A $2.3bn mutual fund sought buyers for more than $1bn of US mortgage bonds on Sunday to cover investor withdrawals after booking heavy losses in the current market turmoil.
The AlphaCentric Income Opportunities fund lost more than 30 per cent of its value last week owing to its heavy exposure to home loans to borrowers with lower credit scores. The fund’s public filings show that at the end of 2019 — when it still had $4bn in assets — it had invested two-thirds of its portfolio in bonds backed by subprime mortgages.
The mortgage market has come under broad pressure as some investors began to doubt homeowners’ ability to repay their loans. Two traders said that the fund’s portfolio managers sought offers from potential buyers on a list of more than $1bn of securities to raise cash.
The mutual fund, which carries the highest, five-star rating by influential investment research firm Morningstar, offers its investors the chance to withdraw their money on a daily basis.
A statement from AlphaCentric’s management team said coronavirus had caused “severe market dislocations and liquidity issues” across the bond market and that they were “moving expeditiously to address the unprecedented market conditions”.
The statement noted that it was not necessarily trying to sell all the bonds it put up for offer. However, because of the “lack of liquidity in the marketplace” it had put a larger pool of assets up for grabs to see which drew “the most favourable prices”.
“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed income market,” the statement continued.
The Federal Reserve accelerated its purchases of agency mortgaged-backed securities on Friday, after earlier interventions failed to calm the market.
While marketed on New York-based mutual fund specialist AlphaCentric’s platform, the Income Opportunities fund’s investment decisions are made by California-based Garrison Point. Tom Miner, the lead portfolio manager, previously worked for 20 years in the structured finance department of now-defunct investment bank Lehman Brothers.
Garrett Smith, chief executive of Garrison Point and a portfolio manager on the fund, declined to comment when contacted by the Financial Times.
Filings show that at the end of last year, 60 per cent of the fund was invested in “legacy” residential mortgage-backed securities (RMBS), which were first sold to investors before the last financial crisis began in 2008.
Some of these bonds were arranged by institutions that ran into trouble for their subprime exposure more than a decade ago such as Countrywide and Bear Stearns.
Mutual funds that are heavily concentrated in a specific type of higher-risk debt have run into difficulty previously.
In 2015, Third Avenue Management had to shut the doors of its $800m high-yield bond fund because it had run out of money to pay redeeming investors without having to dump bonds at fire-sale prices. At the time, the US junk bond market was in the throes of a rout as oil prices crashed and the fund held a large proportion of very low-rated debt from the energy sector.
The AlphaCentric Income Opportunities fund last year won an award from Thomson Reuters’ fund research service Lipper, which said that it had the highest consistent return out of more than 260 funds in its category over three years.
“We are committed to offering products that provide diversification and utilise unique investment strategies, while attempting to mitigate risk,” Jerry Szilagyi, chief executive of AlphaCentric, said when the firm received the award in March 2019.