Funds Keep Singin’ The Subprime Blues
Every few years there is a mini bond crisis. Each time the same thing happens: bond funds that looked great by beating their peers, fall precipitously. Same goes for 2007.
The [Regions Morgan Keegan Select High Income Fund (MKHIX)] is down about 35% this year, and is at the bottom of the junk-bond fund category for the one-, three- and five-year annual performance periods, illustrating how recent events are starting to tarnish even manager Jim Kelsoe's impressive long-term record."
Lord knows how much investors would have lost in these high flying RMK bond funds if the giant financial firm behind the funds didn’t step in (RMK funds are owned by Regions Financial RF):
The annual report that covers these funds also outlines some important steps taken by the funds' adviser and affiliates to help cope with recent losses. These include stepping in to buy about $55.2 million in shares of the High Income Fund and $30 million in the Intermediate Bond Fund [MKIBX] from the beginning of July to the end of August to help provide liquidity."
The takeaway is that you shouldn't mix mutual funds with thinly-traded higher-risk investments, or you could end up singing the subprime blues:
I went to the bond market, fell down on my knees
I went to the bond market, fell down on my knees
Asked the Lord above, have mercy now, save my poor bonds if you please
Standin' at the bond market, tried to flag a buy
Whee-hee, I tried to flag a buy
Didn't nobody seem to know me, everybody pass me by
Standin' at the bond market, risin' sun goin' down
Standin' at the bond market baby, the risin' sun goin' down
I believe to my soul now, my po' bonds is sinkin' down
You can run, you can run, tell my friend Bennie B
You can run, you can run, tell my friend Bennie B
That I got the bond market blues this mornin', Lord, baby my bonds are sinkin' down
(To the music of Crossroads Blues / Robert Johnson 1936)
You are not kiddin,man. I have all my money invested in MKHIX and am down on my knees, begging the good lord for mercy,please. At this point I can't even look at my statement.The only thing left is that the dividend has not changed.
The Crossroad Blues was appropriate for this - funny parody. I have my own take on this on youtube - just search for The Subprime Blues
Kelsoe knew he had a problem in late 2006. He hid it hoping he would work his way out. When he saw the hand writing on the wall he called in a consultant or independent pricing agency to cover his ass and that of his own Board. So about 8/10/07 he said - OH Shit! and the NAV dropped 10% in one day.
It was too late - the tiger had him by the tail.
Doomed and over-valued - over-extended & way over the confines of his prospectus he was lost. Negligence? Yes
Breach of fiduciary duty? Yes Arogance? Yes
Try as they may the Regions Parent can not help this poor son. Will heads roll? Yes Will the fund continue to lose over the 48% today? Yes Should investors take legal action? YES YES YES. This type of investment and the way it was portraid to investors needs to be driven from the market.