http://www.riverparkfunds.com/downloads/News/RiverPark-Cohanzick_3Q15_Shareholder_Letter.pdf- RPHYX was hurt by Goodman Networks, a pre-IPO company that the manager thought would be a "money-good" investment until the company's largest customer cut back on orders, and the company cancelled its IPO plans. RPHYX has since reduced its position in the company.
- RSIVX was hurt by three problems: (i) Goodman Networks, as above, (ii) Verso/NewPage, a bet on a merger between two paper companies that ended up getting dragged out and weakened by regulatory review, and (iii) Hunt Companies, a real estate firm that had promised to get credit ratings for its bonds, but then decided to keep its ratings private. RSIVX has reduced its positions in Goodman and Verso/NewPage, but the manager believes Hunt is still a "money-good" investment and is adding more.
My quick takeaways:
- Those who thought the funds' NAV drop was just due to "mark-to-market" pricing problems are going to be disappointed. It seems the manager has thrown in the towel on Goodman (for both) and Verso/NewPage (for RSIVX); they have already sold off at least some of those bonds, so those losses are locked in. For Hunt, the manager is optimistic, but I don't understand the rationale for the company wanting to keep its ratings private.
- Despite the manager's emphasis on making "money-good" investments, it is pretty clear that there are significant risks involved in the funds' investments. Presumably this is still much less than what a typical high-yield bond fund goes through.
- Although the funds are relatively diversified (compared to say, ZEOIX), it's a good reminder of how even just one mistake can impact the funds' performance.
For what it's worth, I continue to hold RPHYX, but have been considering switching or splitting with ZEOIX.
Comments
RPHYX I hold, and it's outperforming money market with only a tad higher volatility, so I remain satisfied with it and hopeful that it will soon outperform some of its peers.
Derf
Sure there are few AAA rated US corporates now, but that could be because of the sovereign ceiling (generally corporate bonds are not rated more highly than their country's debt). Exceptions are rarely made, and only when it can be shown that a default by the nation would not adversely impact the corporation's ability to service its debt.
That seems hard to do for financials. The report made a point of saying no financials are AAA rated, yet NY Life gets a AAA rating from three of four NRSRO. Only S&P rates it lower. Guess which ratings firm downgraded US sovereign debt.
There's a pie chart that purports to show that 25% of defaulted debt was originally rated investment grade. (The accompanying text says 26%.) But without more, one has to wonder whether this is a cooked number. It doesn't show the odds of investment grade debt defaulting vs. other debt defaulting. So it is useless in supporting the thesis presented that ratings are "less than indicative" of future defaults.
For example, suppose that $25B of debt issued (based on par value) were investment grade, and 1% of that defaulted over its lifetime. Suppose further that $6B of non-investment grade bonds were issued, and 12.5% of that defaulted over its lifetime.
You'd surely conclude that investment grade vs. non-investment grad was a good indicator of default probability. Yet there would be $1B in defaults: $250M of investment grade, and $750M of junk. So, 25% of the defaults would have been investment grade bonds.
1. mistaken judgments about three individual issues. On whole, those sort of goofs have been rare but when your performance edge might be fractions of a percent a year, they count. In this case, the goofs have cost nearly 380 bps. The fund trails its peers this year by 125 bps. He's written-off one, anticipates partial recovery in a second and hopes for full recovery in a third (Hunt).
2. herding in the high-yield space. In the first week of October, HY mutual funds saw $700 million in withdrawals but HY ETFs saw $1.4 billion in inflows. That dramatically boosted issues represented in the major ETFs but left orphan issues largely in the dust. It also may presage hot money trading in the sector.
3. a not-very-coherent peer group. Multi-sector bond, like "miscellaneous region," covered a huge variety of disparate strategies and asset allocations. In Mr. Sherman's case, his allocations differ dramatically from the peer group's in 16 of 17 bond sub-categories. On his allocation to BBB-rated bonds (21%) is typical.
