RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses I’ve a different take on the Riverpark commentary. I’ve had an unwanted degree of familiarity for some time, with Verso, Newpage and the now-merged entity, due to my ‘day-job’. (and please excuse me, a lot of this is based on recollection). Riverpark’s explanation of the problems at Verso are incongruous with my perception/experience with them.
(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.
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses RE: RSIVX and RPHYX, nothing is working for me this year.
Mutual Fund Ladder (vs a CD Ladder) I asked a question as part of a different thread, but thought it worthy of its own limelight.
Here's part of that thread:
rphyx-rsivx-new-commentary-explains-mistakes-that-resulted-in-credit-losses@David_Snowball commented on a possible alternative to RPHYX or
RSIVX :
"...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."This got me thinking and I commented back to 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 or RSIVX...or instead, maybe FIRJX or DLSNX
For 1-2 year money - OSTIX,
For 3-5 year money - PONDX, FAGIXAnyone have thoughts on what your "fund ladder" might consist of?"
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses @David_Snowball,
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?
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses FWIW, RSIVX is underperforming OSTIX by about 3% so far this year after outperforming it by around 2.6% last year. So this is no disaster though I do own it and I am a bit disappointed in two permanent losses of capital in a market that hasn't had all that many blow ups so far. If the discounts for closed end funds like DSL and BGH hold up for the rest of the year, come January I'll be sorely tempted to accept the greater risk and move there from RSIVX (tax considerations preclude me from considering it now).
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses @claimui thanks for this post. I had suspected the volatility might be due to holding thinly traded but "money good" bonds. This info reminds me of a comment Junkster made that basically predicted this outcome. I will think some more about current investment in
RSIVX.
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses Thanks for posting,
@clamui. It's good the manager is honest about his mistakes, but it is disappointing. I think your takeaways are wise. I've still got my retired mother in
RSIVX, but it is only one of three bond funds I have her in for income.
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.
RPHYX / RSIVX: New commentary explains mistakes that resulted in credit losses 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.
Replacement for RSIVX Multi sector bond fund. in a Roth ira fund purchased about a year ago. @expatsp said: "You guys are a tough audience. According to M*,
RSIVX is a whopping 1.6% behind its benchmark over the last year. Any fund with a 6% yield is going to have some volatility. I remember in David's original write up that the manager's promise was to deliver 6-8% yield and more or less stable capital over a five year cycle. It seems to me he's on his way to meet that goal."
I agree. But, it will be interesting to read the 3rd quarter commentary to get David Sherman's take on the fund's recent performance.
Also, I agree with expatsp that PTIAX looks interesting (thanks to
@TSP_Transfer ) . It's current investment mix appears to make it a "hybrid high yield fund" (to invent another category). M* says the fund has about 40% in municipal bonds and B as the average credit quality. Successfully blending those two types of bonds in one fund could serve to even out year to year performance. I wonder what other funds do that?
Here is the three year chart:
Chart
Replacement for RSIVX Multi sector bond fund. in a Roth ira fund purchased about a year ago.
Replacement for RSIVX Multi sector bond fund. in a Roth ira fund purchased about a year ago. You guys are a tough audience. According to M*, RSIVX is a whopping 1.6% behind its benchmark over the last year. Any fund with a 6% yield is going to have some volatility.
I remember in David's original write up that the manager's promise was to deliver 6-8% yield and more or less stable capital over a five year cycle. It seems to me he's on his way to meet that goal.
But if stable capital is what you want on a daily or even monthly basis, you should certainly be elsewhere.
None of this is to say that there might not be better bond funds out there, and the ones listed here look good (PTIAX -- wow!) but I personally am giving RSIVX more of a chance.