.
Yeah this is a conundrum... do you sell at this point down 30% or do you hope that they now have a buyer in the Treasury that the bonds will now reprice upward more in line with their value..... They had to sell.$1.2 B in assets to meet redemptions. Thats a huge number
Thanks for sharing this @TheShadow Well this is clearly warning strong likelihood of more downside.... so maybe best to take our licks and sell today....
There's really absolutely nothing new here. Go back and rummage through the MFO files during and after the 2008 debacle, where it was widely discussed. Liquidity risk, AKA "everyone running for the door at the same time", IS NOTHING NEW OR UNUSUAL. It's pretty much like people running for the single door when the building catches fire. A few make it out, the rest don't.
It's a bit disconcerting that investors with the knowledge and experience of most of us here on MFO are surprised at any of this.
@Old_Joe oh yes I understand that. I understand what's happening. Just asking for folks thoughts on whether to ride it out or sell. Treasury is stepping in now for MBS. Does that increase likelihood that we will get whole again over time?
@MikeW- I absolutely wasn't aiming at you or your questions, Mike. I'm just perplexed that the liquidity risk inherent in any financial product containing thinly traded and difficult to price components seems to have been disregarded by seasoned investors of the MFO caliber.
I don't think it was disregarded. But its happening across the entire bond and stock markets. Its really more systemic risk which is why the Fed is stepping in now.
In fairness OJ the whole bond market has been pretty well trashed and I for one didn't think mortgage-backed bonds would be hit that hard or that fast. Sure a few issues/issuers here or there but not all of them or all at once. Guess I was wrong.
I sold my remaining shares of IOFAX today. It was very helpful to listen to everyone's comments, so thanks from me to you.
My rational was, 1 of 3 things could happen going forward: 1- the Treasury announcing it would step in and buy some of these assets might keep the fund afloat. 2- the fund has more sellers than it can return money too, like me, and continues it's bolder slide down hill, to what, zero? . 3- I could sell, lick my wounds and put that money to work into something else, something more reliable over time (though reliable may be a relative term now).
I chose #3.
I do remember Junkster getting out of this fund before he left us. I believe it was because these securities were so thinly traded. I certainly didn't comprehend what he was saying or the risk involved at the time. I figured at worst the fund would drift down, but not fall off a cliff. Financial lesson # 1028 - learned
Hey, I'm taking the same hit on DSENX. Only had a couple of k there, so no big deal, but still down 1/3.
As I've mentioned elsewhere, about a year ago I went to roughly 95% cash, because I figured that at 80 it was time to quit playing. But I kept a vestigial amount, roughly 2k, in most of the accounts. So I can see the total carnage- almost everything is down by 1/3. I'm no genius either.
Another 14% down today, which is slightly better than I feared.
@Old_Joe. I agree with you that the topic of liquidity has been written about in our commentary (by Ed) and on the board by many, but I've never seen a fixed-income fund fall so much so fast. So, this seems unprecedented to me.
I remember LTCM collapse. Lived through 2001 collapse. 2008 collapse. Severe drops in FAAFX. LLSCX. DODGX. All took my breath away.
I know of Black Monday 22 Oct 1987.
Seen big drops in JNK and even TLT.
I saw VIX collapse in a day, but that was a pure trading vehicle.
I've seen individuals stock drop 30% in a day and more. AIG, BAC, GE collapses.
I've seen levered-products blow-up.
But this?
Not in my experience.
Even fixed income ETFs, as flawed as they may be, seem to have better pricing than this situation. In fact, it may be that an open ended structure helps create the stampede for the door on these types of products, since you don't have insight into the selling pressure and therefore fear the worst.
Until last week, I'd never experienced anything this sudden and catastrophic in a fixed income product ... but I have now. And it's made me much more wary of the fixed income world.
Comments
I don't watch charts daily where I make my decisions. I do see prices daily because every night around 6:30-7 PM I see my total portfolio updates (Both Fidelity and Schwab allow you to aggregate all funds/accounts from several brokers.
Once a week write down my favorite funds for several categories which is around 30 funds. The rest of the time, I'm just watching and since investing is my passion for decades I read, watch, listen daily.
I may hold funds for weeks and months and sometimes years. Since 2000 I have my system of best risk/reward funds. It goes like this, identity best rusk/reward funds, select the top 3-5 funds and keep switching within this list. It's more complicated than that but that's the basics.
