According to Third Avenue’s Chief Executive David Barse the fund took the unprecedented step of halting redemptions because it needed to act quickly to preserve remaining assets. Third Avenue blamed poor bond-market trading conditions that made it almost impossible to raise sufficient cash to meet redemption demands from investors without a fire sale of remaining assets. As the Third Avenue fund began to collapse traders at hedge funds shorted and bet against the mutual fund’s holdings adding pressure to Third Avenue’s investor withdrawals and forcing the sale its holdings. The fund was down 27% this year through mid-December.
As regulators and industry analysts conduct the postmortem on the fund, it appears that a large part of the reason the Third Avenue fund ran into deep problems is because it purchased illiquid and difficult to trade investments that have been steadily losing value as investors fled energy and other kinds of riskier debt. According to Reuters, the fund, when compared with other junk bond funds, carried an elevated amount of risk. For instance the fund disclosed that 20 percent of the assets it carried were hard to value and trade. This amount was higher than any other U.S. junk bond fund with at least $500 million in assets.
Even more eye popping is the fact that the fund had 76% of its portfolio exposed to very low rated CCC+ rated securities and below when compared with a median level of 22% among similar junk funds. Among the Focused Credit Fund’s most troublesome holdings is iHeartCommunications Inc., formerly known as Clear Channel Communications Inc. That bond traded recently at about 30 cents on the dollar. Other extremely distressed debt includes energy company Magnum Hunter Resources Corp. and troubled Spanish gambling company Codere SA.
Investors of with some big name brokerage firms have been losers in this fund. One of Third Avenue’s biggest investors was Fidelity Investments’ Strategic Advisers Income Opportunities Fund, which had a $128 million invested. In addition, Graystone Consulting, Morgan Stanley’s independent adviser to institutional and wealthy clients recommended the fund in 2014 after creating a due diligence report that clearly highlighted the fund’s liquidity risks.
According to new sources however, the writing was on the wall for the fund. In the months leading up to the Focused Credit Fund’s collapse three of the fund’s eight-member team left during the first half of 2015. Since 2014, the $3 billion fund declined to less than $1 billion. The Focused Credit’s asset collapse paralleled the loss of assets across Third Avenue’s funds which peaked at $26 billion in 2006 and dwindled to about $8 billion.
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