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Riverpark short term high yield fund (RPHYX) looks like a great place to park money.
I'm a little confused by "short term" and "high yield" in the name. I doubt "short term" can be high yield. Don't want the fund to fall off a click one day. If you look at the chart it is pretty steady which tells a different story - that it is not high yield.
You might want to read my write-up of the fund, which sort of explains the short term vs high yield tension. The short story is that the fund invests, primarily, in called high yield bonds; that is, high yield bonds that will be redeemed within the next 30 days. That short horizon takes out most of the risk (bankruptcy, default) usually associated with investing in the debt of marginal firms.
Right now, the portfolio is yielding over 4% with negligible share price volatility.
As I read it, there are three questions to ponder about the fund:
are there enough called bonds (or similar securities) available?
can the managers anticipate the risks well enough?
can they negotiate a good price?
Mr. Sherman argues yes (he's got $600 million - $1 billion in capacity for the strategy), yes (there's only be one bankruptcy of a firm with a called bond since 1985) and yes (they're actually the first buyer that many funds turn to when they want to unload such bonds).
David's excellent commentary brought to mind a fund I owned in the 90's, Strong Short Term High Yield Fund. The defunct Strong funds were taken over by Wells Fargo about a decade ago and this fund's decendant now appears in their lineup as the Wells Fargo Short Term High Yield Fund, STHBX.
Not a bond guy. But would guess the Riverside fund is more conservatively positioned. Notwithstanding that proviso, here's what I dug up on Wells' offering. Like the Riverside fund, STHBX seeks stability of principal along with better returns than available in investment grade short term debt. It is available without load for $2500 initial investment ($1000 IRA). Maintains average weighted maturity of less than 3 years. ER is 0.84%, considerably less than the Riverside fund.
One year performance is 6.9%, with a yield in the 3+% vicinity. Obviously much of that gain came from capital appreciation. The fund invests about 20% in foreign securities, so also benefited from dollar depreciation. Under Wells the fund has never had a loosing year. Traditional high yield funds lost 30% or more in '08; however, STHBX appears to have ended the year fractionally higher after experiencing drop of more than 10% at one point. Morningstar does this fund a disservice in grouping/evaluating it alongside all high yield funds, most with longer duration and greater risk. It rates only 2 stars by their method.
Full disclosure: I don't own either fund and don't currently plan to. I think both might make a good addition to some folk's portfolios. Just depends on what you're looking for and than finding the right spot in your mix. My only high yield fund is PRHYX. Price wisely cautions the fund should not comprise a "significant" portion of your investments. After the run up in junk bonds, I'd extend that warning to the Riverside and Wells funds as well.
David's reviews of most intriguing new funds are always, well, intriguing. I currently have over 30% of my portfolio in Vanguard Prime Money Market. I read last week in Bloomberg.com that institutional money as been pouring out of MM funds based on Greece and concerns about wider spread to European countries. I am going to allocate a little to PRHYX for now and see...
The manager got on me for a similar line of questions: "aren't they other short-term, high yield funds? How are you different?" The brief answer is: we don't buy any of what they're interested in. They buy securities that were, at issuance, short term and high yield. We buy securities that were, at issuance, intermediate- to long-term and high yield. We just happen to buy them once they've been called, and their legal maturities drop to 30 days or so.
This fund seems like a cross between a bank loan fund and an arbitrage fund. It invests in very short term loans that are essentially paper by the time they are bought. Then they also invest in arbitrage-type activities. Is that fair?
RPHYX is very interesting and appears to be fairly low-risk fund with steady returns. However, whenever there is a "free lunch" inherent in a strategy, a black swan lurks close by. This fund was started after the liquidity crunch of Q3 & 4 of 2008. Are there partnership returns for this strategy that would indicate how well it held up when everything else was crumbling?
How would you compare all the above named funds with the Weitz Short Term Bond fund WEFIX with regard to risk and return ? I am looking for a fund with a higher return than a M M to park money for the end of the year for an IRA required annual distribution.
Good question. A lot of ultra-low duration Yield+ funds were taken to the cleaners. Floating Rate funds (such as Fidelity one) that used to provide very stable returns until the crisis lost a lot. After all they are "Junk" funds and Junk does not do well in crisis.
I believe this Riverpark fund would not have fared well during the panic of Fall 2008. It seems reasonable to compare this fund to Fidelity's Floating Rate High Income (FFRHX): they have similar credit-qualities and durations. It is my understanding that these types of securities were subject to forced selling by hedge funds in the Fall of 2008. On 9/10/08 the price of FFRHX was $9.36. By 12/15/08 its price fell to $7.30. (Its price on 7/08/11 was $9.83)
To clarify, the fund buys short term "special situation" bonds. I recently spoke with the fund, in an attempt to get them onto our platform at LPL. These bonds include as David highlighted, high yield bonds that have been called, high yield bonds of companies which have been acquired by higher quality owners, or where management has placed a significant portion of the cash due to bondholders in escrow or walled off in some other fashion. The fund does what i call 'working in the corners of the market', issues that are less interesting to high yield managers but cannot be purchased by investment grade managers.
