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I bought a very small taxable position with the agent. One problem seems to be lack of availability with a lot of brokerages. As you pointed out, it has a short track record.
Website is somewhat simple so it probably doesn't catch one's eye.
Thanks, Shadow. I am purchasing via Vanguard ($20 TF), which is the only brokerage I know of that offers STATX.
It almost seems like it could be just a 1 man show over there, based out of a suite in Las Vegas. Not sure if that perception is true. Just seems like a very small shop and the returns are sooooo smooth. It ticks up beautifully.
If the returns were a bit higher, I'd be thinking "Bernie Madoff" scheme.
Taking a closer look at this now than I did in the last thread, and I'm wondering how far off you are with that "Bernie" comment.
The strategy has echoes of RPHYX's - buying "orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers."
In the case of RPHYX, the remnants are short term junk bonds that the fund manager believes have little risk of default. In contrast, STATX is picking up short term Treasuries (with presumably even less risk of default).
While both funds may be picking up coins from the sidewalk (bonds that aren't being bought by other investors), ISTM that RPHYX is picking up nickels and STATX is picking up pennies.
So how does STATX generate an SEC yield a full percentage point higher than RPHIX's, even allowing for its 1/2 percent lower fees? Especially since it is investing in higher grade bonds, slightly shorter average maturity (1.0 vs. 1.1 years), and lower duration (0.01 vs. 0.55 years)?
The only thing I see is the use of reverse repurchasing agreements, which as the prospectus states, has "a leveraging effect on the Fund’s NAV".
Link to STATX (State Funds Enhanced Ultra Short Duration Fund) Fact Sheet.
Wish I understood a bit more about the leveraging effect via lending (reverse repos) and how much that contributes to the returns. They do offer a nifty little video at their site.
Not sure why they pay out divys 2x per month. Treasuries don't pay interest, correct? You buy at a discount. But I guess they churn with those repos and collect fees.
*Fund receives securities lending collateral which is limited to (i) 102% cash or (ii) 102% - 115% US Government Securities.
* Fund lends its 3 Month Treasury bills and receives a lending fee which is paid to the fund and distributed as a dividend to investors.
Maybe this is a fund that only works if the AUM stay small and they can pick off those "pennies and nickels"?
The telephone number on the website seems to be to the actual office of the fund rather than the transfer agent's office.
There was a post on M* (under "Bond Squad" with STATX) that resonates the same sentiment about the telephone number to Las Vegas and how the inquiry was handled.
The Fund distributes substantially all of its net investment income to shareholders in the form of dividends. The Fund intends to declare and distribute income dividends every two weeks to shareholders of record. In addition, the Fund distributes any net capital gains it earns from the sale of portfolio securities to shareholders no less frequently than annually. Net short-term capital gains may be paid more frequently. Dividend payments are made through DTC participants and indirect participants to beneficial owners then of record with proceeds received from the Fund.
@TheShadow: Did you have to call the agent in order to get an application? I don't see anything on the fund's web site about how to invest or any forms to download.
I'm trying hard to convince myself this fund is legit.
Thinking maybe they limit access to STATX because the market is so limited that they would lose the ability to make money if it grows too large. AUM max of $400M-$500M is probably ideal.
I wonder if Vanguard does any DD before they add such funds to their offerings.
What sort of diligence do you feel is due? I'm not suggesting that brokerages have no responsibilities, but rather wondering how you feel Vanguard might not have satisfied them.
Vanguard is facilitating the sale of an SEC-registered security, as opposed to introducing you to a service provider. I'm confident that Vanguard checks that each security is registered for sale in your state before making it available for you to purchase. What else should Vanguard do before selling STATX?
Compare the sale of this security (which is an ultrashort AAA bond fund) with how Vanguard handles other securities:
Vanguard has few qualms about selling SHLDQ. Though unlike, say, Fidelity, Vanguard does require one to buy it using a limit order, since it's an OTC stock.
Vanguard (for the next few hours) will still sell you what it calls a leveraged fund such as DXSSX. It blithely lets you go ahead and purchase it, with nothing but a notice that the fund is leveraged/risky. Fidelity, in contrast, requires you to sign an agreement that you recognize the risk in making some trades and that you are a sophisticated investor.
Should Vanguard make an independent determination that STATX is a risky investment and offer a similar warning? If so, then do do brokerages have an obligation to research each fund and stock that they offer to see how the underlying companies conduct their business?
We already know how Vanguard is dealing with risky (leveraged) funds. As of the end of today, it won't be offering them. But it's doing that categorically, not based on fund-by-fund diligent research.
I too have concerns about STATX. I regard that as my responsibility to research.
Before jumping back into junk bond funds at the end of December I was 100% in a Fidelity money market fund. I would had no qualms whatsoever having all that in STATX were it available to me at T D Ameritrade. Kind of reminds me of IOFIX in early 2017 in its trend persistence. Many refused to invest in IOFIX then because they didn’t understand its mandate and portfolio of toxic debt.
If you have concerns, you can always start with a very small position and see how it progresses over time before making a significant investment.
I am sure others have had concerns with an investment in a mutual fund. The fund is registered with the SEC, it does have other investors and it has $91MM in AUM.
Think about when Bridgeway Funds first started. The manager, John Montgomery, was not a household name. Bridgeway had no prior track record. Investors took a chance on an unknown. Investors were rewarded initially.
Keep in mind, it is hard for a new mutual fund to gather assets if it doesn't market itself. You probably learned about the fund either through this Board or M*.
Even older funds may not gather many assets if they don't market themselves. See BRUFX - 35 years old, $500M, not available through any brokerage. (But it does offer an HSA - talk about a stealth product!)
