Earlier this morning [11], we laid out a list of junk bond-focused mutual funds which based on their atrocious YTD performance, have the highest risk of being the next to follow Third Avenue in gating and/or liquidating, noting that Catalyst, or Nuveen or Franklin are most at risk.
[12]
Now, in its post-mortem note analyzing the "death" of the Third Avenue fixed income fund, Goldman's analyst Alexander Blostein presents just who it is that Goldman itself is focusing its sights on as the next fund to suffer gating and/or liquidations (hint: it is among the names listed above).
Here is Goldman, first with its own take on TFCVX:
An AMG affiliate, Third Avenue Management announced that it will be liquidating its US focused high-yield bond fund (TFCVX; ~$790mn in AuM) as redemptions are outpacing the fund's ability to liquidate its assets without a fire sale. Shareholders will be gated in the meantime.
Bottom line: This highlights to us the degree of illiquidity in certain parts of the high yield fixed income market, and the resulting risks to managers especially amidst accelerated redemptions. Moreover, we have seen elevated redemptions from taxable bond funds recently (-$65bn 2H15 vs. +$51bn 1H15), driven by outflows from high yield funds, which may remain elevated from here amid heightened risk aversion, with price declines exacerbated by liquidity concerns. We believe BEN (Sell) is most at risk given greater HY holdings as well as the recent deterioration in performance.
- Performance and flows: YTD TFCVX is down 22% (-890bps excess performance), ranking 99 percentile relative to peers per Morningstar. Per eVestment, holdings include Caesars, and other sponsor-backed leveraged buyouts, and management commentary also highlighted that some investment have undergone recent restructuring. On the back of weak performance, the fund has seen accelerated outflows (-$680mn YTD vs. +$630mn in 2014).
- Liquidity process: In order to liquidate the fund in an orderly fashion, redemptions from the fund will be gated from here. Management said that existing shareholders will receive interest in the liquidating trust (which will be managed without fee), and cash distributions will be made over time. The full process may take up to a year or more per management commentary. The impact to AMG is likely immaterial, given that it is <1% of total firm AuM.
- Read-across: This is a more extreme outcome of illiquidity in HY fixed income markets, and the risk is greater for smaller managers such as TFCVX, due to more concentrated holdings and shareholder base. That said, we think this is a negative read-across for other HY managers amidst rising redemptions.
And the punchline:
Amongst our coverage, BEN (Sell) is most exposed with 30% of fixed income holdings in high yield securities per eVestment, and with 37% of fixed income exposed to emerging market debt in particular. Importantly, Templeton Global Bond ($100bn in total; $59bn in mutual funds) – BEN’s largest fixed income fund – has seen meaningful outflows YTD (-$7.6bn from retail; -13% annualized rate) and could persist given the deterioration in excess performance (-460bps vs. benchmark YTD).
High yield fixed income has faced net redemptions YTD; BEN most exposed in our coverage:
[13]
We find it ironic if Templeton Global Bond [14]'s 41-year-old "superstar" manager, Michael Hasenstab...
... after being lionized by the media [15]for years due to his bets on central banks bailing out each of his investments, is finally Lehmaned by none other than Goldman Sachs (a Lehmaning of one the largest US-based bond funds which, needless to say, would not only promptly reverse the Fed's tightening ambitions but unleash more QE and NIRP on very short notice).
