Interesting chart from Mike Panzner of an "enhanced money market fund" that — allegedly — used subprime-related assets to boost returns.
the exact nature of what triggered this nice little mark-down…
AXA IM Fixed Income Investment Strategies – US Libor Plus fund is
a fund registered in Luxembourg. The investment objective of the Fund is to
produce an annual total rate of return on a net of fee basis which exceeds
the benchmark (one month Libor) index rate of return of 50 basis points.
>
AXUSLCU daily chart with 50 and 200 day moving average
The symbol on Bloomberg is: AXUSLCU LX
Equity. I use the phrase
the exact nature of what triggered this nice little mark-down…
AXA IM Fixed Income Investment Strategies – US Libor Plus fund is
a fund registered in Luxembourg. The investment objective of the Fund is to
produce an annual total rate of return on a net of fee basis which exceeds
the benchmark (one month Libor) index rate of return of 50 basis points.
>
AXUSLCU daily chart with 50 and 200 day moving average
Ouch!
I always say, there is nothing more expensive than reaching for Yield.
It’s interesting to see supposedly savvy investors vicitmized by a simple pyramid scheme.
Sure you can get a reliable 10% real return paid in predictable monthly increments even though the economy is only growing at one fifth that pace. So long as new “investors” keep piling cash into theses funds, everything should be fine.
Last year’s StdDev was 0.52%, so if they carried forward that assumption, they just had a -30 Std Dev event! Whoops!
I know quite a few that use the GMAC Money market earning 6%. I cannot get my head around how a money market is paying out 6%. Not saying they are using aggressive means but something doesn’t add up.
Check that…I see the GMAC rate is over 5% not 6% I quoted above.
Barry,
It’s not all bad news. They still get to collect their fees!
In fact, they should collect a bonus for handling the downturn so well.
the phrase “orderly exit” has a new meaning….
At least according to BSC
Ciao
MS
Perhaps this will help:
“We would like to bring to your attention the current situation in the US Mortgage-Backed and Structured Securities market and its implications on our US Libor Plus strategy.
As you know, a major correction has intervened in the US MBS/SS asset-class since the beginning of the year. We have released frequent communications during that period in order to address the various developments of this crisis, notably highlighting its systemic nature, and to put the market environment in perspective with the positioning that we were carrying out within our US Libor Plus strategy.
Moreover, we would like to take this opportunity to take you through the provisions that we have decided to implement in the fund in view of the current environment, in order to preserve the integrity of the strategy and to act in the best interest and equal treatment of shareholders, notwithstanding the circumstances.”
From:
http://www.axa-im.com/index.cfm?CFNoCache=TRUE&
servedoc=E47C3546-D3BC-69C5-87604D35C022AB91
Legg Mason “beats” estimates…. http://www.thestreet.com/s/legg-mason-beats-fiscal-first-quarter-views/newsanalysis/assetmanagers/10369798.html?puc=_dm
The translation of this article should be:
We caused a massive short squeeze in AMZN along with it’s orchestrated stock buyback we’ve reduced the amount of the float while increasing our profit.
I wonder what he did without all the AMZN BS.
We shall never know……
Barry…isn’t this post misleading in that it does not say it’s a “money market”….rather a short term bond fund. There is an important difference, no?
Yes, you are correct that it’s foolish to reach for more yield (risk) in short term instruments.
Tax free AAA “auction rate preferreds” pay a risk free 3.6% TAX FREE. At a 40% bracket, that’s ~ 6% taxable equivelent yield.
Taxable ones are paying 5.10% par in, par out.
My wife has a retirement account with AXA Equitable so I grabbed the last statement as soon as I saw this. I could not find the one mentioned as an investment option, although there are similar names (premier VIP Int’l equity, Premier VIP High yield, Premier VIP Aggressive Equity) Makes me wonder how those are doing, and thinking this is a life insurance outfit, it they take a hit could it spread to my wife’s account, which is in the most boring “Guaranteed Interest” account, or are only those investors reaching for yield taking it on the chin. Hoping it stays boring for me…
Lewis
Interesting, but I’m not sure this is new news. From the link provided above by Kevin D., the fund made two changes.
1. It’s temporarily refusing new subscriptions.
2. It’s changing the NAV fair value calculation from a 3rd party model to a mark to market.
We all know that the whole high yield mortgage sector is pretty much seized up though, so if anything I’m a bit surprised it’s only been hit by ~20%. That suggests to me that there’s a fair bit of vulture money around.
So far the metastases of the sub prime are spread out on the specialised lenders and the private individuals.
The intermediary chain seems to be left immune, although the commissions earned by the investment banks were high .
Mr Milken please explain!if not rating agencies please do so!if not, banks auditors do not forget your potential liabilities!