Here are some additional clarifying facts that appear on the fund’s website that provide an answer to your question:
The Fund creates a higher return by conducting Securities lending, Repurchase & Reverse Repurchase agreements ; this clarification appears in the fund fact sheet: http://www.tbil.co/wp-content/uploads/2019/01/Mutual-Fund-Fund-Fact-Sheet-Final-01.11.19.pdf , it states in the Investment Approach part: “IN ORDER TO INCREASE INCOME, the fund is permitted to enter into fixed/variable interest rate Securities lending, Repurchase & Reverse Repurchase agreements”.
Additionally, in the fund’s website, under the ARTICLES Tab ( http://www.tbil.co/articles/ ), you have a lot of info about the Repo market (the market in which you trade Repurchase agreements and Reverse Repurchase agreements), those articles are from sources such as Bloomberg, Risk Magazine and Securities Lending Times are very interesting since they show that Mutual Funds are ETFs are slowly entering into these markets in order to earn better returns, here are two examples of those articles from the Fund’s ARTICLES Tab ( http://www.tbil.co/articles/ ):
If you look at the fund’s fact sheet, you can also see that the fund’s major holdings is a blended portfolio of US treasuries & Reverse Repo transactions which jointly earned a net return of between 3.5% - 4.00% annually since the fund earns for example 7.5% on its Reverse Repo trades and 2.4% on its treasury bills; all the manager needs to do is to daily adjust the composition of the allocation between those holdings to create a blended return of 3.5%-4.00% annually.
That good return also acts as a cushion that absorbs the low price volatility of US treasury bills which the fund holds therefore, created a nice steady increase in value of the fund of about 1 cent per day which over 365 days accumulates to $3.65 annually which is 3.65% per every $100 which is the price of each fund unit.
(I agree with you that 2.4% is a reasonable guesstimate for 3 mo. Treasuries; I just picked up some at that rate.)
A minor point, but one needs a 9% return on the reverse repos to achieve the 4.36% gross return from the fact sheet.
Either I don't understand repurchase agreements, or the descriptions in the fund docs are weird. If the latter is true, is it something that should give anyone pause. If the former is true, then I should still personally decline to invest, as I don't believe in investing in things I don't fundamentally understand.
My understanding of a repurchase agreement is that the owner of a security, in need of cash, temporarily sells a security for the cash along with making an agreement to repurchase the security at a higher value. Typically overnight. A transaction equivalent to a collateralized loan, and a net cost to the borrower. That is, the borrowing side sells the security, to be repurchased later.
From the other party's perspective, it is a lender of cash, the buyer of a security, to be sold later with the higher sale price treated as imputed interest. That's a reverse repo.
For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement (RP) or repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement (RRP) or reverse repo.
The reason I'm making such a big deal over this is that the fact sheet says that "the fund purchases securities as either lender or borrower with the agreement to sell them at a higher price". It's saying that whether the fund is a borrower (repurchase agreement) or a lender (reverse repo), the fund first buys and then sells. That contradicts my description of a repo (sell first, then buy), as well as Investopedia's.
This matters because it is claiming that in both repos and reverse repos, it makes money by buying the security and reselling it at a higher amount. Both sides of an agreement can't be buying first.
Let's look at the prospectus. Under risks of a reverse repo (p. 6), it describes a transaction where it first sells the security (one risk is being unable to timely repurchase "the securities sold by the fund.") I think it has got repos and reverse repos backward in the risk sections, but my point here is that one of them involves the fund selling first, then repurchasing, again contradicting the fact sheet's wording.
You write about the cash flow as reducing volatility. What the prospectus says: "Leverage Risk: Leverage risk is the risk that certain transactions of the Fund, including the Fund’s use of reverse repurchase agreements, will give rise to leverage, causing the Fund’s shares to be more volatile than if they had not been leveraged."
Let's stop right there. This fund is 30% in reverse repos, which it describes as leverage. Short term (overnight) or not, a 30% leveraged fund is not my idea of a low risk fund.
Reading on in the prospectus, we finally get to a full paragraph where it explains how it uses the term "reverse repurchase agreement":
In a typical reverse repurchase agreement, the Fund enters into a contract with a counterparty under which (i) the Fund sells securities for cash or cash equivalents to the counterparty, and (ii) the Fund agrees to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements provide the Fund with a source of liquidity that can be invested elsewhere for no more than six days and/or earn income at either fixed or floating (variable) interest rates and fees. While a reverse repurchase agreement has legal characteristics of both a sale and a secured transaction, economically it functions as a loan from the counterparty to the Fund, in which the securities purchased by the counterparty serve as collateral for the loan.
So it seems that rather than generating income (as the fact sheet states) by selling back securities at a higher price, reverse repos actually incur borrowing costs for the cash the fund gets. Then how does it make money?
The correct way to answer this question is to say that it invests the cash in something that pays a higher rate than its borrowing cost. That is, after all, a conventional way of making money with borrowed cash. See, e.g. this document describing government uses of reverse repos (two basic uses - meeting short term cash flow needs, and investing in higher-yielding instruments). http://www.gfoa.org/ensuring-safety-reverse-repurchase-agreements
Instead, here's how the fund says it makes money on this borrowed cash (from the June 30, 2018 semiannual report):
There are many existing examples that borrowers earn profit in spite of their borrowing activity for example: Banks borrow money via selling deposits and then charging high fees for additional activities related to the deposit including they charging high fees for allowing deposit buyer (the bank’s lender) to make payments (incoming and outgoing) from and to the deposit therefore, the bank actually profits a lot more than the cost it pays for the borrowing since the added commissions turn the borrowing activity into a profitable activity. In the Fund’s case, the fund charges additional fees that turn its borrowing activity into profits by charging fees for allowing its counterparties to substitute the proceeds (collateral) it receives for reasons such as substituting collateral durations.
The fees the fund is charging aren't the 7.5% that you suggested, nor the 9% that I came up with. The semiannual statement reports that the fund is charging a 13.0% "fee rate", at least if I'm reading this part of the statement correctly.
