High-yield mutual fund firms are seeking to distance themselves from last week’s freezing of Third Avenue Management’s credit fund, saying their investments are more diversified and easier to sell.
Fidelity Investments, Capital Group Cos., Waddell & Reed Financial Inc. and Nuveen Investments said Monday their high- income strategies don’t make them distressed credit funds and their holdings of CCC bonds are either selectively positioned or weighted toward better-quality debt within that tier. Toews Corp. said its junk-bond fund moved completely into cash last month.
The firms are trying to reassure investors after the collapse of a fund run by Martin Whitman’s Third Avenue in New York accelerated a selloff in speculative credit. The $788.5 million Third Avenue Focused Credit Fund said Dec. 9 it was closing and freezing shareholder redemptions, an unusual step for an open-end mutual fund, which typically allow customers to pull their money daily. The move spurred clients at other firms to worry that funds targeting lower-quality bonds within high yield will fall victim to the same combination of market illiquidity and withdrawals that sank Third Avenue’s fund.
“The Third Avenue Focused Credit Fund appears to have had a very different investment strategy from a traditional high-yield fund, with the majority of its investments in securities issued by distressed issuers,” Hannah Coan, a spokeswoman for Capital Group’s American Funds, said in an e-mail. “While traditional high-yield funds frequently hold some distressed securities, it is typically not a core part of their investment strategy.”
Fidelity hasn’t seen “any unusual activity” with regard to investor flows in its high-income funds, spokeswoman Sophie Launay said in an e- mail. The Boston-based firm said the funds have a bias toward higher-quality BB and B rated securities.
Shares of Waddell & Reed plunged 7.5 percent on Monday, the most since August, as money managers slumped for a second straight session. The Overland Park, Kansas-based firm said in a statement that its Ivy High Income Fund has 46 percent of its bond holdings in the CCC category. Of that amount, 34 percent is in the higher-quality segment with a rating of CCC+. Forty-seven percent of the assets are rated BBB to B.
Moody’s Investors Service defines a CCC rating as “very high credit risk, poor standing.”
Ivy, Nuveen
Ivy High Income, which had assets of $6.6 billion at the end of October, has declined 7.9 percent this year, trailing 89 percent of peers, according to data compiled by Bloomberg.
While the $386.8 million Nuveen High Income Bond Fund has faced “modest” investor withdrawals this month, the outflows haven’t “posed any difficulties for either maintaining the integrity of our investment strategies or providing necessary liquidity,” spokeswoman Kathleen Cardoza said in an e-mail. The firm hasn’t cut or increased its holdings in lower or non-rated bonds, she said.