Toxic Assets for Everyone?

How would you like to invest in something toxic? No, I’m not talking about the stock market of 2008. I’m talking about the plan released a couple of weeks ago by the Treasury -- the so-called Public-Private Investment Program.

You may have heard about the government’s plan that would “allow” individual investors to participate in the investment of toxic assets -- illiquid real estate loans and securities backed by the loan portfolios. But wait, as taxpayers, aren’t we already investing in the toxic assets? Oh well, most taxpayers won’t be allowed to invest more of their cash in these assets.

At this point, the plan will be limited to accredited investors (investors who meet certain criteria such as a net worth of $1 million or income of $200,000 in each of the two most recent years or $300,000 if married) to invest in the assets.

Some large mutual fund companies are jumping on board (PIMCO and Blackrock). But these investment funds won’t be your run of the mill open-end mutual funds. It appears that closed-end funds are the investment vehicle of choice for these toxic assets.

The closed-end structure lends itself well to more illiquid assets because when an investor buys or sells the fund, they do so on an exchange -- no money flows into or out of the fund after the initial public offering (with a few exceptions). In other words, if an investor wants to sell their fund shares the fund isn’t forced to sell assets -- assets which might be illiquid as is the case with the toxic assets. On the other hand, an open-end mutual fund would need to sell assets in order to meet the cash call of the investor.

Although it appears that closed-end funds are the investment vehicle of choice for the toxic assets, ETF manufacturers are already salivating over the possibility of creating another product for their line-ups. If you’re an advocate of ETFs, and you think an ETF would be a better fit than a closed-end fund for the toxic fund investing, please comment below or take it over to the mutual funds forum for a discussion.