When I see 13% being charged to counterparties for what sounds like "allowing" them to serve as the counterparty in a repurchase agreement (i.e. purchase short term Treasuries so that these securities show on their books overnight), I really wonder about the safety of these agreements.
Maybe I've read most of this wrong - I'm just picking it up as I go along. If so, as I said at the top, that just means I personally don't understand enough to invest in this. At the very least, it suggests looking deeper into the counterparties for these agreements, which amount to 30% of the assets of the fund.
I just did a fast search on the first of the two counterparties, Institutional Syndication LLC. It turns out that the other counterparty, North American Liquidity Resources LLC is the same compny, renamed. Quickly too, since the company was just organized in 2017.
The executive officer is no longer registered as an investment adviser representative, but had worked (from 1/2015 to 11/2016) at New York Alaska ETF, which you may recognize as the management company of STATX. https://adviserinfo.sec.gov/Individual/4522455 (click on detailed report pdf link for full report)
None of this is intended to imply that there is anything improper with the reverse repos. It's just the information that came up when I searched on these companies and officer.
As the name of the counterparties clearly states these are SYNDICATIONS which the Fund can participates in as either a borrower in order to REMOVES liquidity or PROVIDES liquidity into these syndications.
The REMOVE LIQUIDITY and ADD LIQUIDITY activity was created by the stock exchanges, liquidity is not about adding or removing cash but rather enabling a bank that makes a market with REMOVING OR ADDING OF SECURITIES INVENTORY to match the bank’s customer trading flow.
This activity is being done in both the equities market and treasury market, here is an example:
From NASDAQ’s first paragraph on its website: “Nasdaq BX (BX) is a Reg NMS protected quote featuring a price/time priority market structure and popular trading functionality. WITH A REBATE TO REMOVE LIQUIDITY, BX offers attractive economics for liquidity takers. This pricing structure creates opportunities for adders of liquidity as well, providing a way to maximize execution possibilities”
The same is now happening with Treasuries, not just equities and since treasuries are not exchange traded (meaning, there is no central book aggregating all Add & remove liquidity orders) you have to use Syndications that can provide Add or Remove liquidity for treasury market makers that need treasury inventory to match their order flow. Additionally, all syndications have a trustee which is why the fund should want to have its former deputy compliance officer on site, this way, all rules and compliance matters are upheld, you must have compliance experienced people, you can’t use just a regular trust company
Yes, I have invested in this fund and before I did I called up the fund, asked them questions and they explained it all to me and gave me a lot of info on this Repo and Securities lending industry
For example:
iShares, which is one of the biggest fund managers in the world, actually does the same thing that they do under the fund symbol:”SHV” (and StateStreet does it under : “BIL”) but the majority of the enhanced returns that they generate go to IShares and StateStreet following the 2013 victoy iShares had against two pension funds that sued them for taking those profits, read this article:
"As the name of the counterparties clearly states these are SYNDICATIONS"
Minor item first, I guess. A SYNDICATE is a group acting together for a purpose; in the financial arena that's often a group of lenders coordinating a sizeable loan, or a group of actors facilitating (underwriting) the new issue of a security. In this context, SYNDICATEs are generally temporary (unlike the LLC here). https://financial-dictionary.thefreedictionary.com/syndicate
In contrast, a SYNDICATION is the act of forming a SYNDICATE, or (often in the media context) an act of distributing (selling) something (such as a news column) to multiple buyers (who are not themselves a SYNDICATE). https://www.merriam-webster.com/dictionary/syndication
King Features Syndicate is a SYNDICATION company in the business of putting out content in SYNDICATION. Just as Zeitgeist Films is a distribution company that is in the film distribution business. "Syndication", "distribution", these are attributive nouns; as used, they're not standalone nouns.
You might have been thinking about SYNDICATE desks, though there's no mention of "desk" in the company names.
Really, though, if we're going to read stuff into names, what should we make of the management company New York Alaska ETF Management LLC? This company has never managed an ETF.
In the meantime (mid 2016), it proposed offering essentially a clone in open end form, called "1-3 Month Enhanced Short Duration Fund". It wanted to use the ticker BILLX, but the SEC felt that this sounded like a MMF. Ultimately this evolved into what you know and love as the "Enhanced Ultra Short Duration Mutual Fund", STATX.
" I called up the fund, asked them questions and they explained it all to me and gave me a lot of info on this Repo and Securities lending industry. ... iShares, which is one of the biggest fund managers in the world, actually does the same thing ... [see] [a link to an article on securities lending]"
This may be the most disconcerting statement so far. The fund is conflating reverse repurchase agreements with securities lending.
While they look very similar, they're quite different. I'll try to illustrate with an analogy.
I own a house. I give you use of the house for a fee. (In real estate terms, I'd be leasing it to you.) You can use the house as you wish (e.g. sublease it), so long as you pay me the rental fee and return it to me as we agree upon.
I own a house. I need cash, so I turn it over to a third party as collateral (via a deed of trust), you give me cash, and I sign a promissory note that says I'll pay you back with interest. This use of third party trustee and promissory note is the way "mortgages" are effected in many western states.
Notice that either way, you get the house, I get cash to use. In the first, I'm "lending" you the use of the house and making a profit on the rent. In the second, I'm borrowing money and putting up the house as collateral. You're the one making the money here.
I own some securities. I give you the use of those securities (lending them to you, perhaps so that you can sell them short, who knows?). You pay me "rent" for the use of the securities. That's what iShares does, that's what most funds do to make money. It's how Vanguard sometimes manages to beat the indexes it's tracking, in spite of its expenses. We're talking relatively small amounts here (i.e. barely enough to cover index funds' costs).
I own some securities. I need cash. I sell sell them to you (effectively giving you collateral for the money you "lend" me). We make an agreement that I will give you back the cash with interest (i.e. repurchase the securities for a higher price) at an agreed upon time. What we've made is a repurchase agreement.