4. a substantial commitment to ultra-conservative issues. About 40% of the portfolio overlaps the far more conservative Short Term High Yield fund and those issues aren't subject to the sort of rebound that longer-dated ones are.
The portfolio has a yield-to-maturity of 8.57%, rather better than its high-yield benchmark.
For me, the questions are (1) is there a systemic problem with the fund? And (2) what's the appropriate time-frame for assessing the fund's performance? I don't see one with the former, though we're scheduled to meet Mr. Sherman in November and will talk more. On the latter, the best bogey I've got is Osterweis Strategic Income (OSTIX), which Mr. Sherman considers a legitimate peer. In their worst stretch, it took them nine months to recover from a drawdown. Since OSTIX is still below its previous high, the drawdown underway now might last longer. So maybe this is your "in a year or two" money, which implies judging performance over a couple year cycle.
For what interest that holds,
David
Just picking up on your thoughts for OSTIX as part of someone's "in a year or two" money. I went a bit further and added other time frames as well as other fund considerations to create kind of a "fund ladder".
For less than 1 year money - PSHDX, BSBSX, FOSIX,
For 1 year money - RPHYX / RSIVX...or, maybe FIRJX or DLSNX
For 1-2 year money - OSTIX,
For 3-5 year money - PONDX, FAGIX
Anyone have thoughts on what your "fund ladder" might consist of?
David
Mike_E
(Old-) Verso and the merged Verso have been bleeding cash perpetually. Without the merger, Verso would probably likely have had a “corporate event” already. Newpage itself, had entered, then emerged from BK a few years ago. Its trip through BK, allowed Newpage to de-lever somewhat. So along comes Verso, somewhat like a parasitic organism to extract Newpage’s cash to prolong its own existence.
Riverpark’s commentary states that Verso has “exceeded expectations with respect to achieving synergies (of the merger)”. I can tell you with certainty that is a (Verso-) management talking point they put out when their horrific Q2-2015 results came out. – Trying to seduce investors to have faith in a management team, DESPITE the poor results. Riverpark is just parroting Verso’s earnings release/presentation materials, presumably taking it at face value. I viewed the “exceeding expectations” comment from Verso as an indictment --- if they were ahead of the curve in terms of slashing costs, and STILL their reported results were so poor, then they must REALLY be in trouble – and presumably the low-hanging fruit of the synergies has been done. (So not much more to be done to help them.)
As part of the merger (which, I believe closed in January) they did some type of bond exchange. Seem to recall the effect of it was to cram down a principal haircut on some bondholders. In return, the bondholders got a token lump-sum cash-out payment (further draining the merged entity of needed liquidity!!), and higher interest rates on the “new” bonds, some/much of it PIK, not cash. Possibly also a lightening of covenants. Why would you want to lend to a borrower who is doing a principal haircut of its debt? Isn’t that a major red-flag?
A key problem is ownership – Verso is controlled by private-equity firm Apollo. If memory serves, Apollo had large (likely controlling) stakes in both Newpage and Verso. Apollo has a particularly ugly history of asset-stripping companies which it controls, leaving them debt-hobbled to such a degree that servicing the debts eventually becomes impossible. The (predictable-) outcome occurs frequently enough with Apollo, that I view it as a standard Apollo business model. I’ve seen them play this game time and again. Verso, like Apollo’s prior ‘projects’ need not face bankruptcy – all that needs to happen is for Apollo to a)buy a substantial amount of Verso’s bonds at the steep discount provided by Mr. Market, then b) surrender it to Verso in return for equity. In this way, Verso could de-lever. It’s remaining bonds would no doubt substantially rebound in price, lowering its cost of capital.
But doing so, is not in Apollo’s playbook. They extract cash, they don’t contribute cash. I could readily cite other ‘red flags’ over the past year on Verso, but am running long. Attributing Verso’s problems to the regulators is diverting blame. By the way, why didn’t Riverpark mention Apollo, its control of Verso, and its sordid history with other investments?