Example: I held PIMIX from 2010 to 2018, it did so well I couldn't find anything better.
Then, I retired and have enough, so now I mainly investing in bond funds and several times annually trade stock/ETF/CEF/whatever when I see a great trade.
Example: PCI is one of the best CEFs (managed by the PIMIX team and where Ivascyn has most of his money). I don't like CEFs volatility which can be much higher. Last Wed I traded it for around 30 minutes and made 5%, see (link) and the last post
When markets are unreasonable with a screaming value I may buy for short term to make a quick trade.
When I see that bonds+stocks don't make sense + very high VIX + panic I sell everything.
My main 4 goals are:
1) We need to make just 4.5% annually to cover LT costs+inflation for our portfolio to last for 4-5 decades.
2) I still want to make at least 6% annually with the lowest Standard Deviation (under 3) and without ever losing 3% from any last top and be positive annually. I no longer care to maximize performance but to keep our standard of living
3) Use mainly bonds OEFs with the flexibility to trade more often by using momentum and trends
4) May use sometimes faster trades of other funds(stocks,CEFs, gold and more).
But, I made 2 short-term trades. The last trade was on March 18 for about 30 minutes.
https://bloomberg.com/news/articles/2020-03-23/mortgage-bond-sales-flood-market-amid-pleas-for-help-from-u-s
And the beat goes on.......................
Curioser and curioser.
All this bond stuff seems full of more . . . excitement I suppose . . . than it ought to. I thought they were supposed to be boring.
Since these bonds probably sell "by appointment" and I think by phone anybody they called knew they were in trouble and offered low ball prices seeing if they would bite. They had not choice
Once they sold at those low ball levels, there is a price and more of the portfolio gets "marked to market" and the NAV is automatically that much lower, even if the bonds in the fund are really worth much more.
With corporate bonds that mature, like in ZEOIX, the mangers will tell you just to hang on and bonds that mature will mature at par in a few months or so, raising the NAV by that much. I don't know the duration of IOFIX, but if the mortgages mature in 10 to 15 years it will be a long time before they hit "par". Many homeowners may also have enough equity to refinance but that would be a redemption at par and would just reduce the interest payment. but "raise" the NAV.
https://www.sec.gov/Archives/edgar/data/1355064/000158064220001282/alphacentric497s.htm
Derf
It's a bit disconcerting that investors with the knowledge and experience of most of us here on MFO are surprised at any of this.
I'm hoping for the best of luck for everyone.
My rational was, 1 of 3 things could happen going forward:
1- the Treasury announcing it would step in and buy some of these assets might keep the fund afloat.
2- the fund has more sellers than it can return money too, like me, and continues it's bolder slide down hill, to what, zero? .
3- I could sell, lick my wounds and put that money to work into something else, something more reliable over time (though reliable may be a relative term now).
I chose #3.
I do remember Junkster getting out of this fund before he left us. I believe it was because these securities were so thinly traded. I certainly didn't comprehend what he was saying or the risk involved at the time. I figured at worst the fund would drift down, but not fall off a cliff. Financial lesson # 1028 - learned
As I've mentioned elsewhere, about a year ago I went to roughly 95% cash, because I figured that at 80 it was time to quit playing. But I kept a vestigial amount, roughly 2k, in most of the accounts. So I can see the total carnage- almost everything is down by 1/3. I'm no genius either.
@Old_Joe. I agree with you that the topic of liquidity has been written about in our commentary (by Ed) and on the board by many, but I've never seen a fixed-income fund fall so much so fast. So, this seems unprecedented to me.
I remember LTCM collapse. Lived through 2001 collapse. 2008 collapse. Severe drops in FAAFX. LLSCX. DODGX. All took my breath away.
I know of Black Monday 22 Oct 1987.
Seen big drops in JNK and even TLT.
I saw VIX collapse in a day, but that was a pure trading vehicle.
I've seen individuals stock drop 30% in a day and more. AIG, BAC, GE collapses.
I've seen levered-products blow-up.
But this?
Not in my experience.
Even fixed income ETFs, as flawed as they may be, seem to have better pricing than this situation. In fact, it may be that an open ended structure helps create the stampede for the door on these types of products, since you don't have insight into the selling pressure and therefore fear the worst.
Until last week, I'd never experienced anything this sudden and catastrophic in a fixed income product ... but I have now. And it's made me much more wary of the fixed income world.