After picking a diversified growth mutual fund,
ETF Market Opportunity
for the second quarter, and an international fund,
Fidelity China Region
, for the third quarter, I'm turning to the credit market for the fourth quarter and picking
Third Avenue Focused Credit
It's been a good year for equities, and my two picks performed well. ETFOX gained 32.2% from March 31 through Sept. 28, and FHKCX gained 12.4% from June 30 through Sept. 28.
While I still like these two funds for the long term, short-term oriented investors may want to take some profits off the table, as the market has had a nice run from March with barely any correction. TFCVX may offer a better chance for price appreciation over the next quarter, with less downside risk, given current conditions.
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, but the fund will run the gamut of distressed situations, from purchasing undervalued debt all the way to participating in bankruptcy restructurings.
High-yield debt has recovered since March, but even as the market recovers, there are companies struggling to clean up their balance sheets, and bankruptcies are likely to be high for several more quarters. Credit spreads between high-yield debt, and Treasuries are still at the historic high end of the range because the rally was from such historically low levels.
Traditionally, investors need to be well-heeled to invest in this area, and most funds have steep investment minimums. Third Avenue already offers a distressed debt fund, for instance, with a $50 million minimum investment; retail shares, however, will require only a no-load $2,500 investment. Please note there is a 2.0 percent of net asset value redemption fee on shares held less than one year.
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."
TFCVX will follow the custom of other Third Avenue funds and overweight its best ideas. Therefore, while it offers diversification across different credit markets and different strategies, this will be secondary to asset selection. Returns will be driven, for better or worse, by Gary's ability to select individual situations for investment.
The areas from which TFCVX managers will select securities include: performing bonds and loans, debt under stress, capital infusions, distressed assets, and restructurings.
According to a conference call held on Sept. 9, available on the Third Avenue Web site, 80% to 100% of the portfolio will be in the first four areas, with up to 20% in restructurings. The fund will not purchase equities, but it may choose to hold equities received as part of a restructuring. Portfolio positions will range from about 1% to 4%.
TFCVX will have the team of analysts at Third Avenue to call upon, with their years of experience in credit markets. The fund will also have increased help from Third Avenue Value (TAVFX), which recently decided to seek opportunities in the area of capital infusions.
Investors in search of yield won't be disappointed by the fund, but they should know that the fund is focused on total return via capital appreciation. Though he couldn't be specific because the fund has yet to fully invest, Gary said that the fund will hold high-yield assets with current average yields of about 8%, bank loans with yields of about 5%, and hold between 5% and 15% cash.
Based on that information, investors shouldn't count on consistently high income, since the fund's mix of assets will shift over time, but the yield shouldn't drop below the rate on bank loans.
TFCVX doesn't come cheap: fees will be 1.71% for retail shares and 1.27% for institutional shares, although the first year will be reduced to 1.4% and 0.95%. The fund launched in September, making a comparison to returns impossible, but Third Avenue's reputation precedes it. Furthermore, the economic cycle suggests TFCVX should see strong returns going forward.
Investors looking to participate in this area need a lot of capital or expertise to do this on their own, but TFCVX offers investors something that they'd be hard pressed to find elsewhere--a one-stop shop for distressed debt that invests across the entire spectrum of credit securities.
At the time of publication, Dion was long ETFOX.
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.