Pioneer Investments’ High Income Municipal Fund, the best-performer among its peers in 2010, plunged after increasing its American Airlines-related airport debt 64 percent this year, before AMR Corp. (AMR) sought court protection this week.
The Pioneer mutual fund (PIMAX)’s net assets dropped 7 percent to $756.8 million yesterday from $814 million on Nov. 28. American parent AMR entered bankruptcy on Nov. 29. Pioneer said today it had eliminated unsecured debt tied to the airline from all its U.S. funds by yesterday, in a statement on its website.
Unsecured debt tied to American and issued by the Alliance Airport Authority Inc. in AMR’s Fort Worth, Texas, home town dropped as much as 83 percent from mid-November following the court filing. AMR and American backed $3.2 billion of securities called special-facilities bonds sold through airports and municipal authorities to pay for gates and maintenance hangars.
“Whether or not to own American Airlines unsecured was purely based on whether or not you believed they were going to file bankruptcy,” Eric Jacobson, Morningstar’s director of fixed-income research in Chicago, said by telephone. “It didn’t take a credit genius to know that was the linchpin question.”
Unsecured Airport Debt
Pioneer owned some of the Alliance bonds, according to data compiled by Bloomberg. On Oct. 31, American-related debt made up about 8 percent of the Pioneer fund’s value, the data show. The fund held bonds issued through airport authorities in New Jersey as well as New York City, Dallas, Chicago, Los Angeles, and Fort Worth that were valued at $65.9 million at the end of October, according to the data. Trade information put the figure at $30.7 million yesterday.
The fund’s net asset value fell 3.7 percent on the day of AMR’s filing, the biggest decline since October 2008, according to data compiled by Bloomberg. In 2010, the fund returned 7.14 percent, the data show.
Managed by Timothy Pynchon, the fund has returned 0.32 percent this year. That compares with a 6.93 percent average return for peers with similar investment objectives, according to data compiled by Bloomberg. Pynchon didn’t respond to inquiries seeking comment on the fund’s holdings yesterday.
Geoff Smith, a Pioneer spokesman in the company’s Boston headquarters, declined further comment. The investment management firm is a unit of Italian lender UniCredit SpA. (UCG)
Investors in high-yield funds have to be willing to ride out tremendous volatility, Morningstar’s Jacobson said. Pioneer’s fund had about 90 percent of its assets in bonds rated BB and lower, or below investment grade, according to its annual report, issued Aug. 31.
“As soon as you’re dealing with 50, 60, 70 percent in non- rated and BBB rated bonds, you’re dealing with a lot of potential hidden risks,” Jacobson said. The chance that American might declare bankruptcy was widely known, he said.
In an October interview, Pynchon said the business cycle for airlines in general had been “very positive” as they had cut labor and pension costs and reduced excess capacity. His fund had gained more than 5.5 percent this year through that month, according to data compiled by Bloomberg.
Earlier Bankruptcy Concern
Investors at the time were looking past municipal-bond defaults and speculation about an AMR bankruptcy. At the time, Pynchon said they were willing to take the risk for yields as high as 8 percent.
“The fact is that both consumer travel and business travel are healthy right now,” Pynchon said. “The airlines have had some pricing power in this environment.” He declined to comment on American, at the time a focus of investor concern that it might seek bankruptcy protection as the nation’s third-largest airline headed for a fourth-straight annual loss.
Pynchon boosted the fund’s American-backed municipal bonds to $119.3 million in face value at the end of October from $72.6 million in January, according to data compiled by Bloomberg. Among the fund’s transportation holdings as of Oct. 31 were $122.3 million of municipal bonds related to U.S. Airways Group Inc. (LCC), JetBlue Airways Corp. (JBLU), Delta Air Lines Inc. (DAL), United Continental Holdings Inc. (UAL) and British Airways, the data show.
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