Want to Buy Toxic Assets?


By Mark Jewell — AP Personal Finance Writer

BOSTON (AP) — Toxic assets, anyone?

The Obama administration's plan to help banks unload soured mortgage assets isn't just an opportunity for Wall Street. Individual investors may be able to get in on the action — that is, if they've got the stomach for plenty of risk.

At least three mutual fund companies have already expressed interest in buying the toxic assets and giving fund clients a chance to invest.

"We are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer," said Bill Gross, a founder and co-chief investment officer of Pimco, manager of the world's largest bond fund.

Other fund companies said they're exploring options and awaiting plan details.

The Treasury Department's plan gives the private sector a role alongside government in removing as much as $1 trillion in bad debt from banks' balance sheets. The goal is to restore the flow of credit to help usher in an economic recovery.

Much of the interest in buying banks' soured mortgage investments is expected to come from big institutional investors, like pension funds. Other major players will include hedge funds and private equity firms that generally cater to wealthy investors.

But the interest from mutual fund companies marks a new opportunity for the little guy. Individuals who count their money by the hundreds or thousands, rather than in Wall Street's billions, have frequently been left to feel like outsiders in the government's bailouts.

However, just because regular folks may be able to invest in a fund that buys toxic assets doesn't mean it's a good idea. The only people certain to make money in the government's program are hedge fund managers and private equity firm managers, said economist Peter Morici.

"This is no place for Grandma's money," said Morici, a business professor at the University of Maryland and former chief economist at the U.S. International Trade Commission.

The vast majority of mutual funds are prohibited by their own investing guidelines — explained in a fund's prospectus — from buying assets as risky as the mortgage securities that banks are trying to unload.

Eric Tyson, author of the book "Mutual Funds for Dummies" and a former management consultant to financial services companies, equated the risks from investing in the soured mortgage assets to buying into a high-yield or "junk" bond fund.

Such funds can bring hefty returns in good times, but have recently been hit with losses amid the credit crunch.

"Any investor would have to be aware that the fund is stretching for high returns by taking on assets where there is a greater risk of default," Tyson said.

Gregg Warren, an equity analyst with fund-tracker Morningstar Inc., said individual investors' access to funds buying toxic assets could largely involve closed-end funds, which issue a fixed number of shares, unlike more common open-end funds.

Warren said two fund companies that are expressing interest so far in the government program have plenty of the necessary expertise in high-risk investments. Those are Pimco — formally known as Pacific Investment Management Co., a Newport Beach, Calif.-based unit of Allianz AG — and New York-based BlackRock Inc.

The companies want to be among the handful of firms the government is expected to name to manage the mortgage assets. The program's success hinges on banks agreeing to sell tainted assets at prices far below their original values, and buyers' willingness to take on big risks. The tradeoff is that the depressed values give buyers an opportunity for potentially high yields.

Curtis Arledge, co-head of U.S. Fixed Income in BlackRock's Fixed Income Portfolio Management Group, said his company is brainstorming what investment products it could offer tied to the mortgage assets.

"We certainly intend to create a product that is attractive for retail investors," Arledge said. "Investors may say, 'You know what, these assets are cheap. I wasn't buying them because I was afraid the prices were going to go down, but maybe now I should focus more on being afraid of not being invested in them.'"

Mary Athridge, a spokeswoman for Baltimore-based Legg Mason Inc., which manages about $700 billion in assets, said her company also is interested in applying to become an asset manager under the program, and in bidding to buy the securities.

Several of the largest mutual fund companies — among them, Fidelity Investments, Vanguard Group and American Funds — said Tuesday they have not made a firm decision on whether to participate.

While most mutual funds' investing criteria wouldn't permit them to buy soured mortgage investments, any manager seeking to launch a new fund would have to apply to the Securities and Exchange Commission. Investment experts declined to venture a guess on how long such approvals may take, and an SEC spokesman declined to comment. But it may take some time for any funds created from this program to reach the market.


AP Personal Finance Writer Dave Carpenter contributed to this report from Chicago.

Copyright 2009 The Associated Press.

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