Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

IOFIX - I guess it works until it doesn't

245

Comments

  • I saw a pretty interesting chart the other day comparing covid-19 with the Spanish flu in terms of market reaction. Nearly identical to this point. With the Spanish flu the market recovered rapidly and well before the virus subsided. If we follow the same pattern now is the time to buy. We may not follow the 2008 model, which was a financial crisis.

    https://www.marketwatch.com/story/market-behavior-a-century-ago-suggests-the-worst-could-be-over-for-stocks-if-not-for-the-coronavirus-pandemic-2020-03-19
  • edited March 2020
    To be honest, I wouldn't be surprised if there are lawsuits over this one because as I've said before pricing of the underlying debt can be so difficult. How was it possible that on March 16th, a day when stocks lost 12% and closed-end funds for the same kind of debt crashed and Mr. Market was saying really non-agencies are worth X, this fund only fell slightly--from 12.88 a share to 12.58--relatively speaking? And then a few days later it falls 17.2% in one day. Anyone who sold the fund on March 16th where it claimed it only fell 2.3% probably got a lot more money than they should have and those who've sold on March 20th when it dropped 17.2%, even though the stock market only fell 5%, probably have gotten a lot less than they should have. Those still in the fund are left holding the bag.
  • And what is the recommendation for those still in the fund ? Hold on or take whatever they can get ?
  • edited March 2020
    The bond market probably does need better pricing mechanisms for lightly traded assets.

    On no further information, I think this turned into a classic run on the bank. I suppose they could attempt to stop redemptions, like Third Avenue did if I recall. Not sure if that option is in prospectus or if even allowed by SEC for an OEF.

    Yes, 38% down is about what the holders of a DODGX are feeling. So much for drawdown avoidance.

    This one really hurts.

    March Madness.

    This fund was so well-behaved for so long, the drop stunned investors (it did me) and they fled. Like investors did with Fairholme. Only this one is so niche, liquidity risk spiked.

    Hang in there?

    That depends on risk tolerance, investment horizon, role this fund plays in your portfolio, and expectations. The latter has been crushed for sure. And since we tend to measure risk by volatility, investors lulled by steady-eddy behavior came in droves ... I was one.

    But liquidity risk is something (I'm learning) that goes unnoticed, until it doesn't and by then it's probably too late.

    A bit of a perfect storm for this strategy, unfortunately.
  • @Charles: You mentioned DODGX . Seems to me they took a big hit back in 2008 ! Overweight in financials. This time I don't know.
    Derf
  • edited March 2020
    I see financials at levels I've not seen in years ... BAC under $20, WFC under $30.

    I think these are sales for long-term investors.

    I suspect the folks at D&C are well prepared and are working overtime to capitalize. But after this past week, I'm thinking it will get worse before better.
  • IOFIX was only at a little over 2% of my portfolio when the storm hit, so its not a major hit for me. I feel for those who were more concentrated in it. I am a chicken little when it comes to concentrating my portfolio into any one "specialty" holding even if I have respect for the managers....which I did (and do) with IOFIX.
    wxman123 said:

    I saw a pretty interesting chart the other day comparing covid-19 with the Spanish flu in terms of market reaction. Nearly identical to this point. With the Spanish flu the market recovered rapidly and well before the virus subsided. If we follow the same pattern now is the time to buy. We may not follow the 2008 model, which was a financial crisis.

    https://www.marketwatch.com/story/market-behavior-a-century-ago-suggests-the-worst-could-be-over-for-stocks-if-not-for-the-coronavirus-pandemic-2020-03-19

    Thanks for that chart @wxman123 . I, like many, am trying to figure out when to move in a substantial way to reenter the market of stocks. This history lesson from 1917 to 1918 is helpful in that regard. It suggests that at some point living with a pandemic becomes the new normal and gets priced into the market. So far I have been nibbling enough to keep the stock % in my portfolio from dropping significantly, but nothing more. I am currently inclined to wait at least until fall to see if there is a new surge in covid-19 cases then before moving back into stocks in a more substantial way.....assuming the initial surge peaks within the next several weeks. That will also provide time to get a sense for peoples willingness to restrict their interactions over an extended period of time as a vaccine is probably not going to be available any time soon.
  • "I am currently inclined to wait at least until fall "

    That sounds reasonable to me.
  • I know that this is a wild and crazy thought but you should all be used to this from me by now. See, I think this is a time when fund companies and fund managers should step up and be a little more up front and forthcoming about what is going on with their funds and what actions they are taking be it position failures, selling panic, redemption calls, margin calls, etc., and so on. Instead of hiding behind keyboards and screens get up front with your investors. Is maintaining AUM really only their motivating factor? Reality is almost surely that we will not see or hear a thing until they issue their required reports which will be totally stale by 3-6-9 months before we even get to read them.