Notice that either way, you get the securities, I get the cash to use. In the first, I'm lending you the use of the securities and making a profit on the "rent". In the second, I'm effectively borrowing money and putting up the securities as collateral. You're the one making money here.
Two very different arrangements despite superficial similarities. The fact that you were told that these are the same I find quite disturbing. I begin to understand how Mona could have been told that the fund accrues dividends daily.
Here's Vanguard's paper on how it lends securities. A key takeaway is on p. 6 - all the measures that Vanguard takes to minimize risk in these transactions. They include limiting the amount of loans to any one counterparty. I have faith in Barclays as well. What's New York Alaska ETF Managment doing to protect your investment?
1. A syndicate can be a group of borrowers and/or a group of lenders; there is even a loan syndication association which created rules on how to manage a syndication : https://www.lsta.org/
2. Repo, Reverse Repo and Securities lending are ALL very similar in essence, here are the evidences:
"For purposes of this Interpretation, a REVERSE REPURCHASE AGREEMENT (reverse repo) refers to a transaction that is accounted for as a collateralized lending in which a buyer-lender buys securities with an agreement to resell them to the seller-borrower at a stated price plus interest at a specified date or in specified circumstances. The “receivable” under a reverse repurchase agreement refers to the amount due from the seller-borrower for the repurchase of the securities from the buyer-lender. IN CERTAIN INDUSTRIES, THE TERMINOLOGY IN REVERSED; THAT IS, ENTITIES IN THOSE INDUSTRIES REFFER TO THIS TYPE OF AGREEMENT AS REPO".
Those legal agreements and the legal opinions supporting them are the protections that all of the industry uses, including the fund, this is a standardized market in which everyone uses the same legal agreements therefore everyone has the same legal protections no matter the size of the entity.
If you feel more comfortable with a brand name you should go over there, this discussion is interesting but no one is trying to make anyone invest in this fund.
1. A syndicate can be a group of borrowers and/or a group of lenders; there is even a loan syndication association which created rules on how to manage a syndication : https://www.lsta.org/
Of course a syndicate can bring together lenders and/or borrowers. I never said otherwise. Though most likely there would be a syndicate of borrowers and a syndicate of lenders, but not a single syndicate comprised of "a group of borrowers and/or a group of lenders."
What I did say is that syndication is an action. So "rules on how to manage a syndication" would be rules on how to manage the process of syndicating a loan.
"For purposes of this Interpretation, a REVERSE REPURCHASE AGREEMENT (reverse repo) refers to a transaction that is accounted for as a collateralized lending in which a buyer-lender buys securities with an agreement to resell them to the seller-borrower at a stated price plus interest at a specified date or in specified circumstances. The “receivable” under a reverse repurchase agreement refers to the amount due from the seller-borrower for the repurchase of the securities from the buyer-lender. IN CERTAIN INDUSTRIES, THE TERMINOLOGY IN REVERSED; THAT IS, ENTITIES IN THOSE INDUSTRIES REFFER TO THIS TYPE OF AGREEMENT AS REPO".
Sure, in a repurchase agreement one side sells, one side buys. One side calls it a repo and the other side a reverse repo. Maybe these terms get reversed. But one side always "buys securities with an agreement to resell them" to the other side.
Nowhere is there mention of a loan of securities absent a sale, though as the note indicates, the mechanics/accounting look like a collateralized loan. Which is why I previously analogized it to a "mortgage". (Closer mechanically to a deed of trust and promissory note.)
Certainly as far as mechanics go, there's little difference between selling something with an agreement to repurchase, and lending something (so long as one grants all rights inherent in ownership). Though the master loan agreement draws a distinction between the treatment of government securities (clearly relevant here) and other securities, while the master repo agreement does not.
Where they part is precisely in essence. The motivation, or essence if you will, of a securities loan is the interest of the borrower in possessing the security temporarily. That is, the borrower in this transaction is the one taking possession of the security (and giving collateral).
The motivation of a repo agreement is found in the seller who wants cash temporarily. That is, the effective borrower in this transaction is the one getting cash by giving up possession of the security (which serves as collateral - see your FIN-41 note 2 above).
Borrower is the one wanting something; borrower pays.
If you feel more comfortable with a brand name you should go over there, this discussion is interesting but no one is trying to make anyone invest in this fund.
It's not that I'm more comfortable with brand names; I often seek out boutiques. Rather it is that I'm less comfortable with this specific fund.
To make me comfortable with a fund that is newly formed, that uses a management company that has never managed a fund before and couldn't launch an ETF, that employs a manager who has never managed a fund before, it's going to take more than a one year record built on leverage. Especially when 30% of assets are at risk with a single counterparty with even less history.
Seafarer this ain't. Though to mirror your comment, no one is trying to make anyone divest of this fund.
Yes, I have invested in this fund and before I did I called up the fund, asked them questions and they explained it all to me and gave me a lot of info on this Repo and Securities lending industry
The advisor, New York Alaska ETF Management, seems to have two employees, offices on the third floor of a nice though anonymous Las Vegas building (5550 Painted Mirage Rd) and about $90 million in assets. The founder's, Ofer Abarbanel, Linked In profile identifies him as "Founder, Prime Brokerage Ltd, Aug 2000 – Present. Contact Prime Brokerage Ltd is Israel's No.1 ranked Non-Bank Secured Credit Brokerage firm which specializes in Securities Lending, Covered Bonds, TRS, CDS and Repo transactions."
The manager, Nicholas Abbate, "has significant experience in capital markets [through] various roles at Knight Capital Group," but extensively as "a market maker in NASDAQ securities and Over the Counter Bulletin Board (OTCBB)/OTC Pink Securities in various sectors." He left KCG in 2010 and, for four years, was an independent real estate investor and developer.
As I charted STATX against RPHYX, ZEOIX and MINT, I noted a supernatural steadiness to its returns. It has returned 6.5% since inception, over the same period the others have returns something in the 3.5 - 5.5% range.
