NEW YORK (
) -- Investors willing to take some extra risk to achieve higher returns from the
portion of their portfolio should consider the
Third Avenue Focused Credit Fund
While fixed-income investing has become popular amongst a broad range of investors, attractive yields
. Money market fund yields have steadily decreased throughout 2009, and the seven-day yield on taxable money-market funds has been holding steady at a record low of 0.03%.
Municipal bonds are becoming riskier, as regions of the country are bogged down by debt, and many investors fear Treasury bonds will fall in price as rates rise.
Popular ETFs like the
iShares iBoxx High Yield Corporate Bond ETF
SPDR Barcap High Yield Bond ETF
, but also expose the investor to considerable risk.
Even in an improving economy, these investments have the risk of default, and disruptions in credit markets have caused these ETFs to trade at marked differences from their underlying values.
Fortunately, for risk tolerant investors, there's another market out there: the distressed debt market. Many companies are still bankruptcy risks or have their bonds trading at discounts. Investors looking for a fixed income investment that has a good risk/reward scenario should consider the
TFCVX managers can "go anywhere" in
, from bank loans, high-yield, and convertibles, to holding stock as part of a restructuring. Instead of owning a fund in one of these sectors, investors have exposure to the ones the managers believe have the best chance of appreciation.
Third Avenue Focused Credit has the following stated objective: "Seeks total return from a combination of capital appreciation and interest income, by focusing capital in our highest-conviction ideas across the credit spectrum."
Manager Jeffrey Gary was the head of BlackRock's high yield and distressed investment team before joining Third Avenue. His approach is to "focus on our downside risk first and then our upside potential." He wants to concentrate the portfolio in 50 to 60 holdings, and will select securities based on what has the best upside potential, regardless of what type of security it is. Finally, the fund will be event driven. Gary has said, "We want an event that will drive price higher and reduce credit risk of our investment."
Troubled economic times can be great news for distressed debt because it offers the opportunity for a reallocation of assets, most notably when equity holders are wiped out in bankruptcy. The fund will run the gamut of distressed situations, from purchasing undervalued debt all the way to participating in bankruptcy restructurings.
Even though high-yield debt has recovered since March, credit spreads are still extremely wide, and bankruptcies are likely to continue in the next several quarters. These negative conditions can also provide investment opportunities, and TFCVX' open-ended structure allows this fund to be more nimble than a passively-managed ETF like JNK or HYG.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion did not have any positions in the funds mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.