To BR Bond: They do not have a partnership that mirrored this strategy. The biggest issue, as with many funds that invest in shallow markets, the capacity for the fund cannot be huge (although not a problem yet at $30mm or so). Just look at Driehaus Active Income . . . invest in limited arbitrage opportunities in the international fixed income markets, i believe it closed with just over $1.5 billion.
To 00BY: WEFIX is a great fund, i use it extensively on conservative accounts, but the riverpark fund hasn't been around long enough to say it provides worse downside protection. It only opened in October of 2010, and has been in the words of dennis gartman "moving from the lower left to the upper right".
As to elmer's comment, this is not a floating rate fund. Although it is high yield, there are mitigating factors other than the credit quality of the other business (special situations). The hedge fund industry was stuck forced selling mostly thinly traded sovereign credits as opposed to the corporate issues that riverpark invests in. Also, please note that FFRHX did perform poorly, but the numbers you presented don't take into account the few percent that were distributed as dividend income on a monthly basis.
As soon as this is available thru LPL, it will be inserted as a instant addition to our income models (and some use as a cash alternative).
mobryon, I have no doubt that RPHYX is different from all the other junk bond funds in buying only called bonds with an average of 30 days until the call date where there is cash on the corporate balance sheet to redeem. Before the OP randolf "parks" money in such a strategy, it might be helpful to ask, "what could possibly go wrong?" In a liquidity crunch when LIBOR spikes and lines of credit are being suddenly withdrawn, the cash on hand might not be sufficient for redemption, yet the bonds have been called. This would not be good.
You mention LCMAX, and KC Nelson is a very clever manager, however this fund has a bit of beta to the equity markets as he hedges out interest rate risk but not credit risk. My choices to "park" money that fared pretty well in 2008 would be SNGVX and, if available, DFIHX.
In pursuit of answers to your questions, I spoke again by the RiverPark folks. Morty Schaja, the president, made several worthwhile points which mostly accorded with my own understanding:
1. Cohanzick had no stand-alone accounts using this strategy in 2008
2. Cohanzick did use this strategy in 2008 as an element of other accounts and these bonds "performed exceedingly well."
3. Cohanzick does not resell the bonds it buys, it holds them until they're bought back. As a result, a "market freeze" as in 2008 is largely irrelevant to them since they have a guaranteed buyer.
4. A "market freeze" would, however, temporarily decrease the fund's NAV since pricing of the bonds would become difficult. For buyers who held their shares, though, the NAV would rebound quickly because of the exceedingly short time that the "impaired" bonds would remain in the portfolio.
5. If the fund saw net purchases in such a crisis, the fund could "realize unusually and unsustainable significantly higher returns" as it snapped up other mispriced bonds. David Sherman, the manager, reported during our interview that the fund generates $600,000/month in cash on its $20 million in holdings; he believes that cash flow alone would be enough to cover redemptions in most scenarios.
6. The fund's risk profile should be better than a floating-rate funds because the average duration is much shorter and the managers won't buy securities unless they believe the issuer will have the money - often 30 days hence - to complete repurchase.
By way of a side observation, RPHYX's NAV was unchanged after Monday's market panic, sparked by debt issues in Europe.
Shareholder since late July. Income $900, return $600 due to a few cents erosion in NAV. Distributions are volatile, Sept $300, Oct $150, a difference of 50%. After three months ROI is seventy two basis points (0.72%) according to Quicken. Far less volatile to date than FFRHX/Fidelity Floating Rate, another holding (1% vs. 6% range over the last six months.)
Comments
You might want to read my write-up of the fund, which sort of explains the short term vs high yield tension. The short story is that the fund invests, primarily, in called high yield bonds; that is, high yield bonds that will be redeemed within the next 30 days. That short horizon takes out most of the risk (bankruptcy, default) usually associated with investing in the debt of marginal firms.
Right now, the portfolio is yielding over 4% with negligible share price volatility.
As I read it, there are three questions to ponder about the fund:
are there enough called bonds (or similar securities) available?
can the managers anticipate the risks well enough?
can they negotiate a good price?
Mr. Sherman argues yes (he's got $600 million - $1 billion in capacity for the strategy), yes (there's only be one bankruptcy of a firm with a called bond since 1985) and yes (they're actually the first buyer that many funds turn to when they want to unload such bonds).
For what interest it holds,
David
Not a bond guy. But would guess the Riverside fund is more conservatively positioned. Notwithstanding that proviso, here's what I dug up on Wells' offering. Like the Riverside fund, STHBX seeks stability of principal along with better returns than available in investment grade short term debt. It is available without load for $2500 initial investment ($1000 IRA). Maintains average weighted maturity of less than 3 years. ER is 0.84%, considerably less than the Riverside fund.