No opinion or recommendation, just a bit of additional data.
As I charted STATX against RPHYX, ZEOIX and MINT, I noted a supernatural steadiness to its returns. It has returned 6.5% since inception, over the same period the others have returns something in the 3.5 - 5.5% range.
David
Yes, its that "supernatural steadiness" that really caught my eye. How do these guys manage to pull off what no other MF can?
Comments
Website is somewhat simple so it probably doesn't catch one's eye.
Has nearly $100MM in assets.
https://www.mutualfundobserver.com/discuss/discussion/46465/state-funds-enhanced-ultra-short-duration-mutual-fund-statx
It almost seems like it could be just a 1 man show over there, based out of a suite in Las Vegas. Not sure if that perception is true. Just seems like a very small shop and the returns are sooooo smooth. It ticks up beautifully.
If the returns were a bit higher, I'd be thinking "Bernie Madoff" scheme.
The strategy has echoes of RPHYX's - buying "orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers."
[Than you Professor for Riverpark's fund profile: https://www.mutualfundobserver.com/2012/09/riverpark-short-term-high-yield-fund-rphyx-july-2011-updated-october-2012/]
In the case of RPHYX, the remnants are short term junk bonds that the fund manager believes have little risk of default. In contrast, STATX is picking up short term Treasuries (with presumably even less risk of default).
While both funds may be picking up coins from the sidewalk (bonds that aren't being bought by other investors), ISTM that RPHYX is picking up nickels and STATX is picking up pennies.
So how does STATX generate an SEC yield a full percentage point higher than RPHIX's, even allowing for its 1/2 percent lower fees? Especially since it is investing in higher grade bonds, slightly shorter average maturity (1.0 vs. 1.1 years), and lower duration (0.01 vs. 0.55 years)?
The only thing I see is the use of reverse repurchasing agreements, which as the prospectus states, has "a leveraging effect on the Fund’s NAV".
Link to STATX (State Funds Enhanced Ultra Short Duration Fund) Fact Sheet.
Wish I understood a bit more about the leveraging effect via lending (reverse repos) and how much that contributes to the returns. They do offer a nifty little video at their site.
Not sure why they pay out divys 2x per month. Treasuries don't pay interest, correct? You buy at a discount. But I guess they churn with those repos and collect fees.
*Fund receives securities lending collateral which is limited to (i) 102% cash or (ii)
102% - 115% US Government Securities.
* Fund lends its 3 Month Treasury bills and receives a lending fee which is paid to the
fund and distributed as a dividend to investors.
Maybe this is a fund that only works if the AUM stay small and they can pick off those "pennies and nickels"?
The telephone number on the website seems to be to the actual office of the fund rather than the transfer agent's office.
There was a post on M* (under "Bond Squad" with STATX) that resonates the same sentiment about the telephone number to Las Vegas and how the inquiry was handled.
Here is the link to M* discussion on STATX:
http://socialize.morningstar.com/NewSocialize/forums/p/385173/3953084.aspx
M* listed VG as the only brokerage to trade STATX.
I believe the prospectus mentioned something about paying dividends at least twice a month:
https://www.sec.gov/Archives/edgar/data/1679960/000116204418000223/state485bpos201803.htm
FUND DISTRIBUTIONS
The Fund distributes substantially all of its net investment income to shareholders in the form of dividends. The Fund intends to declare and distribute income dividends every two weeks to shareholders of record. In addition, the Fund distributes any net capital gains it earns from the sale of portfolio securities to shareholders no less frequently than annually. Net short-term capital gains may be paid more frequently. Dividend payments are made through DTC participants and indirect participants to beneficial owners then of record with proceeds received from the Fund.
I called the transfer agent;the telephone number is:
(440) 922-0066 ext. 123 (that is a direct line to Steven Milcinovic at Mutual Shareholder Services LLC).
He actually emailed me the applications.
Thinking maybe they limit access to STATX because the market is so limited that they would lose the ability to make money if it grows too large. AUM max of $400M-$500M is probably ideal.
I wonder if Vanguard does any DD before they add such funds to their offerings.
Vanguard is facilitating the sale of an SEC-registered security, as opposed to introducing you to a service provider. I'm confident that Vanguard checks that each security is registered for sale in your state before making it available for you to purchase. What else should Vanguard do before selling STATX?
Compare the sale of this security (which is an ultrashort AAA bond fund) with how Vanguard handles other securities:
Vanguard has few qualms about selling SHLDQ. Though unlike, say, Fidelity, Vanguard does require one to buy it using a limit order, since it's an OTC stock.
Vanguard (for the next few hours) will still sell you what it calls a leveraged fund such as DXSSX. It blithely lets you go ahead and purchase it, with nothing but a notice that the fund is leveraged/risky. Fidelity, in contrast, requires you to sign an agreement that you recognize the risk in making some trades and that you are a sophisticated investor.
Should Vanguard make an independent determination that STATX is a risky investment and offer a similar warning? If so, then do do brokerages have an obligation to research each fund and stock that they offer to see how the underlying companies conduct their business?
We already know how Vanguard is dealing with risky (leveraged) funds. As of the end of today, it won't be offering them. But it's doing that categorically, not based on fund-by-fund diligent research.
I too have concerns about STATX. I regard that as my responsibility to research.
If you have concerns, you can always start with a very small position and see how it progresses over time before making a significant investment.
I am sure others have had concerns with an investment in a mutual fund. The fund is registered with the SEC, it does have other investors and it has $91MM in AUM.
Think about when Bridgeway Funds first started. The manager, John Montgomery, was not a household name. Bridgeway had no prior track record. Investors took a chance on an unknown. Investors were rewarded initially.
Keep in mind, it is hard for a new mutual fund to gather assets if it doesn't market itself. You probably learned about the fund either through this Board or M*.
I'll go with a 10% allocation for now, and build from there.
