A Third Avenue junk bond mutual fund has halted investor redemptions, provoking concerns that this may be the canary in the high-yield fund coal mine. However, exchange traded funds that track speculative-grade debt are not exposed to the same level of risks.
On Tuesday, Third Avenue Management LLC blocked investors from redeeming positions from the $789 million Third Avenue Focused Credit Fund (TFCIX), warning investors that sellers may not receive all their money back for months, the Wall Street Journal reported.
The fund provider contends that the poor bond-market trading conditions made it nearly impossible to raise the necessary cash to meet redemptions without resorting to a fire sale.
Nevertheless, investors should not let one bad apple spoil the barrel.
“While we believe this development is worrisome to those investors, some of whom likely anticipated holding the fund for more time, this should not deter others from considering investing in the high-yield space,” Todd Rosenbluth, director of ETF & mutual fund research at S&P Capital IQ, wrote in a research note.
Rosenbluth pointed out that TFCIX has made riskier bets in its bid to achieve alpha. The mutual fund had 28% of assets in bonds rated CCC or lower, or almost triple its peers, and just 3% in debt rated BB, or less than one-tenth of peers.
Moreover, the Third Avenue junk bond fund held about 53% of assets in bonds where no ratings information was available – typically, non-rated bonds are less widely held or very illiquid.