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Third Avenue Focused Credit Returns to a Fund Structure

Returning to the open-end format provides more transparency for shareholders but changes little else.

The Third Avenue Focused Credit saga took another turn Wednesday when Third Avenue announced a different structure for liquidating shareholder assets.

What was the original plan? Faced with crippling shareholder redemptions and amid a challenging high-yield bond market, Third Avenue announced a plan on Dec. 9, 2015, to shutter Third Avenue Focused Credit because many of its low-rated holdings had become too illiquid to sell. That plan stipulated Third Avenue transfer the portfolio to a liquidating trust, while paying a distribution to shareholders that represented the current cash in the fund on Dec. 16, 2015. Shareholders would subsequently receive proceeds from the fund only when management received income or was able to dispose of assets at prices it deemed fair. Third Avenue said it could take up to a year for the portfolio to be fully liquidated.

What is the new plan? On Dec. 16, 2015, Third Avenue applied to the SEC for exemptive relief in order for the original fund to suspend redemptions, effective Dec. 10, 2015. While exemptive relief requests can often take some time to be addressed, the SEC granted the relief to Third Avenue Focused Credit to suspend redemptions on the same day of the proposal. Third Avenue then transferred the assets from the liquidating trust back to the original open-end mutual fund structure. As was the case with the liquidating trust, the fund will gradually sell its assets as opportunities present. It will make periodic distributions to shareholders until all of its assets have been sold, at which point it will presumably disappear.

What does this mean for shareholders? Although the events surrounding Third Avenue Focused Credit have likely created some confusion among investors, there is at least one benefit to the open-end format versus the liquidating trust--specifically, better transparency into the pricing and makeup of the portfolio throughout the liquidation process. Unlike the liquidating trust, Third Avenue Focused Credit will strike a daily net asset value, so investors will be able to better track the value of their remaining investment. Investors will also receive quarterly shareholder reports detailing the fund's remaining holdings.

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Leo Acheson

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Leo Acheson, CFA, is director, multi-asset ratings, global manager research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

He oversees Morningstar’s multi-asset ratings as well as the firm’s multi-asset and alternatives manager research team. The group covers a range of investment vehicles, including allocation strategies, alternatives, target-date funds, 529 plans, HSAs, model portfolios, and Mexican pension funds.

Before joining Morningstar in 2013, Acheson spent four years working for a Chicago-based investment consultant, conducting mutual fund and asset-class research to help corporations manage their investment programs.

Acheson holds a bachelor’s degree in finance and accounting from Indiana University’s Kelley School of Business. He also holds the Chartered Financial Analyst® designation.

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