OT…? Somewhat..
The following is a link to an excellent commetary by Bill Gross of Pimco… Here’s an excerpt….
“No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market.”
Link:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+August+2007.htm
A view that coincides exactly with mine…
Best regards,
Econolicious
It’s very important to make your readers know this IS NOT A MONEY MARKET!
This is a short term bond fund, whose NAV rises AND FALLS. It carries MARKET RISK…a money market fund does NOT.
I’m now seeing a noted short seller out scaring people that money markets “are the next shoe to drop”…this is disengenuous, and innacurate to say the least.
WRT GMAC Money Market – you might want to look at that a bit closer. Are you sure it’s not purely a short-term GMAC instrument…ie) it’s not a diversified fund, but a credit bet on GMAC?
Fred – “It carries MARKET RISK…a money market fund does NOT”
I have to respectfully disagree. Although capital loss is a low probability, it isn’t zero probability. MM funds MAY invest some portion of their assets in paper with non-zero credit risk (eg. commercial paper) or interest rate exposure. You need to look at the policies of the fund.
For example, from Vanguard’s web site the following disclaimer…
A money market mutual fund investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
Estra….I’m aware of those prospsctus legal disclaimers. And we should ALL know that “Enhanced Money Market funds” have ENHANCED RISK. There is a big difference.
The fact remains 99.99% of Money Market funds have miniscule market risk. Investors should not be scared of money markets.
Of course shorts, who will profit from scaring investors into the “Sealy Posturpedic” money market, screaming credit crunch will be arm waving that the end is nigh.
Buy Fear
c’mon…. this post is stretching reality quite a bit to try to pass off a decline in a souped up Libor trading fund with the possibility that straight money market funds could also be in trouble.
“there is nothing more expensive than reaching for Yield.”
Suppose there were a large amount of institutional money, for example pensions, with intense pressure to reach certain yield levels.
The moment they start investing with the approach “we have to have a yield of X%” rather than “we want the best yield now possible”, they cease being the rational market participants of economic theory.
Two possible effects:
1) Added liquidity as new financial arrangements (beyond traditional controls) are used to leverage up and magnify yield (and risk)
2) Narrowing of spreads on riskier investments as the “yield of X% no matter what” philosophy requires ignoring risk.
The net effect of this would be to _temporarily_ drive markets up higher than they would go otherwise.
In other words, just as the use of extensive hedging makes data on volume of shorts less reliable as an indicator, institutional investors constrained by their institutional agendas to try to force higher yields would make the entire market itself less reliable as an indicator of the future direction of the market itself.
Obviously, I am just back-fitting the data, but it would explain why the market has been going up as the economy has cooled off. And suggests that the market is due for a correction.
Reading the link provided by TBP,
this was a fund that bought a lot of
A and BBB housing debt (~80% of the fund)
How Safe Is Debt?
Answer:
ONE WEEK erased all the gains of the past 2-3 years..! and still counting…
and if you add in inflation…ouch!!!!!
Am I the only one who noticed that on one of the last fear induced puke fests, “Wrong Way – Gross” came on the boob tube and scared investors with his (WRONG) call of much higheer rates?
His market calls are on a par with Al Michaels.
Non government money markets DO have risk and right now, they have more risk than ever, in my opinion, because we’ve got more systemic leverage than ever, with more complex derivative exposures.
What’s that risk?
I have no idea. Why should I waste time worrying about it for an additional 75 basis points (or whatever)?
All my managed accounts use nothing but US Government Money Market funds. That’s supposed to be secure money that I can access when the fur is flying. I don’t need to wake up one morning to find that they won’t let me have my money for a “while” during the “work out”.
And Mr. Ritholtz sounds like he was listening to my interview on Marketviews this weekend. :D
I was waxing didactic on the “reaching for yield” thing, too. Never, ever do it. I learned that in 1987 from Ben Garside (for you old timers). I’ve never seen such advice turn out badly. I have consistently seen those who do get burned, however.
Mark Young
When I was a kid, my Dad (owner of a medium-size construction company) and I used to discuss economics. I remember the one day he said, “When you head to safety make sure you get to safety.” That’s his analogue of not reaching for yield.
This whole mess was so predictable, but, like the equity bubble bursting starting in March-ish of 2000, it is still awesome to watch play out in real time.
Unlike many money market funds offering high returns, the GMAC Bank Money Market fund is FDIC insured.
To clarify my above comment: The GMAC Bank Money Market Deposit Account is FDIC insured up to $100,000. The distinction is that it is a Money Market Deposit Account rather than a Money Market Mutual Fund Account. Unlike Money Market Deposit Accounts (such as the GMAC Bank MMDA), Money Market Mutual Fund Accounts are NOT FDIC insured.