Have a stomach for lots of risk? Investing in banks' toxic assets may be for you

By Mark Jewell
Associated Press / March 26, 2009
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Toxic assets, anyone?

The Obama administration's plan to help banks unload soured mortgage assets isn't just an opportunity for Wall Street. Individual investors may be able to get in on the action - if they've got a stomach for plenty of risk.

At least three mutual fund companies have already expressed interest in buying toxic assets and giving fund clients a chance to invest.

"We are intrigued by the potential double-digit returns . . . " said Bill Gross, a founder of Pimco, manager of the world's largest bond fund.

Other fund companies said they're awaiting details.

The Treasury Department's plan gives the private sector a role, alongside government, in removing as much as $1 trillion in bad debt from banks' balance sheets. The goal is to restore the flow of credit.

Much of the interest in buying banks' soured mortgage investments is expected to come from pension funds, hedge funds, and private equity firms.

The interest from mutual fund companies marks a new opportunity for the little guy. However, just because regular folks may be able to invest in a fund that buys toxic assets doesn't mean it's a good idea. The only people certain to make money in the government's program are hedge fund managers and private equity firm managers, said economist Peter Morici. "This is no place for Grandma's money," said Morici, a business professor at the University of Maryland.

The vast majority of mutual funds are prohibited by their own rules from buying assets as risky as the mortgage securities banks are trying to unload.

Eric Tyson, author of "Mutual Funds for Dummies," equated the risks with buying into a high-yield or "junk" bond fund.

"Any investor would have to be aware that the fund is stretching for high returns by taking on assets where there is a greater risk of default," Tyson said.

Gregg Warren of Morningstar Inc said individuals' access to funds buying toxic assets could largely involve closed-end funds, which issue a fixed number of shares, unlike more common open-end funds.

He said two fund companies that are expressing interest in the government program have plenty of the necessary expertise in high-risk investments. Those are Pimco and BlackRock Inc.

The program's success will hinge on banks agreeing to sell tainted assets at prices far below their original values, and buyers' willingness to take on big risks. The tradeoff is that the depressed values give buyers an opportunity for potentially high yields.

Several of the largest mutual fund companies - among them, Fidelity Investments, Vanguard Group, and American Funds - said they have not made a firm decision on whether to participate.

Mark Jewell is an Associated Press personal finance writer. The AP's Dave Carpenter contributed to this report.

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