Just as auction rate securities were sold by most investment firms as safe alternatives to money market funds which paid a higher rate, so also were a number of mutual funds. Packaged and sold as ultra-short term bond funds and a safe haven for funds which were to be secure and assessable, many of these funds were really invested into high-risk and or potentially far from liquid assets.
Three of these funds are the SSgA Yield Plus fund, which was liquidated in June, the Fidelity Ultra-Short Bond (symbol: FUSFX), and Regions Morgan Keegan Select High Income (symbol MKHIX). All three, it has been learned, were actually actually “junk bond” funds. As problems in the credit markets surfaced over the past year, these funds have lost up to 80% of their value
The portfolios of these funds had structured debt instruments tied to subprime mortgages and other assets that do not trade frequently. This prevented the volatility of the assets from being properly reflected, consequently masking the risks of investing into the funds. The recent changes in the values have greatly altered the risk parameters, but too late for those invested in the funds who have sustained significant losses.
Thus, much as the bond credit rating agencies have proven to be failures in assessing the risks of investments, so also have volatility indices such as Morningstar failed to properly demonstrate the risks of certain investments in which price changes are difficult to determine. As well, all such measurements are “backward-looking” reminding us that past performance is no guarantee of future events.
However, the question may be why were such flaws in the rating systems not properly disclosed to investors either by the funds or the companies which rank the funds.
The lesson to be learned by those doing the calculations is that thinly traded or complex securities have risks that can escape detection for years. Unfortunately, the lesson to be learned by investors, those who have actually paid the price, is that an old maxim applies: “Figures may not lie, but liars figure.”
If you have lost in these or other investments contact the stockbroker fraud law firm of Shepherd Smith Edwards & Kantas LTD LLP. WIth no obligation, one of our securities attorneys will discuss with you whether we may be able to assist you in recovering your losses.