I was shocked when I saw that the share price of Angel Flexible Income Fund dropped 1.23% on a day the bond market was flat. Then I remembered how ANFLX always seemed to drop right before end of quarter. This is different from month end dividend distributions.
I'm frustrated because there is no warning, no nothing that a precipitous drop is coming except knowing that it is the end of the fiscal year and market prices must be assigned to illiquid securities.
Has anyone else experienced this in their bond fund?
Mike E.
Comments
Bought ANFLX on 9/18/15 out 01/11/16 @-2.37% loss
Sep 30, 2015 10.08 Close
Sep 30, 2015 0.04 Dividend
Sep 29, 2015 10.24 Close
https://finance.yahoo.com/q/hp?s=ANFLX&d=0&e=26&f=2016&g=d&a=10&b=3&c=2014&z=66&y=66
Down today ????
Angel Oak Flexible Income Fund Class A
(MUTF:ANFLX)
9.66-0.12(-1.23%)
Jan 26, 4:00PM EST
https://www.google.com/finance?q=MUTF:ANFLX&ei=rA6oVsnHCsLlmAG836_gBw
Hi Mike,
Our information desk sent me over your inquiry on the ANFLX move yesterday. I cover the central territory with my partner, so feel free to reach out to me directly going forward – I’ll typically be able to get you a very quick response.
The move was led mainly by CLOs, marked lower by approximately 2%. Continued secondary market supply in CLOs over the past few trading days has put pressure on the sector from a technical perspective. To give an idea of where spreads on our bonds are compared to corporate credit and high yield, I’ve pulled some graphs that compare the two. In our opinion, CLOs are a much better way to play Corp/HY credit due to the diversified nature of the bonds – i.e. they’re securitized senior bank loans so they don’t have single name issuer exposure. They are also pure floating rate instruments so they protect you from short term rates rising as well, all while yielding more than their traditional corporate counterparts.
Unfortunately as I mentioned earlier, the secondary supply has driven the spreads wider, dropping the prices on these bonds. Also to note, CMBS prices dropped marginally yesterday due to a deal trading at a very wide level. We can’t say for certain, but all the indicators point to a forced sale.
I hope this helps explain the price movement yesterday – if you have any questions please don’t hesitate to give me a call.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1104508
May I ask one more question? How disruptive to the fund’s daily operations is the large outflow of assets that have occurred over the past four months? As of 9/30/15, the fund’s assets stood at $421MM. As of today, they stand at $323MM (per Morningstar). Has that resulted in the fund selling more of its liquid holdings and left the fund with a greater risk of illiquidity? How close is ANFLX to a Third Avenue fund situation?
Thanks again for your feedback.
Mike Edwards
Angel Oak's response follows:
That’s a great question, Mike. Fortunately the spreads on our bonds hadn’t widened out when we started seeing redemptions, so it wasn’t difficult to meet them organically. There was no forced selling of bonds like you saw in some hedge funds last year.
Back in the beginning of the fourth quarter, we also saw the signs that credit markets could get even choppier than they were in July and August, which initially effected high yield due to oil selling off. When we saw those signs, we got conservative in our cash management. As of 12/31 we held roughly a ~17% position in cash. We raised this by minimizing our CMBS position, which we fortunately were able to do before spreads really started widening in that space. In terms of how we are on liquidity, we basically traded very liquid CMBS for cash, so it’s roughly a net zero sum trade off.
I am happy to say we are nowhere close to where Third Avenue found themselves last year. While we are a credit fund, we invest in considerably different areas than where Third Avenue traded. Third Ave basically was reaching into deeply distressed areas of credit where it could take a lot of time for the trades to come to fruition. Unfortunately for them, when they started seeing redemptions, they could only sell what the street would buy – i.e., their liquid positions. They were left with roughly 7 illiquid positions including deeply distressed restructuring deals which were trading at pennies on the dollar. An interesting tidbit, In typical wall street shark fashion rival traders at hedge funds were shorting a lot of their positions because they knew they were going to see redemptions and would be forced to sell quickly at incredibly wide levels given their mutual fund/daily liquid structure. It’s definitely a cautionary tale that the market has witnessed – they were really doing a hedge fund trade in a 40act fund. Returns were great for a time, but when things got bad it was evident why a less liquid vehicle is important for those types of distressed trades that take a long time to see the result of an investment.
To contrast what we do to Third Ave, most of the bonds we buy have embedded credit enhancement or aka principal protection. On our CLOs, we have roughly 8-15% credit enhancement, depending on the deal, meaning we could see 8-15% losses annually before we saw a dollar in principal loss – we believe that gives us a lot of insulation from credit events. To give you an idea, historical default rates in CLOs are around 4% and during the crisis they peaked at 9%, so in short we can say with fairly relative certainty that these are money good bonds. Unfortunately they can see some mark-to-market volatility like yesterday.
I am noticing a pattern in the forum of people getting into new unproven funds and getting burned. I like this investor behavior when they fund startups but are you sure you aren't playing VC to mutual fund startups but without the high upside?
The fund going down more than 1% for a 2% markdown implies they are more than 50% in CLOs. Is that what you signed up for? The response mentions that the notes in these CLOs are senior bank loans. So are the notes in most Floating Rate bank loan funds. But that isn't the whole story. The CLOs have tranches with a pecking order. Insurance companies typically take the most senior tranches for less risk and lower rates, hedge funds somewhere in the middle and the yield hungry mutual funds and investors the junior tranches with the highest rates but with most risk. Did the material he sent explain this and where they stand? Otherwise, the statement he made could be misleading even if unintentional.
From a due diligence perspective, the two senior managers came from WaMu when it collapsed in 2008-09 and were in their mortgage division. May be they were the two guys who were not involved at all or have learnt from their mistakes and getting a do-over with Collaterization 2.0. Or may be not if they are doing so with your money.
I also note that this company has affiliates that have started to originate securitization of subprime mortgages with the same individuals involved. Nothing wrong with that on its own especially if they have learnt from mistakes before. But the fact this company is on both the supply side and the demand side of this securitization would make me nervous even if in theory they have all the safeguards to keep things at arm's length and fiduciary responsibilities, governance boards, etc to prevent misdeeds. In theory.
I apologize if I come across as criticizing the choice. I am not trying to. The above is the kind of minimum thinking and due diligence an investor does when deciding whether to invest in a startup. Perhaps it is being in that world that makes me more conservative in my fund investments. Without sufficient information to decide one way or the other, one avoids a particular investment in the same way one keeps a respectful distance from a car that appears banged up while driving. You don't know if the driver is responsible but don't have sufficient upside in testing their driving skills. You don't owe them the benefit of the doubt.
Do we really need to invest in such funds?
PS: Please redact the personal phone numbers of the guy who responded to you out of courtesy. It is unnecessary and bad for them when such things float around from their private emails in searchable internet content. Thanks.
P.S. I deleted the gentlemen's phone number and address. Thanks for catching that.
Mike
http://www.bloomberg.com/news/articles/2016-02-29/when-good-credit-assets-go-bad