Individuals may be able to invest in toxic assets
Wall Street stands to get richer off the latest installment of the financial system rescue. But this time, some individual investors might be offered a piece of the action.
Two of the country’s biggest money managers -- Newport Beach-based Pacific Investment Management Co., known as Pimco, and New York-based BlackRock Inc. -- say they may launch funds that would allow individuals to have a stake in some of the bad assets to be purchased from banks.
Under one of two programs announced Monday by Treasury Secretary Timothy F. Geithner, the government will invite money managers and other investors to buy residential and commercial mortgage-backed bonds from banks using a combination of the investors’ capital and government capital.
The idea is for the money managers to buy the bonds at prices that won’t destroy the banks but that still leave a good chance for the investors and taxpayers to profit as the underlying loans are collected or sold over time.
Bill Gross, co-chief investment officer at Pimco, said his firm was looking into the idea of creating mutual funds that would tap into the program. BlackRock is doing the same, said Curtis Arledge, co-head of fixed income at the firm.
“I think it’s a very good opportunity for investors,” Arledge said.
But the format of such funds for individuals probably would be a “closed-end” portfolio rather than the more common “open-end” portfolio, Arledge and Gross said.
A closed-end fund raises a specific amount of capital from investors and then invests the proceeds in a pool of securities. The funds’ shares typically trade on a securities exchange, such as the New York Stock Exchange.
With an open-end fund, by contrast, investors can buy new shares in the fund at any time and sell them back at any time.
Closed-end funds are ideal for illiquid assets that may take years to pay off. By contrast, open-end funds must set a value on their holdings daily.
BlackRock recently launched a closed-end fund called BlackRock Fixed Income Value Opportunities to invest in “distressed” mortgage and corporate bonds, Arledge said. But the fund’s shares don’t trade on an exchange; the company told investors that the fund, while expected to generate regular income for shareholders, would exclusively be a buy-and-hold investment for the next few years.
The fund also had a $25,000 minimum investment and was limited to high-net-worth investors.
The Fixed Income Value Opportunities fund could be a template for closed-end funds under the Treasury’s new programs, Arledge said.
That wouldn’t allow average-Joe investors to get aboard, but it would be less exclusive than limiting the investor pool to pension funds, hedge funds and other institutions.