The Fund creates a higher return by conducting Securities lending, Repurchase & Reverse Repurchase agreements ; this clarification appears in the fund fact sheet: http://www.tbil.co/wp-content/uploads/2019/01/Mutual-Fund-Fund-Fact-Sheet-Final-01.11.19.pdf , it states in the Investment Approach part: “IN ORDER TO INCREASE INCOME, the fund is permitted to enter into fixed/variable interest rate Securities lending, Repurchase & Reverse Repurchase agreements”.
Additionally, in the fund’s website, under the ARTICLES Tab ( http://www.tbil.co/articles/ ), you have a lot of info about the Repo market (the market in which you trade Repurchase agreements and Reverse Repurchase agreements), those articles are from sources such as Bloomberg, Risk Magazine and Securities Lending Times are very interesting since they show that Mutual Funds are ETFs are slowly entering into these markets in order to earn better returns, here are two examples of those articles from the Fund’s ARTICLES Tab ( http://www.tbil.co/articles/ ):
ETFs OFFERING TASTY SEC LENDING RETURNS:
http://www.securitieslendingtimes.com/securitieslendingnews/article.php?article_id=220699#.V4e3fcLfOHu
REPO RATE HITS 7.25% ON YEAR-END VOLATILITY:
https://www.risk.net/derivatives/6263606/repo-rate-hits-725-on-year-end-volatility?utm_medium=email&utm_campaign=RN.Derivatives.RL.EU.A.U&utm_source=RN.DCM.Editors_Updates&im_amfcid=2376027&im_amfmdf=150a592b1a6f2ca496ab241b389d87b9
If you look at the fund’s fact sheet, you can also see that the fund’s major holdings is a blended portfolio of US treasuries & Reverse Repo transactions which jointly earned a net return of between 3.5% - 4.00% annually since the fund earns for example 7.5% on its Reverse Repo trades and 2.4% on its treasury bills; all the manager needs to do is to daily adjust the composition of the allocation between those holdings to create a blended return of 3.5%-4.00% annually.
That good return also acts as a cushion that absorbs the low price volatility of US treasury bills which the fund holds therefore, created a nice steady increase in value of the fund of about 1 cent per day which over 365 days accumulates to $3.65 annually which is 3.65% per every $100 which is the price of each fund unit.
From fact sheet: 0.40% ER + 3.96% yield = 4.36% gross return
70% Treasuries @ 2.4% + 30% @ 7.5% = 3.93%
(I agree with you that 2.4% is a reasonable guesstimate for 3 mo. Treasuries; I just picked up some at that rate.)
A minor point, but one needs a 9% return on the reverse repos to achieve the 4.36% gross return from the fact sheet.
Either I don't understand repurchase agreements, or the descriptions in the fund docs are weird. If the latter is true, is it something that should give anyone pause. If the former is true, then I should still personally decline to invest, as I don't believe in investing in things I don't fundamentally understand.
My understanding of a repurchase agreement is that the owner of a security, in need of cash, temporarily sells a security for the cash along with making an agreement to repurchase the security at a higher value. Typically overnight. A transaction equivalent to a collateralized loan, and a net cost to the borrower. That is, the borrowing side sells the security, to be repurchased later.
From the other party's perspective, it is a lender of cash, the buyer of a security, to be sold later with the higher sale price treated as imputed interest. That's a reverse repo.
Here's the best page I've been able to find that explains this (including 1.5 min video):
https://www.investopedia.com/terms/r/reverserepurchaseagreement.asp The reason I'm making such a big deal over this is that the fact sheet says that "the fund purchases securities as either lender or borrower with the agreement to sell them at a higher price". It's saying that whether the fund is a borrower (repurchase agreement) or a lender (reverse repo), the fund first buys and then sells. That contradicts my description of a repo (sell first, then buy), as well as Investopedia's.
This matters because it is claiming that in both repos and reverse repos, it makes money by buying the security and reselling it at a higher amount. Both sides of an agreement can't be buying first.
Let's look at the prospectus. Under risks of a reverse repo (p. 6), it describes a transaction where it first sells the security (one risk is being unable to timely repurchase "the securities sold by the fund.") I think it has got repos and reverse repos backward in the risk sections, but my point here is that one of them involves the fund selling first, then repurchasing, again contradicting the fact sheet's wording.
You write about the cash flow as reducing volatility. What the prospectus says: "Leverage Risk: Leverage risk is the risk that certain transactions of the Fund, including the Fund’s use of reverse repurchase agreements, will give rise to leverage, causing the Fund’s shares to be more volatile than if they had not been leveraged."
Let's stop right there. This fund is 30% in reverse repos, which it describes as leverage. Short term (overnight) or not, a 30% leveraged fund is not my idea of a low risk fund.
Reading on in the prospectus, we finally get to a full paragraph where it explains how it uses the term "reverse repurchase agreement": So it seems that rather than generating income (as the fact sheet states) by selling back securities at a higher price, reverse repos actually incur borrowing costs for the cash the fund gets. Then how does it make money?
The correct way to answer this question is to say that it invests the cash in something that pays a higher rate than its borrowing cost. That is, after all, a conventional way of making money with borrowed cash. See, e.g. this document describing government uses of reverse repos (two basic uses - meeting short term cash flow needs, and investing in higher-yielding instruments).
http://www.gfoa.org/ensuring-safety-reverse-repurchase-agreements
Instead, here's how the fund says it makes money on this borrowed cash (from the June 30, 2018 semiannual report): The fees the fund is charging aren't the 7.5% that you suggested, nor the 9% that I came up with. The semiannual statement reports that the fund is charging a 13.0% "fee rate", at least if I'm reading this part of the statement correctly.
When I see 13% being charged to counterparties for what sounds like "allowing" them to serve as the counterparty in a repurchase agreement (i.e. purchase short term Treasuries so that these securities show on their books overnight), I really wonder about the safety of these agreements.
