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Third Avenue Ups Its Distress Game

Upromise, Nevada drop Vanguard, hire State Street.

Morningstar Fund Analysts, 02/17/2012

Third Avenue Management is upping its game when it comes to its distressed-investing efforts. The firm announced that it is making an equity investment in Millstein & Co., a firm created in the fall of 2011 by Jim Millstein. Millstein is most recently known for his work with the U.S. Department of the Treasury as its chief restructuring officer, where he helped restructure the U.S. government’s investment in American International Group AIG. He has a long history of working with distressed investments--a pond in which he is a big fish.

Third Avenue Funds and the fund family's founder, Marty Whitman, have long and successfully practiced the art of distressed investing. Whether doing something as simple as buying the still-performing loans of troubled companies to capital infusions to taking a company all the way through bankruptcy and coming out equity owners, Third Avenue has experience here. Whitman and his colleagues sometimes hold such investments in the firm's mutual funds and in 2009 launched Third Avenue Focused Credit TFCVX to more fully take advantage of such opportunities. The firm also has a small limited partnership that invests in distressed debt.

To date, Millstein & Co. has been involved primarily in the advisory business. Its partnership with Third Avenue, though, will eventually lead to the creation of private equity funds or similar vehicles. Those funds will be more directly involved in corporate restructurings and, potentially, mergers and acquisitions down the road. Third Avenue's mutual funds get something out of this deal, too, though: Millstein can help with the sourcing of ideas and, importantly, with access to deals. In distressed investing, often it is whom you know.

Upromise 529 Plan Drops Vanguard, Hires State Street
Nevada and Upromise said this week they will replace the lineup of Vanguard investment options in their Upromise College Fund 529 Plan with a suite of investment options from State Street Global Advisors. The new lineup will feature SPDR exchange-traded funds, including age-based portfolios that use State Street's tactical asset-allocation strategies to shift among ETFs based on short-term market expectations. Sallie Mae Bank will continue managing the plan's savings portfolio. The plan, which will change its name to the SSGA Upromise 529 Plan, will transfer current investors' assets to similar State Street age-based or static investment options on April 16, 2012. The plan will remain part of Upromise's rewards program, which directs a fraction of participants' spending at certain retailers into the 529 plan.

Competition in the 529 plan industry drove the state to make the change. Vanguard has investments in more than a dozen 529 plans. Its nationally marketed namesake plan, The Vanguard 529 Plan, is also based in Nevada and offers the same investment options as the Upromise plan but with a $3,000 minimum investment and significantly lower fees. Several other plans in different states also offer the same Vanguard investments at lower costs. Morningstar currently rates the Upromise plan Below Average because of its high fees but will revaluate it later this year.

Based on preliminary documents for the new plan, total costs for investors will fall slightly with SSgA. The age-based options will have a total expense ratio ranging from 0.45% to 0.55%, which is down from the current 0.57% fee. Under the new plan, Upromise will cut its program-management fee in half to 0.22% from 0.45%, but the SSgA investment-management fee will be higher than Vanguard's.

Despite the lower costs, there are some risks. The Vanguard investments, for example, are all broadly diversified core holdings, but the new SSgA options include some more narrowly focused, volatile ETFs, such as SPDR S&P Emerging Markets Small Cap EWX and SPDR Barclays Capital High Yield Bond JNK. SSgA will need to educate investors how to use these ETFs within a broader portfolio.

Using tactical allocation in the age-based options also could be risky. Although the SSgA team is experienced, such moves are difficult to get right consistently over the long term.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.
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