One year performance is 6.9%, with a yield in the 3+% vicinity. Obviously much of that gain came from capital appreciation. The fund invests about 20% in foreign securities, so also benefited from dollar depreciation. Under Wells the fund has never had a loosing year. Traditional high yield funds lost 30% or more in '08; however, STHBX appears to have ended the year fractionally higher after experiencing drop of more than 10% at one point. Morningstar does this fund a disservice in grouping/evaluating it alongside all high yield funds, most with longer duration and greater risk. It rates only 2 stars by their method.
Full disclosure: I don't own either fund and don't currently plan to. I think both might make a good addition to some folk's portfolios. Just depends on what you're looking for and than finding the right spot in your mix. My only high yield fund is PRHYX. Price wisely cautions the fund should not comprise a "significant" portion of your investments. After the run up in junk bonds, I'd extend that warning to the Riverside and Wells funds as well.
The manager got on me for a similar line of questions: "aren't they other short-term, high yield funds? How are you different?" The brief answer is: we don't buy any of what they're interested in. They buy securities that were, at issuance, short term and high yield. We buy securities that were, at issuance, intermediate- to long-term and high yield. We just happen to buy them once they've been called, and their legal maturities drop to 30 days or so.
For what it's worth,
David
To BR Bond: They do not have a partnership that mirrored this strategy. The biggest issue, as with many funds that invest in shallow markets, the capacity for the fund cannot be huge (although not a problem yet at $30mm or so). Just look at Driehaus Active Income . . . invest in limited arbitrage opportunities in the international fixed income markets, i believe it closed with just over $1.5 billion.
To 00BY: WEFIX is a great fund, i use it extensively on conservative accounts, but the riverpark fund hasn't been around long enough to say it provides worse downside protection. It only opened in October of 2010, and has been in the words of dennis gartman "moving from the lower left to the upper right".
As to elmer's comment, this is not a floating rate fund. Although it is high yield, there are mitigating factors other than the credit quality of the other business (special situations). The hedge fund industry was stuck forced selling mostly thinly traded sovereign credits as opposed to the corporate issues that riverpark invests in. Also, please note that FFRHX did perform poorly, but the numbers you presented don't take into account the few percent that were distributed as dividend income on a monthly basis.
As soon as this is available thru LPL, it will be inserted as a instant addition to our income models (and some use as a cash alternative).
I have no doubt that RPHYX is different from all the other junk bond funds in buying only called bonds with an average of 30 days until the call date where there is cash on the corporate balance sheet to redeem. Before the OP randolf "parks" money in such a strategy, it might be helpful to ask, "what could possibly go wrong?" In a liquidity crunch when LIBOR spikes and lines of credit are being suddenly withdrawn, the cash on hand might not be sufficient for redemption, yet the bonds have been called. This would not be good.
You mention LCMAX, and KC Nelson is a very clever manager, however this fund has a bit of beta to the equity markets as he hedges out interest rate risk but not credit risk. My choices to "park" money that fared pretty well in 2008 would be SNGVX and, if available, DFIHX.
In pursuit of answers to your questions, I spoke again by the RiverPark folks. Morty Schaja, the president, made several worthwhile points which mostly accorded with my own understanding:
1. Cohanzick had no stand-alone accounts using this strategy in 2008
2. Cohanzick did use this strategy in 2008 as an element of other accounts and these bonds "performed exceedingly well."
3. Cohanzick does not resell the bonds it buys, it holds them until they're bought back. As a result, a "market freeze" as in 2008 is largely irrelevant to them since they have a guaranteed buyer.
4. A "market freeze" would, however, temporarily decrease the fund's NAV since pricing of the bonds would become difficult. For buyers who held their shares, though, the NAV would rebound quickly because of the exceedingly short time that the "impaired" bonds would remain in the portfolio.
5. If the fund saw net purchases in such a crisis, the fund could "realize unusually and unsustainable significantly higher returns" as it snapped up other mispriced bonds. David Sherman, the manager, reported during our interview that the fund generates $600,000/month in cash on its $20 million in holdings; he believes that cash flow alone would be enough to cover redemptions in most scenarios.
6. The fund's risk profile should be better than a floating-rate funds because the average duration is much shorter and the managers won't buy securities unless they believe the issuer will have the money - often 30 days hence - to complete repurchase.
By way of a side observation, RPHYX's NAV was unchanged after Monday's market panic, sparked by debt issues in Europe.
For what it's worth,
David
but how can i be totally assured the admin will continue to pay the proposed and gained roi ??
maybe if its win-abled -- that might help ??
Distributions are volatile, Sept $300, Oct $150, a difference of 50%. After three months
ROI is seventy two basis points (0.72%) according to Quicken. Far less volatile to date than FFRHX/Fidelity Floating Rate, another holding (1% vs. 6% range over the last six months.)
http://finance.yahoo.com/q/bc?s=FFRHX&t=6m&l=on&z=l&q=l&c=RPHYX