Third Avenue Ripples Felt in Japan as Fidelity Fund Drops

Fidelity Investments’s Japan-based U.S. high yield mutual fund fell below 1 trillion yen ($8.3 billion) in assets Monday for the first time since September 2013 after the halting of bond fund redemptions at Third Avenue Management rattled credit markets.

Fidelity’s product is Japan’s biggest bond mutual fund, according to data compiled by Bloomberg, and is sold to individual investors in yen. The fund dropped 2.1 percent Monday, bringing its net asset value to 4,662 yen per share, its lowest since October 2012, as Japan’s top 10 high yield funds declined amid a rout in riskier debt.

The junk-bond market is headed for its first annual loss since 2008 after a wave of redemption requests from investors ripples around the globe. Japanese investors held at least 3.8 trillion yen in high-yield mutual bond funds on Monday, according to data compiled by Bloomberg, after ramping up investments in higher-yielding overseas assets as the Bank of Japan pushed down domestic interest rates.

“What many people think is happening is the bond market is in serious trouble, and this is just the beginning,” said Edwin Merner, the president of Atlantis Investment Research Corp. in Tokyo. “It’s uncertainty, when you are not sure, what do you do, you sell.”

Fund Trouble

Lucidus Capital Partners said Monday it liquidated its entire portfolio and plans to return $900 million to clients next month. Funds run by Third Avenue Management and Stone Lion Capital Partners have halted cash redemptions as investor demand drained their liquid assets.

Tomoko Aikawa, a spokeswoman for Fidelity in Tokyo, declined to comment on the drop in assets.

Fidelity’s Japan fund almost tripled in assets to a high of 1.34 trillion yen in the 18-month period to August 2014 as prices of riskier U.S. corporate debt climbed. The Fidelity fund is four times bigger than the next biggest mutual junk bond fund in Japan, according to data compiled by Bloomberg. That fund, which is run by Amundi SA invests in European high-yield assets, has fallen 5.2 percent during the past month.

Other high-yield mutual funds domiciled in Japan to fall Monday included offerings from Nomura Holdings Inc., Goldman Sachs Group Inc. and Sumitomo Mitsui Trust Holdings Inc.

Fidelity’s Japan fund dropped 4.4 percent over the past month, trailing 68 percent of its peers, and has fallen 4.2 percent this year, according to data compiled by Bloomberg. The fund had an average annual return of 14 percent over the past three years, beating 89 percent of peers, according to the data.

Spreads on U.S. high yield debt climbed to their highest since the end of 2011, according to Bank of America Merrill Lynch data, amid a market slump that forced at least three funds to close in the past week. 

“People, they thought they could sell, you know, almost like cash and they could go to the bank and take the money out,” according to Atlantis’s Merner. “People just don’t know what is going to happen. What happens to one, will it happen to more and more or is this the end?”

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