I’ve a small ‘stub’ holding in RPHYX, having sold most of it earlier in the year as junk spreads kept widening. At that time, also sold a ‘starter position’ in RSIVX which was doing nothing. I was contemplating adding to my RPHYX position shortly, as I suspect junk may continue to be buoyed. Frankly, I’d no idea Verso was a significant holding of Riverpark’s. That it was (is ?) is troubling to me, given my familiarity with Verso -- Verso was never (in the past 3 years) a credit that a prudent portfolio manager would own – at least not without hedging it (possibly by shorting the equity).
After reading the Riverpark commentary, I am rather dis-inclined to add to my Riverpark position at this time. Their explanation of Verso is absent some critical understanding of what they invested my money in. Verso should have been a VERY EASY problem to keep out of the portfolio.
And also a candidate for some tax loss harvesting. I'll be rolling my investments in Strategic Income into High Yield, waiting the requisite 30 days, and then rolling back.
- Goodman: The problems mentioned in the letter -- IPO withdrawn, largest customer cancelling orders -- seem to me that they should have been equity risks, not credit risks. A company that cannot pay off its bondholders without completing an IPO and selling lots of product hardly strikes me as being "money-good." Was there some kind of convertible upside for these bonds (perhaps in the IPO) to justify this risk? Even then, I would not think it is suitable for the objectives of RPHYX.
- Versa/NewPage: Edmond's perspective is excellent, and I have nothing to add for this one.
- Hunt: I am a little troubled that the manager attributes this to a "mark-to-market" situation. I can understand if there was a fall in price solely due to a large bondholder suddenly liquidating and a shortage of buyers (for reasons unrelated to the company itself). But Mr. Sherman says the price was due to the company decided not to release is credit rating. Again I do not understand the rationale for the company's decision, but as an example, if Apple stops giving iPhone sales figures and the stock price drops because investors think it raises a red flag, I don't think you get to call that a "mark-to-market" problem.
Taking this a little further, I wonder what Mr. Sherman's initial assessments of these companies indicated. As others have pointed out, perhaps the large size of the fund means that Mr. Sherman cannot invest only in truly "money-good" opportunities, and he needs to put some money in in riskier issues than he would have preferred? Might be a point in favor of a smaller fund like ZEOIX.
The fund is supposed to hold around 50% in bonds that are due in under 90 days (or are expected to be called in that short a time). Sounds a little like prerefunded, but clearly more risky (no stash of cash backing up payments). The book value of a company is supposed to be enough to cover 100% of the bond's value, but that depends on the company's business (is it bleeding cash and so reducing book value, did it just fail to increase book value due to a failed IPO, etc.) And even if a company can cover bond payments if it goes bust (book value exceeding bond value), that doesn't mean it will go through bankruptcy and pay off when the bonds mature.
Remember too that most of the bonds held are junk. That rating can include expected defaults, even for truly "money good" bonds. The fund has an interesting strategy, and one that should generally work well in small doses (thus the concern raised by a poster above about the fund being too large). But by definition, junk bonds, even ultra short ones, carry risk.
I'm still uncomfortable about the explanations given. Maybe I'm just looking for something along the lines: there is judgment involved here, otherwise we could not get this sort of yield. Judgment isn't 100% perfect - even when everything looks good, stuff happens. Here's what happened in these cases ...
I figured that the yield was good enough to provide a buffer in case of a blow up (i.e. it would still come out better than a bank account). So far, that's true, but without much margin of error left, at least until the fund resumes performing better.
@msf: Yes.
Come on, Mr. Sherman. Give!
Mohan
Included in the results were management comments (essentially) that Verso is "going concern" risk and that they don't have adequate liquidity and that "restructuring" is a real possibility.
I don't recall seeing that verbiage in earlier press releases.
Foreseeable. Predictable. Apollo Investments does it again!