“A top-rated bond mutual fund was down 17% on Friday”, Bloomberg’s Lisa Abramowicz tweeted, on Sunday morning in New York. “In one day”, she added, for emphasis.
The product in question is the AlphaCentric Income Opportunities fund which, according to the prospectus, “primarily focuses on non-agency residential mortgage-backed securities and other residential housing debt, although it can invest in other secured credits where management finds value”.
As of February 29, it sported a five-star rating from Morningstar. Have a look:
As you can see in the “NAV/1-Day return” column, the fund reported a massive drop at the end of last week.
And it wasn’t just Friday. Thursday looks like it was rough too.
A quick scan of the historical data shows the fund reported a steady NAV for weeks, despite extreme stress across virtually all credit markets. And then, this:
Since mid-February, dislocations not seen since the depths of the financial crisis have shown up across a number of credit ETFs which, unlike mutual funds, promise instantaneous (almost literally) liquidity to investors.
As noted on Saturday, you might be inclined to suggest the disconnects between popular ETFs (e.g., the iShares iBoxx $ Investment Grade Corporate Bond ETF) and NAV is just “price discovery”. In other words, you could argue that the ETF is providing a way for an illiquid market to be priced in real-time, just as some country-specific equity ETFs allow US investors to price foreign equities even when those markets are closed (e.g., for a non-US holiday).
While that may be some semblance of true for debt issued by corporate titans with fortress balance sheets (i.e., for companies who will have little trouble surviving the severe economic downturn that’s coming over the next several months, and whose debt might drop now, but will easily recover), I would suggest that in many cases, the disconnects can’t properly be described as “price discovery”. Rather, what you’re seeing is probably people tapping the ETFs for liquidity (e.g., to fund redemptions or raise cash). The underlying market for a lot of this stuff is probably no-bid.
When it comes to the fund mentioned above, one plausible guess when it comes to explaining what happened, is that it was inundated with outflows and had to sell. At that point, NAV had to catch up (or, in this case, “down”) to the reality of a credit market that is currently ablaze.
A word of caution (which also serves as a disclaimer): I’m writing this on a Sunday and I do not claim that the above is a definitive take. These are merely my own ad hoc musings which may or may not be echoed, validated or otherwise confirmed by subsequent reporting from mainstream financial media outlets.
One thing I can say with near certainty, though, is this: If there aren’t already reporters from those media outlets looking into this, they will be first thing Monday morning.
Sometimes it’s hard to find a bid, so you sell and the bid moves against you. They had to sell it seems.
Interesting. This seems to be a case where Closed End Funds are usefully more transparent than open mutual funds. Albeit they are no less impacted. NAVs and prices for bond CEFs have been dropping steadily throughout the crisis. For example, the popular Pimco multi-sector bond fund, PCI, is down similarly (about 35% 52-week chg), but it’s price decay started on Feb 25, in line with the real world. Similarly, one of Doubleline’s income CEFs, DSL has shown realistic NAV/price decay since the onset. So – perhaps this will lessen a bit the shock value as at least retirement investors should have been seeing NAV erosion clearly in a portion of their portfolios.
CEFs are pretty skinny piece of the pie, unfortunately, so not that visible.
With a 1.75% expense ratio in this environment, they are probably having to dump assets to meet redemptions.
The same thing is going on in the muni market, virtually no bid. In that environment, nav measurements are inexact since pricing is almost impossible. You will get these kinds of dislocations in open end traditional mutual funds, etfs, and lastly closed end funds. Closed end funds dont have to sell to meet redemptions unlike the other two, but may hit leverage caps,and then they may have to sell. When the underlying assets crater, there is no place to hide.
Why govt nit shutdown trading. Just seeing fun by loosing people money. It is too bad on govt statergy