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Credit Mutual fund liquidation - Marty Whitman


valueorama
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This kinda has been irking me a bit lately. How can a value investing fund with a somewhat conservative approach on debt have to shut down... this not an over leveraged, hedge fund like LTCM or an novice dot.com fund manager who took on too much risk..

 

This is coming from a value investing house that espoused being "an aggressive conservative investor".  It wasn't run by Marty Whitman, but his tenets run all over the place.  I was a big fan of Marty Whitman and can accept all his funds have been underperforming lately.. but, I don't think they threw the value investing concepts out and became a momentum fund.

 

I was not invested in it, but, were they really that off the mark? Did they stray off the game plan and stretch for yield? I don't think so. 

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This kinda has been irking me a bit lately. How can a value investing fund with a somewhat conservative approach on debt have to shut down...

 

Theoretically any mutual fund can "have to shut down". If there is a run on it, they cannot do anything else except return money. Of course, for majority funds, significant number of holders don't sell even if fund underperforms/drops a lot.

 

Now, Focused Credit had large illiquid positions. This exacerbates any run on the fund, since you can't sell these positions at any reasonable price to cover withdrawals. Think what happens if they buy distressed bond and it goes into default - liquidity may dry up until recap and prices offered may be 2-3x below purchase price even though eventual work out might be positive.

 

I think Marty's funds played with this in the past too. They never got burned on it until now though.

 

Like someone said on another thread, Focused Credit should have been a CEF or limited-withdrawal hedge fund. In case of panic, this does not work as a mutual fund.

 

It's also possible that their investments were simply bad and the run was justified. We may not know in the end.

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The fund got pretty big due to a good performance in 2013, so I think a lot of new investors  were performance chasers that did not really know what they owned. Then came the crash in crude late 2014 that tanked many of their energy related investments. They dealt one trashiest segment of the bond market and the recent rush on junk bond debt did them in.

http://seekingalpha.com/article/2904666-third-avenue-focused-credit-tackles-distressed-debt

 

3rd Avenue tells a good value investor story, but they seem to suck in terms of performance. Read their shareholder letters and buy what they buy 30% lower, or maybe better don't buy it at all.

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