Maybe I've read most of this wrong - I'm just picking it up as I go along. If so, as I said at the top, that just means I personally don't understand enough to invest in this. At the very least, it suggests looking deeper into the counterparties for these agreements, which amount to 30% of the assets of the fund.
I just did a fast search on the first of the two counterparties, Institutional Syndication LLC. It turns out that the other counterparty, North American Liquidity Resources LLC is the same compny, renamed. Quickly too, since the company was just organized in 2017.
It was formed in 2017 (STATX commenced operations April 13, 2017), organized in Nevada (not unusual, after Delaware, Nevada is a popular place to organize companies), run out of Staten Island, with the same address as that of its executive officer.
https://www.sec.gov/Archives/edgar/data/1721520/000172152017000004/xslFormDX01/primary_doc.xml
The executive officer is no longer registered as an investment adviser representative, but had worked (from 1/2015 to 11/2016) at New York Alaska ETF, which you may recognize as the management company of STATX.
https://adviserinfo.sec.gov/Individual/4522455 (click on detailed report pdf link for full report)
According to this page, he was formerly their Chief Compliance Officer and Chief Investment Officer.
https://relationshipscience.com/person/victor-amadeo-chilelli-jr-194903034
None of this is intended to imply that there is anything improper with the reverse repos. It's just the information that came up when I searched on these companies and officer.
The REMOVE LIQUIDITY and ADD LIQUIDITY activity was created by the stock exchanges, liquidity is not about adding or removing cash but rather enabling a bank that makes a market with REMOVING OR ADDING OF SECURITIES INVENTORY to match the bank’s customer trading flow.
This activity is being done in both the equities market and treasury market, here is an example:
NASDAQ has a “Takers program” that rebates (= PAY A FEE) to participants FOR REMOVING LIQUIDITY, here it is: https://www.nasdaqtrader.com/trader.aspx?id=nasdaq_bx
From NASDAQ’s first paragraph on its website:
“Nasdaq BX (BX) is a Reg NMS protected quote featuring a price/time priority market structure and popular trading functionality. WITH A REBATE TO REMOVE LIQUIDITY, BX offers attractive economics for liquidity takers. This pricing structure creates opportunities for adders of liquidity as well, providing a way to maximize execution possibilities”
The same is now happening with Treasuries, not just equities and since treasuries are not exchange traded (meaning, there is no central book aggregating all Add & remove liquidity orders) you have to use Syndications that can provide Add or Remove liquidity for treasury market makers that need treasury inventory to match their order flow.
Additionally, all syndications have a trustee which is why the fund should want to have its former deputy compliance officer on site, this way, all rules and compliance matters are upheld, you must have compliance experienced people, you can’t use just a regular trust company
Do you (or would you be willing to) own any STATX?
-Joe
For example:
iShares, which is one of the biggest fund managers in the world, actually does the same thing that they do under the fund symbol:”SHV” (and StateStreet does it under : “BIL”) but the majority of the enhanced returns that they generate go to IShares and StateStreet following the 2013 victoy iShares had against two pension funds that sued them for taking those profits, read this article:
http://www.securitieslendingtimes.com/securitieslendingnews/article.php?article_id=218875
Minor item first, I guess. A SYNDICATE is a group acting together for a purpose; in the financial arena that's often a group of lenders coordinating a sizeable loan, or a group of actors facilitating (underwriting) the new issue of a security. In this context, SYNDICATEs are generally temporary (unlike the LLC here).
https://financial-dictionary.thefreedictionary.com/syndicate
In contrast, a SYNDICATION is the act of forming a SYNDICATE, or (often in the media context) an act of distributing (selling) something (such as a news column) to multiple buyers (who are not themselves a SYNDICATE).
https://www.merriam-webster.com/dictionary/syndication
King Features Syndicate is a SYNDICATION company in the business of putting out content in SYNDICATION. Just as Zeitgeist Films is a distribution company that is in the film distribution business. "Syndication", "distribution", these are attributive nouns; as used, they're not standalone nouns.
You might have been thinking about SYNDICATE desks, though there's no mention of "desk" in the company names.
Really, though, if we're going to read stuff into names, what should we make of the management company New York Alaska ETF Management LLC? This company has never managed an ETF.
Though it tried; it filed in 2015 first to manage the "1-3 Month Liquidity Bonds ETF", which later that year was apparently renamed "1-3 Month Enhanced Short Duration ETF". It was to have traded under the ticker TBIL. Apparently it gave up the ghost at the end of 2016; last filing appears to have been 12/26/16.
https://sec.report/CIK/0001627597
In the meantime (mid 2016), it proposed offering essentially a clone in open end form, called "1-3 Month Enhanced Short Duration Fund". It wanted to use the ticker BILLX, but the SEC felt that this sounded like a MMF. Ultimately this evolved into what you know and love as the "Enhanced Ultra Short Duration Mutual Fund", STATX.
" I called up the fund, asked them questions and they explained it all to me and gave me a lot of info on this Repo and Securities lending industry. ... iShares, which is one of the biggest fund managers in the world, actually does the same thing ... [see] [a link to an article on securities lending]"
This may be the most disconcerting statement so far. The fund is conflating reverse repurchase agreements with securities lending.
While they look very similar, they're quite different. I'll try to illustrate with an analogy.
I own a house. I give you use of the house for a fee. (In real estate terms, I'd be leasing it to you.) You can use the house as you wish (e.g. sublease it), so long as you pay me the rental fee and return it to me as we agree upon.
I own a house. I need cash, so I turn it over to a third party as collateral (via a deed of trust), you give me cash, and I sign a promissory note that says I'll pay you back with interest. This use of third party trustee and promissory note is the way "mortgages" are effected in many western states.
Notice that either way, you get the house, I get cash to use. In the first, I'm "lending" you the use of the house and making a profit on the rent. In the second, I'm borrowing money and putting up the house as collateral. You're the one making the money here.