    I know it's my job, my responsibility to know what I'm investing in but how can I be when the available information is not readily available. Even the SEC documents and SAI are not always up to date or have permissible lags in reporting.
  • Alphacentric just released this letter. I'm not sure this relieves my concerns. It doesn't explain the steep drops:

    March 20, 2020
    Valued Investor,
    We appreciate your commitment in the AlphaCentric Income Opportunities Fund IOFIX | IOFCX | IOFAX, especially
    during periods of uncertainty and volatility. We believe the Fund is positioned well for this low mortgage rate
    environment.
    Markets have seen an enormous amount of cash being raised out of fear over COVID-19.
    The recent NAV decline in our Fund is largely technically driven. On the flip side, the large draw down in the
    corporate world, in both equities and bonds, can mostly be explained through deteriorating fundamentals (ex.
    massive drop in airline, hotel, restaurant, retail, travel revenues).
    While we are prepared for potential continued technical volatility, longer-term we are as confident as ever in the
    fundamentals of our portfolio and believe the current rate environment may accelerate upside returns for our
    Fund.

    Here are the underlying reasons:
    • Legacy mortgages originated back in 2002-2007, are 13-18 years old, why this is important:
    o These borrowers made it through the worst housing crisis ever in 2008/2009.
    o They have on average 43% equity in their homes today and have spent over a decade building
    this equity.
    o A good portion of their monthly payment today is on principal.
    • YTD mortgage rates have dropped around 17% to historical lows, why this is important:
    o Lower rates = increase in refinancing by homeowners and bond calls by service providers.
    o Many of the legacy bonds that we paid less than par for are now likely to be paid off at or near
    par.
    o The increase in refinancing and foreseeable bond calls sets the table for nice price appreciation
    over the next 12-18 months, in addition to the monthly income.
    o Average price of the homes in the portfolio is around $260k, this segment of the housing market
    continues to remain strong with low rates and a shortage of homes.
    • Unlike corporate debt, our bonds are backed by hard assets - homes with real equity and in many cases,
    the biggest asset a homeowner has.
    o 10 out of the last 11 recessions have had minimal impact on housing.
    o The Government provided many mortgage assistance programs to keep homeowners in their
    house during the last recession and now, more than ever, it is of the utmost importance for
    homeowners to stay put in their homes and away from others.
    o In many cases, homeowner's two largest expenses, mortgage and energy, just got reduced.
    o The Fund has no exposure to CLO's, CMBS, consumer credit, etc...just housing.
    This will not continue forever, and as always markets will eventually stabilize. We know that being an investor
    today, and during any period isn't exactly a stress-free experience, but we believe value investors should consider
    adding to this portfolio.
    Please let me know if you have any questions. If you would like to schedule a call with one of the portfolio
    managers, we are happy to schedule it.
    Thank you,
    AlphaCentric Advisors
    Garrison Point Capital LLC
  • edited March 2020
    I wholeheartedly agree with Mark. It's amazing how forthcoming fund houses can be when things are going well. The better test is whether they keep communicating when things go wrong. I remember D&C's folks in 2009 were constantly engaged with worried and even upset investors (I made a couple such calls).

    Ha! I looked for a letter or explanation from GP yesterday, but could not find anything on either site. Thanks MikeW.

    Glad GP finally has a statement.

    "The recent NAV decline in our Fund is largely technically driven."

    Is that code for liquidity risk?

    Or is the implication its assets are being mis-priced and the situation will self correct?

    I do think the strategy has been beautiful for this low interest environment, but clearly there were underlying risks that surfaced during this crisis. Again, the proverbial black swan.

    Going forward, certainly credit risk has increased given rising unemployment, although I believe the government will help provide mortgage payment relief.

    I guess we need to know the fund outflows to get a sense of whether or not GP was forced to sell at discounted prices to meet redemptions. If so, I simply don't understand how they get those discounts back.

    This is a tough one.
  • IOFIX has a history of large one day movements in the share price...mostly to the upside but there was at least one to the downside (in Nov. 2018 if I recall correctly). @sma3 discussed the difficulty of pricing their thinly traded holdings on a daily basis. Before I made an investment, I tried to get a sense for how that is done. The closest I came was there was someone sitting behind a desk making their best estimates (as I recall I got the name of a pricing firm while searching but that didn't provide much clarity). It felt to me there might be an element of throwing darts at a dart board involved to come up with the daily prices. I am sure there are presently few buyers in this cash is king market environment. So, the lumpy downward movements are perhaps not tooooo surprising.
  • edited March 2020
    Their first two underlying reasons seem to cancel each other out so yes, I'm a little confused as well (both technically and non-technically). I'll have to reread this again a few times.

