Third Ave teaches finance – and management

The Third Avenue Focused Credit Fund (TFCVX) is closing, squeezed by waves of redemptions, but investors can’t get their money back for “up to a year or more”.

“It’s now in the realm of possibility that we have a recession in 2016, especially some localized recessions in the Midwest states”, said Brian Peery, a portfolio manager at Hennessy Funds.

Billionaire investor Carl Icahn told CNBC in a phone interview Friday: “The high-yield market is just a keg of dynamite that sooner or later will blow up”.

Apparently, the firm continued paying out all redemption requests through December 8th, just before it shuttered the fund, and transferred all of the fund assets into a liquidating trust, shares of which are to be distributed to former shareholders in the closed bond fund. It’s unlikely that other, more broadly diversified and higher-quality funds will meet a similar fate, as they don’t invest in illiquid fare to the same extent as the Third Avenue fund. We do not believe this will prove to be the first in a series of similar failures that sweep high-yield funds.

Third Avenue’s valuation committee consists of three veteran insiders: general counsel Jim Hall, Controller Jim Buono and Chief Financial Officer Vincent Dugan, disclosures show.

As Benzinga previously reported, the iShares iBoxx $ High Yid Corp Bond (ETF) (NYSE: HYG), the largest junk bond ETF by assets, traded $2 billion in the secondary market last Tuesday.

Often the assets are bankruptcy claims, risky mortgage-backed bonds or debt issued by a company in financial distress.

‘The risk is that this is going to cascade into something bigger, ‘ said Minerd, whose firm oversees $240 billion. The firm said it will now be led by a team of executives.

European stocks also came under heavy selling pressure Friday, with the Euro Stoxx 50 losing 2 per cent, partly in response to China allowing the yuan to record its biggest weekly fall since the shock devaluation upended global markets in August. Investments in the emerging markets of Ethiopia and Mozambique, for example, have been sold in recent months, he said. During this interim period, the fund’s manager will typically sell the portfolio’s holdings to raise cash, using the proceeds to pay out shareholders who redeem their investments. As of July 2015, management had invested half the fund’s assets in bonds rated below B and another 40% in nonrated fare.

Even so, the wider credit markets reacted badly. Third Avenue responded to the criticism on Monday by announcing longtime CEO David Barse had left. Investors yanked $3.8 billion from high-yield bonds in the past week, the largest outflows in 15 weeks, according to Bank of America Merrill Lynch.

The fall in the price of oil and other commodities is hitting highly leveraged companies that require access to capital markets.

But should we be anxious about contagion as more and more investors look to yank their money out these funds and ETFs for fear of fear itself – or at least because of further deterioration in the energy sector and among other corporate issuers? This tight spread characteristic is an indication of the rich valuation of the high yield asset class at that time.