I own some securities. I give you the use of those securities (lending them to you, perhaps so that you can sell them short, who knows?). You pay me "rent" for the use of the securities. That's what iShares does, that's what most funds do to make money. It's how Vanguard sometimes manages to beat the indexes it's tracking, in spite of its expenses. We're talking relatively small amounts here (i.e. barely enough to cover index funds' costs).
I own some securities. I need cash. I sell sell them to you (effectively giving you collateral for the money you "lend" me). We make an agreement that I will give you back the cash with interest (i.e. repurchase the securities for a higher price) at an agreed upon time. What we've made is a repurchase agreement.
Notice that either way, you get the securities, I get the cash to use. In the first, I'm lending you the use of the securities and making a profit on the "rent". In the second, I'm effectively borrowing money and putting up the securities as collateral. You're the one making money here.
Two very different arrangements despite superficial similarities. The fact that you were told that these are the same I find quite disturbing. I begin to understand how Mona could have been told that the fund accrues dividends daily.
Here's Vanguard's paper on how it lends securities. A key takeaway is on p. 6 - all the measures that Vanguard takes to minimize risk in these transactions. They include limiting the amount of loans to any one counterparty. I have faith in Barclays as well. What's New York Alaska ETF Managment doing to protect your investment?
1. A syndicate can be a group of borrowers and/or a group of lenders; there is even a loan syndication association which created rules on how to manage a syndication : https://www.lsta.org/
2. Repo, Reverse Repo and Securities lending are ALL very similar in essence, here are the evidences:
3. Accounting rules which recognize the similarity - The accounting standard board called FASB recognizes that similarity in their FIN 41 clarification, see Note #2 at the bottom of page number FIN41-2: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1175801626916&acceptedDisclaimer=true
"For purposes of this Interpretation, a REVERSE REPURCHASE AGREEMENT (reverse repo) refers to a transaction that is accounted for as a collateralized lending in which a buyer-lender buys securities with an agreement to resell them to the seller-borrower at a stated price plus interest at a specified date or in specified circumstances. The “receivable” under a reverse repurchase agreement refers to the amount due from the seller-borrower for the repurchase of the securities from the buyer-lender. IN CERTAIN INDUSTRIES, THE TERMINOLOGY IN REVERSED; THAT IS, ENTITIES IN THOSE INDUSTRIES REFFER TO THIS TYPE OF AGREEMENT AS REPO".
4. Legal wording of the agreement – all those agreements (Repo, Reverse Repo and Securities lending ) are standardized agreements created by SIFMA and are very similar in their essence : https://www.sifma.org/resources/general/mra-gmra-msla-and-msftas/
Those legal agreements and the legal opinions supporting them are the protections that all of the industry uses, including the fund, this is a standardized market in which everyone uses the same legal agreements therefore everyone has the same legal protections no matter the size of the entity.
If you feel more comfortable with a brand name you should go over there, this discussion is interesting but no one is trying to make anyone invest in this fund.
/ora group of lenders."What I did say is that syndication is an action. So "rules on how to manage a syndication" would be rules on how to manage the process of syndicating a loan. The evidences are somewhat lacking with regard to securities lending. Sure, in a repurchase agreement one side sells, one side buys. One side calls it a repo and the other side a reverse repo. Maybe these terms get reversed. But one side always "buys securities with an agreement to resell them" to the other side.
Nowhere is there mention of a loan of securities absent a sale, though as the note indicates, the mechanics/accounting look like a collateralized loan. Which is why I previously analogized it to a "mortgage". (Closer mechanically to a deed of trust and promissory note.) "Wording" and "essence" are virtually antonyms. One refers for form, the other to substance. "Letter" and "spirit" if you prefer.
The legal wordings of the master repurchase agreement and the master securities loan agreement are structurally very different. So you might want to describe a bit more about the "essence" of these agreements.
Certainly as far as mechanics go, there's little difference between selling something with an agreement to repurchase, and lending something (so long as one grants all rights inherent in ownership). Though the master loan agreement draws a distinction between the treatment of government securities (clearly relevant here) and other securities, while the master repo agreement does not.
Where they part is precisely in essence. The motivation, or essence if you will, of a securities loan is the interest of the borrower in possessing the security temporarily. That is, the borrower in this transaction is the one taking possession of the security (and giving collateral).
The motivation of a repo agreement is found in the seller who wants cash temporarily. That is, the effective borrower in this transaction is the one getting cash by giving up possession of the security (which serves as collateral - see your FIN-41 note 2 above).
Borrower is the one wanting something; borrower pays.
International Capital Markets Association, FAQ #13: What is the difference between repo and securities lending? It's not that I'm more comfortable with brand names; I often seek out boutiques. Rather it is that I'm less comfortable with this specific fund.
To make me comfortable with a fund that is newly formed, that uses a management company that has never managed a fund before and couldn't launch an ETF, that employs a manager who has never managed a fund before, it's going to take more than a one year record built on leverage. Especially when 30% of assets are at risk with a single counterparty with even less history.
Seafarer this ain't. Though to mirror your comment, no one is trying to make anyone divest of this fund.
Who did you speak with?
https://www.sec.gov/Archives/edgar/data/1679960/000116204419000001/state497201901.htm
The manager, Nicholas Abbate, "has significant experience in capital markets [through] various roles at Knight Capital Group," but extensively as "a market maker in NASDAQ securities and Over the Counter Bulletin Board (OTCBB)/OTC Pink Securities in various sectors." He left KCG in 2010 and, for four years, was an independent real estate investor and developer.
As I charted STATX against RPHYX, ZEOIX and MINT, I noted a supernatural steadiness to its returns. It has returned 6.5% since inception, over the same period the others have returns something in the 3.5 - 5.5% range.
No opinion or recommendation, just a bit of additional data.
David
Cash & Equivalents 99.51%
Government 0.49%
How exactly do you get to 6.5% that way?