    Edit: But I do feel there will be upside to this fund and my position was not large so I will be holding for now but only reinvesting not adding to.
  • When I look at their website, there is a special March update but it is only available to financial professionals & interestingly not for shareholders of their funds.
    Most of the above (except for the reference to Covid 19) is the same information they have in their fund "presentation" pdf which seems very reasonable & makes the fund appear quite safe. There are a lot of tables & graphs. However, I don't recall seeing the graph for the scenario where the fund drops straight down off of a cliff.

    Back in November 2018 the fund did drop just slightly more than 1% (those were the good old days when 1% seemed large) but that was a one day only event.

    From their August SAI:
    The following table shows the dollar range of equity securities of the Fund beneficially owned by each portfolio manager as of March 31, 2019.
    Name of Portfolio Manager
    Dollar Range of Equity Securities in the Income Opportunities Fund
    Tom Miner
    Over $1,000,000
    Garrett Smith
    $100,001–$500,000
    Brian Loo
    $100,001–$500,000
    So I assume they themselves are feeling some pain right now.

    Fortunately I'm not, as I sold out my position in IOFIX the week before after a very bad feeling about this fund & the bond world in general.
  • edited March 2020
    Good on you. Yeah, bond market creaking right now, seems like.
  • IOFAX fund manager ownership / @zenbrew

    Tom Miner
    Over $1,000,000
    Garrett Smith
    $100,001–$500,000
    Brian Loo
    $100,001–$500,000

    These numbers are likely very minimal to the overall portfolios
    for these fund managers. I got stuck with a much greater percentage than the managers did. But going back to @newgirl 's question, what to do now?

    For me, since this fund shows that it can fall at the same rate as equities, why not sell it and put that money in equities? For example, is IOFAX going to increase more than say BRK/B in the next year or 2 on a risk adjusted basis? I doubt it.

    I happened to sell about 1/3 of this fund on the same day of the 1st big drop last week. I took the 17% hit the following day with the remainder. Now, like newgirl, I'm deciding what is next.

  • edited March 2020
    @MikeM and @newgirl.

    Thinking more about the letter MikeW shared ...

    If the sudden drops are caused by forced redemptions, which I fear they are, the situation seems tough.

    Forced redemptions mean discounted prices on thinly traded assets, which then sets the pricing matrix for remaining assets in portfolio. So, kind of self-fulfilling.

    Suspect that impacts funds with similar RMBS. At least that's the way it should work.

    While you can call this just "technical" as opposed to "fundamental" those selling prices now represent market price ... with the portfolio being "marked-to-market."

    I could very well see these assets regaining their value quite quickly. In that sense, OK "technical" ... the assets are oversold. Like a lot of other assets seem right now.

    Long run, RMBS will be AOK of course.

    The struggle will be to survive more redemptions. All these investors (like me) lulled by low volatility and high return for nearly five years ... expectations now blown.

    Liquidity is a risk we don't normally see until it's too late.

    I don't think OEMs can stop redemptions, but I wish this one could.

    If the nation closes next week, hope the markets close too for a while.

    Maybe some reprieve.

    Anybody else have a better take?

    Good to see GP offering to take calls, which is the right thing to do.
  • I'm guessing that the vast majority of their assets are defined as Level 2 or 3 per fasb 157. Investopedia discusses fasb 157 and I'm sure there are additional resources that describe fasb 157 in more detail .
  • If I read the letter correctly, they essentially say that some part of the equities market is substantially damaged, whereas the homes still stay and their owners are reliably paying mortgages, so their assets are fundamentally intact. Does it sound as a reasonable argument? Or maybe people were paying their mortgages while they had regular income, part of it is less guaranteed now?

    Since many of us learned about IOFIX reading discussions at MFO, maybe some members of MFO would like to schedule a call with one of the portfolio managers, as they suggested, and then share with us their impressions.

    Charles, you had a first hand experience with them, so maybe you better than many of us may understand what changed since the time you visited them, and what can be expected? Of course, they themselves may not have a full picture, and the situation will surely remain volatile for quite a while, but if you or someone else would be willing to make this call, I am sure that it would be really appreciated by many of us.
  • @Finder raises some good points. On one level, RMBS may be fundamentally intact in the long view. But there may well be an income hiatus where mortgage payments fall behind, not because of games in the mortgage business as in 2008, but because a fair number of home owners may be unemployed.

