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.
The securitized saga isn't over. VCFAX -3.1...SEMMX -2.95...ANGLX -1.4...DHEAX -2.25. DHEAX is even more unique with 80+% in IG rating bonds. VCFAX is about 50/50 IG/below IG. Slowly but surely they are going down.
The most vulnerable strategies in the current environment have been flashing red well in advance. For example, AlphaCentric Income Opportunities (IOFIX), a multisector bond fund that has invested the majority of its assets in mezzanine subprime MBS, has experienced heavy redemptions in recent weeks. Given that the portfolio was roughly 95% invested in nonagency residential mortgage credit, it’s highly unlikely the managers were able to raise cash to meet those redemptions without locking in losses in the current environment. The fund has erased more than 40% of its value for its shareholders since the beginning of March, with most of those losses coming in the last several trading days.
But that fund’s highly aggressive approach already made it an outlier relative to competitors in the multisector bond category, which is home to funds with a greater appetite for credit-sensitive sectors. Its portfolio chock-full of subordinated mortgage credit avoided by other fund managers, its indeterminate credit quality profile (most of the fund’s holdings were nonrated), and absence of high-quality holdings to provide liquidity should have raised concerns for any investor. The fund’s chart-topping returns in recent years--its trailing three-year annualized return of 10.4% through February 2020 outpaced its next closest competitors’ by a full 300 basis points--should have also raised questions about the risks its managers were taking to achieve those results.
...absence of high-quality holdings to provide liquidity should have raised concerns for any investor.
The fund’s chart-topping returns in recent years... should have also raised questions...
What a bunch of crap. Did this author write a similar story before the collapse entitled "everybody get out asap because this fund is going to lose 1/2 it's value"? Shoulda, coulda, woulda...
Good one MikeM. M* kinda of rubbing investors' noses in it ... "You should have been invested in one of our metal rated funds." And yes, they get to take a bow ... this March I sure wish I had been in PIMIX! But honestly, for the last 3 years, I was happier in IOFIX. Can I add that into the ROI equation? Otherwise, I think the article is pretty informative.
Some "unknowns" that are making life difficult for the MBS trading gang as well as their risk managers and middle office mark-to-market folks...
We know that mortgage refi applications were surging in response to rapidly dropping rates, but how many of those applications can or will be approved? How many folks jobs/incomes are as secure as they appeared a couple months ago? How does a bank grant a new loan to an individual with no current income? Possibly with no job to return to? How could such a new loan qualify for purchase by Fannie, Freddie, or Ginnie? A loan officer I am working with shut the doors 10 days ago, to re-fi's and new applications.
Bottom line: those surging prepayment speed assumptions have no doubt devastated the mark-to-market prices of many MBS, servicing rights assets and/or instruments used to hedge them. We really have no idea what ACTUAL prepayment speeds will be realized, and we probably won't for quite some time.
So assets under management are now down to $1.4B. I'm just curious have all of you sold off your positions now. Anyone still holding? I have a very small position in it that I bought when I worried about the fund closing... I'm probably going to go ahead and just sell today. seems like its going to keep going down.
@MikeW- Ditto . There was this in the morningstar article - "That now gives mutual funds the flexibility to turn to their management companies for loans to provide liquidity should they face pressure to sell less-liquid assets to meet redemptions." wonder if they have access? Wishful thinking ? If the underlying MBS are really worth are worth more than the price they are selling for ?
I'm still in also. What I learned about myself recently is that I can tolerate a 40% drop in a stock I hold, but an equivalent drop in a bond fund makes me retch. IOFAX has not recovered, but ORNAX has rebounded in the last two days.
As of this moment my position constitutes about 1.5% of my total portfolio roughly the same as 2 weeks ago. I can allow myself to ride along for awhile. Here is where confidence in one's active managers comes into play and where Bob C would usually say "I don't think they started taking stupid pills."
I'm still in also. What I learned about myself recently is that I can tolerate a 40% drop in a stock I hold, but an equivalent drop in a bond fund makes me retch. IOFAX has not recovered, but ORNAX has rebounded in the last two days.
I totally agree with @BenWP about the gut wrenching feeling to lose so much in a bond fund, but I came up with a different decision. I'm betting IOFAX does not come back, so I sold out.
My small mind doesn't see how the fund can sell off most or much of it's portfolio of holdings at discount prices to make seller-redemptions and expect what remains in the portfolio to recover those losses. Talk about not having any dry powder. I fear this fund has just as much potential to drop another 20% over the next month than it has to increase 20% over the next 3 years.
