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A group of proprietary closed-end bond funds created by UBS and which were heavily invested in Puerto Rico municipal debt is plummeting in value and fast. The funds were highly leveraged, and many local investors are preparing for a legal fight to recoup their money.
As reported by Investment News, the group of UBS Puerto Rico bond funds consists of 14 closed-end funds that were sold exclusively through registered representatives and brokers with UBS Financial Services of Puerto Rico. According to marketing materials on the funds, UBS sold more than $10 billion of the products through the end of 2012.
The funds have suffered drastically in recent months, caught mainly in the cross hairs of an eroding municipal bond market. At the end of August, the Puerto Rico Fixed Income Fund Inc. reported a net asset value (NAV) of $5.46 per share. Less than a month later, on Sept. 25, the fund reported a NAV of $3.74 per share, a decline of 31%.
Investors aren’t taking the news lightly. As reported in the Investment News story, one investor has already filed a complaint with the Financial Industry Regulatory Authority (FINRA) against UBS Financial Services of Puerto Rico. The investor is a 70-year-old retiree who had $500,000 in the proprietary closed-end funds, along with individual municipal securities contained inside the funds she already owned.
According to the Investment News story, this investor “relied on the income [from the municipal holdings] to pay for retirement, and UBS has been liquidating the holdings to pay interest on margin loans.”
The news gets even worse for UBS. As reported by the New York Times last week, UBS has put one broker on administrative leave after claims emerged that he encouraged clients to buy securities on a line of credit. In the same story, Robert Mulholland, head of wealth management advisers in the Americas for UBS, reportedly characterized the closed-end fund issue as “the perfect storm” in a meeting in San Juan last month.
In addition to the Puerto Rico Fixed Income Fund, other UBS closed-end funds that are believed to have suffered similar declines in value include:
Puerto Rico AAA Portfolio Based Funds I and II
Puerto Rico AAA Portfolio Target Maturity Fund
Puerto Rico Investor’s Tax-Free Funds I — VI
Puerto Rico GNMA & U.S. Gov. Target Maturity Fund
Puerto Rico Investors Bond Fund I
Puerto Rico Mortgage Backed & US Govt. Fund
Puerto Rico Fixed Income Funds I-VI
Tax-Free Puerto Rico Target Maturity Fund
Tax-Free Puerto Rico Funds I and II