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October 22, 2019
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With investors’ faith in the long-running economic expansion and bull market being tested, we thought some comments on high yield bonds would be of interest to turnaround investors. Companies with these bonds, sometimes referred to as “junk bonds,” often are, or probably should be, in turnaround mode. And, if the companies eventually file for Chapter 11 bankruptcy, they can provide appealing distressed bond or post-bankruptcy stock opportunities. Given their riskier nature, high yield bonds tend to behave more like stocks than other, higher quality bonds.  

When is it possible to buy stocks at large discounts to what everyone else pays? When you buy them through a closed end mutual fund. Like open-end mutual funds, closed end funds (“CEFs”) hold actively managed baskets of publicly-traded stocks. Yet unlike their cousins that can expand or shrink their size based on whether investors are buying or selling, closed end funds have a fixed number of shares. Investors can trade the shares throughout the day at whatever price the market determines.

It is easy to get mesmerized by the potential gains in a turnaround stock and put in too much of your money. Even if you avoid most of the common turnaround investing mistakes, events may not work out the way you expected. The best way to manage this risk is through diversification.   While important to any investment program, diversification is critical to successful turnaround investing, as turnaround investing carries higher risk than traditional stock investing. Some turnaround stocks will produce large returns, others small returns, and some may even produce large losses. If you diversify, however, an unlucky pick or two may be more than offset by one or two big gains from other turnarounds that you own.

It’s mid-May and proxy season has arrived. Holders of individual stocks have been receiving documents with cryptic instructions from their companies, and in some cases blue and white “Dear Fellow Shareholder” pamphlets urging them to vote for or against some proposals.   Many investors are familiar with proxies and can quickly complete the voting process. But, for other investors, this may all be new. So, what are proxies, and why do they matter?  

Investing in distressed securities can produce outsized gains, but also involves more risk than investing in traditional securities. In our final note in the series, The Turnaround Letter steps away from the mechanics and analytics to share some thoughts on how to handle the emotions involved, when to exit and the role of  distressed securities in your portfolio. We’ll wrap it up with a quick review of the series.

While investing in distressed companies can produce enormous gains, not all distressed companies fully recover. Some slip into bankruptcy, yet this might still produce a positive return for some bondholders.   However, in some cases the company has little value at all, and is best sold piecemeal, for scrap, in essence. What happens to your investment then?