Exactly one year ago I was asked if I would write a piece for NY Magazine regarding an article about Michael Osinski, a former computer programmer/banker who helped generate the algorithms that comprised all the toxic assets that the government later bought from Wall Street.  At the time, Osinski believed that these toxic assets were a fantastic bargain and I largely agreed with him.  A few months before this article I said we were in the midst of a “once in a lifetime opportunity in distressed debt”.  So, I felt comfortable writing the article (I rarely if ever write for other outfits).  Unfortunately, I received a pretty substantial backlash from the article (from some notable sources).  The general response was:

“It is so irresponsible to recommend that small investors buy toxic assets”.

Well, first of all, I wasn’t making, nor do I ever make recommendations for anyone.  That should be ABUNDANTLY clear to any and all readers of everything I write.  I was simply brainstorming about the ways that small investors could gain access to toxic assets because it’s a relatively closed space to the small investor if you don’t have certain connections.  Anyhow, I wrote the following:

“So how can you consider joining Michael Osinski and invest in toxic assets? Well, first of all, let’s make clear that we offer no investment advice or recommendations. That’s not what we know how to do. But so that readers can explore the area further on their own, we asked Cullen Roche, the proprietor of excellent financial blog the Pragmatic Capitalist, to review the various options. Here’s what he said:

Investors who are looking to invest in toxic assets will not gain easy access to “pure plays.” It’s unlikely that your financial adviser or discount broker will have the sophistication or access to create a toxic-asset portfolio for you. The best options for small investors are via the closed-end fund market and exchange-traded funds (ETFs). The following are various ways for investors to gain access to this market:

BlackRock is offering the BlackRock Legacy Securities Public-Private Trust, which will have an initial public offering (IPO) sometime in the fourth quarter of 2009. This will be the first true pure play on the Treasury Department’s Public-Private Investment Program (PPIP) that the public will have access to. PowerShares is also registering two residential mortgage-backed securities (RMBS) products that will likely be ready sometime early next year. Keep an eye out for all three funds to IPO.

For immediate access, the best options for investors are via the closed-end funds and ETFs currently on the market that specialize in government-agency debt, collateralized debt obligations (CDO), mortgage-backed securities (MBS), and asset-backed securities (ABS). The following funds all generate income and/or growth via the toxic-asset market:

BlackRock Income Trust (Ticker: BKT) — The BlackRock Income Trust commenced operations in July 1988 with the investment objective to provide high monthly income while preserving capital by investing in a portfolio of mortgage-backed securities.

Helios Strategic Mortgage Fund (Ticker: HSM) — The Fund seeks to provide a high level of current income by investing at least 80 percent of its total assets in MBS, and may invest up to 20 percent of its total assets in U.S. government securities or cash or other short-term instruments. The Fund’s investments in MBS will include Agency MBS, Non-Agency RMBS, and CMBS.

TCW Strategic Income (Ticker: TSI) — The Fund seeks to generate investment income. The Fund’s investments may include, but are not limited to, dividend-paying equity securities, non-convertible debt securities, high-yield debt securities, mortgage-related securities, and asset-backed securities, in addition to convertible securities.

First Trust Mortgage Income (Ticker: FMY) — The Fund seeks to provide a high level of current income. As a secondary objective, the Fund will seek to preserve capital. The Fund will pursue its objectives by investing primarily in mortgage-backed securities representing part ownership in a pool of either residential or commercial mortgage loans.

Helios Total Return (Ticker: HTR) — The Fund seeks to provide high total return, including short- and long-term capital gains and a high level of current income, through the management of a portfolio of securities.

Investors who are looking to take an indirect equity position in toxic assets might consider the actual banks and real-estate investment trusts themselves. Many of the large money centers and regional banks are still loaded with toxic assets and will either benefit or suffer depending on the underlying asset performance. The Vanguard REIT index will also have a high correlation to the performance of their underlying real-estate portfolio. The following funds are direct plays: XLF, KRE, and VNQ.

But be especially careful here. One of the great unknowns with the financial system is exactly how many bank assets are toxic and whether they’ve come anywhere close to properly accounting for them.”

Even though these ideas were generated well after the market bottom the one year results prove that we were indeed in the midst of a once in a lifetime opportunity:

BKT:  +13.31%

HSM: +20.74%

TSI:  +39.25%

FMY:  +26.35%

HTR:  +18.81%

XLF:  -1.5%

KRE:  +11.73%

VNQ: +39.32%


Average: +21%

S&P 500: +11.45%

Unfortunately, the once in a lifetime opportunity is likely gone as the risk/reward environment has altered dramatically….In fact, distressed debt looks more crowded by the minute….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. what IS NOT crowded these days? Everything has become the same trade. You either have risk on or risk off. It’s amazing. Once the herd turns you better get out of the way. This market is turning into one big coiled spring.

  2. You see the bank stocks today? Getting crushed.

    No idea how the market can keep ignoring what is clearly a very big issue in this sector that will be systemic in nature.

  3. Sure, I could have named names in my piece, but I did not mention the fact that Salmon was none too gracious in his smearing of the piece. Oh well, markets are made up of people with different opinions. I like Felix’s work and I have nothing against his opinions. I don’t agree, but are we going to quibble? He seems to think everything he reads on the internet is “financial advice”. That’s a dangerous starting point and I hope my readers are aware of the fact that you should view EVERY piece (even by supposed “experts”) with a hefty grain of salt, always do your own homework and if you’re not an expert by all means consult one.

  4. If you’re dumb enough to get your investment advice from NY Magazine then it serves you right. On the other hand, 21% a year sounds pretty nice. Maybe the title of Felix’s piece should have been “Here’s some free advice from someone who called the crisis, called the bottom and actually understands how the economy and investment world works”.

  5. The only thing I find agreeable in Felix’s article is that a 21% return (over the S&P 11%) hardly merits the additional risk. The rest is whining.

    Heck, I bailed on the Vanguard REIT too early, and I don’t regret it, despite missing the 19% YOY gain. My portfolio ended up doing almost as well, with more work (fun?), but less risk that an individual “toxic asset fund”.

    Folks don’t take the time to read blogs like yours to hear reassuring but meaningless platitudes like “buy and hold”. We got killed in the last decade, buying and holding, and we are sick to death of it. I want to get returns closer to what the pros are getting for their BEST clients, not just us middle class suckers.

    I would NEVER consider your writing to be financial advice unless I was directly paying you for it, and you had some skin in the game with me. I consider it financial education. And well worth the price.

    On the positive side, you must be doing something right if people are using their air time to attack you.

  6. His whole argument is semantics. He’s arguing that you were giving bad advice. First of all, people recommend specific tickets EVERY friggin day. Has Felix Salmon never seen Jim Cramer? Does he think Jim is his financial advisor? Cramer is not legally accountable for what he says and neither is anyone else who talks about stocks over the internet. If that were the case the legal system would be filled to the brim with cases such as this. No judge or lawyer in the world would agree with Salmon. So yes, he was wrong the first time and now your performance makes him look even dumber.

  7. Yeah, that’s worrisome. It’s clear that the operating environment is no longer as friendly to the banks.