Toxic Securities For Everyone

According to a Wall Street Journal report, fund manager BlackRock is creating a mutual fund made up of toxic assets for the general public to buy shares in. The securities in the fund will be purchased by BlackRock through the Treasury's Public-Private Investment Partnership. It could turn out to be a great investment, or it could turn out to be a disaster.

How well might an investor in this mutual fund do? The Wall Street Journal explains:

Sources are hoping that, when you factor in the financial engineering, the fund will be able to earn maybe 10-12% annually over its ten-year life. That would be a pretty good return.


But that's a guess, nothing more. The results may be quite different. Fine words, as my English grandmother would say, butter no parsnips.

I am a little uncomfortable with providing amateur investors the opportunity to buy into a fund of toxic securities. Generally, only accredited investors (large, sophisticated and professional investors with deep pockets) can buy mortgage-backed securities and other complex structured products. While such securities surely made their way into some funds available to the general public over the years, this is the first fund I've heard of consisting of all distressed structured securities available to anyone.

How good a deal it ends up being depends on exactly what the fund consists of. Some toxic assets are worse than others. For example, many asset-backed securities based on pools of auto loans and credit cards will likely incur no principal losses. Those bonds, however, are still trading at deep discounts due to a sort of guilty-by-association attitude to all asset-backed securities. I would consider buying a bond in a mutual fund consisting of pristine prime auto-backed securities, for example. A mutual fund of collateralized debt-obligations (CDOs), however, I wouldn't touch with a ten-foot pole.

The other question, of course, is whether the stock market will rally. If it does, then stock returns could easily eclipse the returns of a mutual fund of toxic securities -- especially if those securities turn out to be as bad as some fear. It's a toss up either way. But for those less risk-adverse investors out there, this mutual fund might present a fun way to buy a little piece of what started the Great Financial Crisis of 2008.