    If that period of unemployment can be covered in some way, perhaps by some sort of emergency legislation, the now-unknown length of that gap can perhaps be neutralized to some extent.
  • Thanks. Sure wish Junkster was around. c
  • @Charles - For further discussion on mortgage backed securities you might want to give this M* community discussion a look. Let me know if you have trouble accessing it.

    PIMCO says mortgage-backed securities are cheap

    PIMCO's blog Insight Report is here
  • Also a good discussion of what has been happening in mortgage bond land lately by Lou Barnes at Premier Mortgage Group:

    Mortgage Credit News March 20, 2020
  • edited March 2020
    I had several hundred thousand in IOFIX but I sold most of it on Feb 28 and all on March 9. That was based on the fact that stocks are crashing + bonds don't behave rationally to rate drop + even treasuries didn't act on rates properly every day + thousands global coronavirus + VIX > 50. Let's call it what it is..a black swan.
    The market will turn and I will first look at the 2 funds I owned several weeks ago. NHMAX = HY Muni (includes leverage > 20%) + IOFIX. What comes down further usually goes up faster.

    Several months ago I talked to the manager of EIXIX and he explicitly mentioned that his holdings have a much lower risk than IOFIX and one day IOFIX will explode.

    The Pimco guys always say that MBS is the best place to be;-)

    AGC has great articles about CEFs but you get a lot of info on fixed income...see this (article)

    "So what do you do at this point?

    Sitting still and doing nothing can be the hardest thing in the world but is likely the best course of action. Resist selling and even buying much of anything at this point. We need to see some stabilization before really buying anything further: 1) we need volatility (VIX) to peak and start to subside. 2) Oil prices need to stabilize. 3) We need to see new cases of COVID19 trend similar to China or South Korea with the second derivative trail off.

    Once these things happen, we believe that the market will bottom and start their recovery."

    As usual, I follow my chart/trends and they come directly from the price which is the end result of the opinions of all traders.
  • a black swan.
    I think it is more like black swine....given how bonds performing lately. Their correlation has turned increasingly positive to equity. Is this similar to the 2008?

    Back in 2008, I held a small position of Loomis Sayles Bond, LSBRX. It felt like a rock during the decline and ended with -22% for the year. Little explanation was given on the annual report until Dan Fuss mentioned that in an interview that the thinly traded high yield positions held suffered from "mark-to-market" as the prices went into free fall during the severe decline. Higher credit bond funds such as total bond index funds performed much better.
  • Good one!
  • Yep, in a real meltdown like 2008 and 2020, correlation goes much higher. CEFs actually lost a lot more. Funds with extra risk such as NHMAX+IOFIX lost more than similar funds.
    In the above situation, treasuries do best. Remember Bogle 2 simple indexes SP500 + US Total bond index(which is not all treasuries but a good LT index)?

  • edited March 2020
    @FD1000 said,"As usual, I follow my chart/trends and they come directly from the price which is the end result of the opinions of all traders. "
    Something like the Junkster would have said ! Follow the price !
    Derf
  • edited March 2020
    Got it. So in this environment we must all be watching prices daily? I know that is a strategy and certainly works well for Junkster. I understand one reason ETFs started was in response to Black Monday 1987. Maybe some assets (and some types of funds ... IOFIX?) need to be traded daily. Junkster is a day trader. It is one approach to investing, which I suspect is not suitable for most of us. Our MFO screening tools only use monthly data. Of no use here. March's month ending data will (most likely) mark the end of the last bull market (the 5th since 1960) and the beginning of a new business cycle.
  • Hi @Derf
    @FD1000 said,"As usual, I follow my chart/trends and they come directly from the price which is the end result of the opinions of all traders. "
    Something like the Junkster would have said ! Follow the price !
    This method "price"; is a fully viable process. This does not preclude one's paying attention to what may or may not be pushing a price up or down; and of course, one's risk assessment.

    A simple example from my simple mind. One is thinking of buying a particular vehicle that they have had their eye on......but, to be smart; buy a two year old model and avoid most of the first 2 years depreciation. Then one discovers the secondary/used pricing is even lower than anticipated and what would be normal. What happened? In searching the net you discover that, in spite of large new sales volumes, owners over the two year period have become dissatisfied with the product. So, Mr. Market price; sets the price.
    Part of my method to discover pricing. But, I agree with FD1000; and his long time process, which is technical; but helps answer the question of why investment "x" is price performing in a particular fashion. @rono and others here also pay attention to Mr. Market pricing.

    c'est tout

    Take care,
    Catch
Sign In or Register to comment.