According to reports, Wachovia’s money-management unit, Evergreen Investments, will be liquidating $403 million from its Ultra-Short Opportunities Fund. The fund, which is primarily backed by mortgage securities, has lost 20% this year alone and has dropped 18% just this month.
The failure of this fund highlights the ongoing problem brokerage firms are having in pricing the value of their investors’ illiquid investments. Bond-fund managers are being pressed to ensure their holdings are valued correctly so investors receive the correct amount of liquid funds from their shares.
As of March, two thirds of Ultra-Short Opportunities assets consisted of home-loan securities that were not backed by government entities. The fund also carried only 70% ($9.1 million) of the original value of Novastar ABS CDO I Ltd. because it was created from low-rated subprime-mortgage bonds.
Wachovia wrote down the value of its bank-owned insurance policies this spring, which resulted in a loss of $708 million on May 6th. The bank also paid a $144 million settlement over complaints of telemarketers and payment processors stealing from customer accounts under the supervision of former Chief Executive Kennedy Thompson.
Although debt-pricing companies such as Interactive Data Corp. and Street Software Technology, Inc. are making strong efforts to place correct valuations on securities, difficulties arise in getting an accurate price when high-yield or non-investment-grade bonds aren’t trading in high volumes.
Other firms such as Charles Schwab and Fidelity Investments are facing lawsuits from investors who have suffered substantial losses due to the sub-prime mortgage crisis.