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Why the current credit crisis might be 35 times worse than you thought

Last week, Third Avenue Focused Credit Fund suspended investor redemptions, and credit markets reacted violently. This was the first time mutual fund investors were similarly gated since the financial crisis of 2008. However, the $788.5 million Third Avenue fund might be the tip of the iceberg. 

According to data obtained by Yahoo Finance*, there are currently $27.2 billion in mutual fund assets that have suffered peak-to-valley losses over the last year greater than 10%. This amount is 35 times greater than the size of the Third Avenue fund, which suffered the third worse loss in the list of -34.5%.

List of mutual funds

The two greatest losses bear a common name, which dominates the list: Credit Suisse. Total assets of $15.9 billion are represented by Credit Suisse named funds, or 59% of the $27.2 billion total.

The largest fund in the list is Credit Suisse Institutional International, which has total assets of $9.9 billion. According to Morningstar, it is currently managed by American Funds.

When the time period of the analysis is extended to the peak of June 19, 2014, fund performance for the Credit Suisse named fund reflects a loss of -24.6%, which is roughly half of the -47.4% loss of the Third Avenue fund.

Third Avenue vs. Credit Suisse

Today, the Federal Open Market Committee commences a two day meeting and is widely expected to announce on Wednesday an interest rate increase of 25 basis points for its benchmark Federal Funds rate. Further rate hikes may exacerbate problems in the credit markets, as companies that rely on high yield financing would face difficulty obtaining new loans and rolling over existing loans.

Contagion in risk markets might be contained, according to Goldman Sachs. In a report dated December 11, Goldman said credit markets are simply sending a "false recession signal" similar to the events that unfolded in 2011. 

Nevertheless, the trend of withdrawals in the mutual fund sector continues. According to the latest data from Lipper, U.S. based stock funds suffered $8.6 billion in net outflows over the week ending December 9, which is the worst reading in four months. As assets are shifted around into year end, the trend is likely to continue.

 

* Note regarding data collection: for mutual fund families that contain multiple funds that trade under different tickers, only one fund name is represented. However total assets are reported for the entire family of funds. It is also possible that fund names do not necessarily imply current sponsorship or management, and may simply reflect historical sponsorship or management.