25 March 2009
NEW YORK (Dow Jones)--Financial advisers reacted with skepticism and a host of questions Monday after the government suggested individual investors and mutual funds might be buyers of troubled assets through the government's bailout of mismanaged financial institutions.
A statement from the Treasury Department detailing how it plans to spend up to $1 trillion of bailout money said at least one program designed to target pools of loans "will particularly encourage" these and other long-term investors.
Another program designed around mortgage-backed securities may also have some role for individuals.
For financial advisers, that news presented a frustrating paradox: the sense that somebody's fortune will be made buying these assets at fire-sale prices, and the realization that almost no small investors have the detailed expertise to play that role.
"You want individuals to step up and invest in these?" says Hildy Richelson, co-author of the investment primer "Bonds," with her husband, Stan. "Even institutions can't figure these out. Even the best of them. It would be very risky for an individual to participate, even if there was the potential for big upside."
Moreover, it wasn't immediately clear how individuals who did want to invest would end up doing so. Although the Treasury statement mentions "private investors," these are expected to take on roles such as bidding at special auctions and servicing portfolios of loans they've bought, so it seems likely any individuals would have to be part of a fund.
Experts could only guess at whether the Treasury envisions broad-based mutual bond funds buying a sliver of loan assets as part of their large, diversified portfolios or whether it expects to see a crop of specialty funds for investors that want to bet specifically on distressed assets.
Some broad-based funds may face restrictions on buying bundles of loans, depending on how their investment mandates are worded. On the other hand, it could take firms at least three to four months to launch targeted funds designed especially for the bailout, says Kathleen Moriarty, a fund lawyer at Katten Muchin Rosenman LLP in New York.
Specialized funds seem more likely participants, at least right off, because broad-based funds will be reluctant to dabble in troubled assets amid all the bad publicity without an explicit mandate from clients, says Milton Ezrati, senior economic and market strategist with Lord Abbett & Co. LLC, a Jersey City, N.J., money manager. However, he thinks some junk bond funds, whose investors are already primed to accept big risks, are good candidates.
He adds that closed-end funds and exchange-traded funds might be better suited to be early participants in the illiquid market for loans and other securities because, unlike open-end funds, they don't face having to sell their holdings if investors cash out.
At least one ETF firm, Invesco Ltd.'s (IVZ) PowerShares unit, has already proposed a pair of ETFs that would own risky mortgage-backed bonds, applying to launch the fund with the Securities and Exchange Commission several weeks ago. Meanwhile, at least one conventional fund company, bond fund giant Pacific Investment Management Co. confirmed it would like to participate in some way.
Linthicum, Md., financial adviser John Bacci says while he'd be "eager" to buy distressed assets, "you don't know how it's going to be packaged and presented. The devil is in the details."
He says lack of transparency about loans or other assets is a big problem, especially since ratings agencies and issuers of mortgage securities were discredited by these products' implosion last year. Still, he would consider becoming an investor alongside a fund manager he trusted.
"I believe the spotlight is bright enough to cast away the shadows," he says.
Finally, while the government may see the inclusion of individual investors as a source of additional capital -- or even of political cover amid a bailout of wealthy banks -- some are still feeling the same queasiness as larger buyers.
"My clients are looking to reduce risk," says Manchester, N.H., financial planner Jean Fullerton. "Not make a killing."
Source: http://online.wsj.com/article