Given that, why not take that money and put it into something that has greater likelihood to recover? That was my thought anyway and I may be waaaaay wrong.
no one really knows until the managers provide some clarity but I doubt it will go up as quickly as it went down even if the virus passes in a few months. Maybe as refinancings dry up fewer of their bonds will be turned over, but some of these folks will not be able to pay their mortgages when they loose their jobs. With the stimulus they will be able to hold on to their house for a while and evictions and foreclosures will be on hold. Impossible to know but I am glad I sold 90% of my position
Greetings, my first MFO post! I had a large position in what I believed were low vol. “safer” bond funds...SEMPX, VCFAX, IOFAX. Sold off the first two, still have a toe hold in IOFAX, but sold off more than 80% of it. I continue to hold a significant allocation to PIMIX. My rationale for owning these 3 funds was based on the role these funds had in my portfolio: these all had among the lowest “risk” measures, great ratings, with decent yields and good performance. I have learned that even universally loved funds can tank in certain environments. I’m lucky, in that I’m investing for growth, not income, so my bond holdings needed to provide a low risk balance to my equities in a 60/40 AA. I sold because they clearly did not play a low risk role! I’d rather hold cash, and will add to equities when I next rebalance. Best of luck, Rick
Yay! HYD and HYMB also up strong today and closed discounts to VWLAX prices. Maybe too this will help redemptions stop for IOFIX. Maybe it's fed intervening in market in general, offering MF firms interest free cash for redemptions. I don't know. Maybe a sense from SPY that things will not be as bad as thought ... today in fact we entered a bull market. (Smile.) c
I (like everyone else on Earth) never know how much the market overdiscounts in advance. Meaning the news today is bad, bad, bad, really bad, virus and economy alike ... meaning the wave has not reached the shore and indeed many other worse waves at on the horizon. Is most of that already baked in for the most part? Will today turn out to have been a great day to sell more than I did?
The following is a test I do every time for buy/sell/hold. Suppose I have 100% in cash now and want to invest, what are my best 2-3 mutual funds ideas? The answer is what I do! The past is dead for me.
or another way to look at it is by using an NBA basketball team. I want my best team on the court at all times, I don't care if your name is Jordan or Lebron, I want my current players and team to be the best right now and my goal is to go to the playoffs every season. Winning the championship isn't guaranteed but I must be in the playoffs.
I got killed here, losing over 40% in a month. I failed to ask and answer the why did I buy this in advance. The answer would have been for income. But what I bought was something with greater than equity risk in the name of boosting the return of the bond component of my portfolio. Wrong fund for the intended mission. This buy resulted in the biggest loss in the shortest time I've experienced in over 30 years. No asset manager likes to see assets leave their fund, but I think this fund could have done a much better job communicating with shareholders, and protecting their risk. Maybe more investors would have stayed. The best equity funds do this in tough times and with success keep investors on their team. I think of a firm like Grandeur Peak, for example.
Right on @Dalemn. I did the same. My mistake was owning a fund because of a great trend line and low volatility. That apparently was meaningless. Maybe smarter people than me understood the risks, but I didn't.
MM, nobody on earth understood this particular risk, almost everything diving in unison so extremely quickly
don't feel bad about that
sure, time to judge fund treatment and comms, not just performance
but a lot of people of middling wealth, not wildly rich, are down hundreds and hundreds of thou of dollars, with maybe more to come, to serious budget-altering effects at best
since my spending is your income and vice-versa, curtailing spending severely always feels bad, among other things
I think I will be modulating slightly more to my CAPE + BND in some proportions or other presently, over time; bah to RE (maybe)
It was a quick unique black swan. The last one, 2008-9, was slower. The hard part, the next one can be years from now and you would invest based on the last fiasco. Many would buy US bond index or treasuries just to see an average annual return of 2-2.5% in the next several years.
While it's surely true that nobody can predict the exact nature or timing of an en route swan, it's always true that something, sometime, will dramatically end even the best of good times in Investment City. Sure, reasons vary, length of downturns vary, the nature of the recoveries vary, the destruction ratios of some kinds of things vs other kinds of things vary.
But one thing does not vary: at some time, for some reason typically unanticipated by charts and experts, the damned thing is going to crash and burn. It's just the nature of the beast.
If there's anything unique about this one it's that you can't even head to your local watering hole to commiserate with your friends and neighbors.
@MikeW. The fund's thesis was that senior non-agency RMBS debt once considered toxic was now much more credit worthy because: 1) borrowers now fully entrenched in their homes, 2) home values now exceed money owed ... more so each month due to both appreciation and debt paid down, and 3) record employment.
The last two arguments have been crushed by the credit tsunami brought on by CV-19.
I have to assume the fund sold-off its most liquid holdings to meet redemptions ... look how well that worked out. If the fund can hold on long enough, the promise of a strong dividend will attract new buyers, perhaps enough to cover any continued redemptions.
The legacy owners were as much attracted to its low volatility as they were to its performance. (Reminds me a bit of Berkowitz's Fairholme Fund of 2000's versus 2010's.)
Long run still think RMBS will be OK, but can't see a correction that makes legacy holders whole again.
Would appreciate other thoughts. But right now, I don't see it possible.
Of course a blind man should have seen the threat coming in early March, even sooner, which makes me worse than blind.
@Charles I agree with your assessments. I also think that non-agency RMBS/CMBC/other will come around in several months(maybe weeks) and where I will start buying again. The question is do I want to be in funds with mostly securitized (IOFIX,EIXIX,SEMMX,VCFAX,DPFNX) and making more money potentially or take a less risky approach and buy something like PIMIX(more diversified) or both. If I look at YTD (chart), EIXIX would be my choice to get back into this category but we are not there yet
Comments
https://www.reuters.com/article/us-health-coronavirus-alphacentric/fund-manager-alphacentric-looks-to-raise-cash-as-coronavirus-bites-idUSKBN21A1PG
(similar excerpt about IOFIX in today's WSJ)
The most vulnerable strategies in the current environment have been flashing red well in advance. For example, AlphaCentric Income Opportunities (IOFIX), a multisector bond fund that has invested the majority of its assets in mezzanine subprime MBS, has experienced heavy redemptions in recent weeks. Given that the portfolio was roughly 95% invested in nonagency residential mortgage credit, it’s highly unlikely the managers were able to raise cash to meet those redemptions without locking in losses in the current environment. The fund has erased more than 40% of its value for its shareholders since the beginning of March, with most of those losses coming in the last several trading days.
But that fund’s highly aggressive approach already made it an outlier relative to competitors in the multisector bond category, which is home to funds with a greater appetite for credit-sensitive sectors. Its portfolio chock-full of subordinated mortgage credit avoided by other fund managers, its indeterminate credit quality profile (most of the fund’s holdings were nonrated), and absence of high-quality holdings to provide liquidity should have raised concerns for any investor. The fund’s chart-topping returns in recent years--its trailing three-year annualized return of 10.4% through February 2020 outpaced its next closest competitors’ by a full 300 basis points--should have also raised questions about the risks its managers were taking to achieve those results.
https://www.morningstar.com/articles/974632/market-turmoil-has-bent-bond-mutual-funds-but-most-have-not-broken
We know that mortgage refi applications were surging in response to rapidly dropping rates, but how many of those applications can or will be approved? How many folks jobs/incomes are as secure as they appeared a couple months ago? How does a bank grant a new loan to an individual with no current income? Possibly with no job to return to? How could such a new loan qualify for purchase by Fannie, Freddie, or Ginnie? A loan officer I am working with shut the doors 10 days ago, to re-fi's and new applications.
Bottom line: those surging prepayment speed assumptions have no doubt devastated the mark-to-market prices of many MBS, servicing rights assets and/or instruments used to hedge them. We really have no idea what ACTUAL prepayment speeds will be realized, and we probably won't for quite some time.
I am still holding onto my IOFIX position.
My small mind doesn't see how the fund can sell off most or much of it's portfolio of holdings at discount prices to make seller-redemptions and expect what remains in the portfolio to recover those losses. Talk about not having any dry powder. I fear this fund has just as much potential to drop another 20% over the next month than it has to increase 20% over the next 3 years.
Given that, why not take that money and put it into something that has greater likelihood to recover? That was my thought anyway and I may be waaaaay wrong.
Best of luck,
Rick
The answer is what I do! The past is dead for me.
or another way to look at it is by using an NBA basketball team.
I want my best team on the court at all times, I don't care if your name is Jordan or Lebron, I want my current players and team to be the best right now and my goal is to go to the playoffs every season. Winning the championship isn't guaranteed but I must be in the playoffs.
don't feel bad about that
sure, time to judge fund treatment and comms, not just performance
but a lot of people of middling wealth, not wildly rich, are down hundreds and hundreds of thou of dollars, with maybe more to come, to serious budget-altering effects at best
since my spending is your income and vice-versa, curtailing spending severely always feels bad, among other things
I think I will be modulating slightly more to my CAPE + BND in some proportions or other presently, over time; bah to RE (maybe)
But one thing does not vary: at some time, for some reason typically unanticipated by charts and experts, the damned thing is going to crash and burn. It's just the nature of the beast.
If there's anything unique about this one it's that you can't even head to your local watering hole to commiserate with your friends and neighbors.
The last two arguments have been crushed by the credit tsunami brought on by CV-19.
I have to assume the fund sold-off its most liquid holdings to meet redemptions ... look how well that worked out. If the fund can hold on long enough, the promise of a strong dividend will attract new buyers, perhaps enough to cover any continued redemptions.
The legacy owners were as much attracted to its low volatility as they were to its performance. (Reminds me a bit of Berkowitz's Fairholme Fund of 2000's versus 2010's.)
Long run still think RMBS will be OK, but can't see a correction that makes legacy holders whole again.
Would appreciate other thoughts. But right now, I don't see it possible.
Of course a blind man should have seen the threat coming in early March, even sooner, which makes me worse than blind.
I agree with your assessments. I also think that non-agency RMBS/CMBC/other will come around in several months(maybe weeks) and where I will start buying again.
The question is do I want to be in funds with mostly securitized (IOFIX,EIXIX,SEMMX,VCFAX,DPFNX) and making more money potentially or take a less risky approach and buy something like PIMIX(more diversified) or both.
If I look at YTD (chart), EIXIX would be my choice to get back into this category but we are not there yet