Junk-Bond Fund's Demise Mars Vulture Investor's Storied Career

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Martin Whitman has spent over four decades buying unloved stocks and bonds, usually profiting as they rose in value.

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Lately, however, these investments are turning into blunders, not bargains.

On Thursday, a junk-bond fund managed by the investment firm Mr. Whitman founded, Third Avenue Management, moved to block investors from withdrawing their money, a rare and jarring move that underscores the recent downturn in various markets for riskier debt investments. Falling oil prices have crippled all kinds of energy stocks and bonds, while other kinds of debt also is coming under pressure as some worry about the economy's outlook, sparking losses for the Third Avenue fund and others debt funds.

The move by the Third Avenue Credit Fund, intended to enable an orderly liquidation of the fund, is a mark on the long career of Mr. Whitman, who remains chairman of the firm.

"It's such a surprise to see a firm with a long-revered name, such as Third Avenue, face such incredibly difficult decisions" about how to close a mutual fund, says Jeff Tjornehoj, head of Americas research at Thomson Reuters Lipper.

After founding M.J. Whitman & Co. in 1974 Mr. Whitman, who began his career as an expert witness in securities litigation related to bankruptcies and restructurings, started investing in the mortgage bonds of then-bankrupt Penn Central Railroad.

A decade later, Mr. Whitman led a takeover of a mutual fund and subsequently scored a windfall investing in the debt of a bankrupt oil-drilling company now known as Nabors Industries. Mr. Whitman eventually formed Third Avenue Management and expanded into stocks and various kinds of bonds, scoring profits emphasizing so-called value investments, or those that are relatively inexpensive. Mr. Whitman became known as a pre-eminent "vulture" investor, often buying the debt of struggling companies and sometimes turning it into lucrative, equity stakes in those companies after debt restructurings.

"Marty is considered one of the deans of the credit-investing industry for 40 years, says Howard Marks, founder of Oaktree Capital Management. "He's been a very good investor in risky and illiquid situations."

Third Avenue Management has been struggling with poor performance and management turnover in recent years, however. The firm's flagship $1.5 billion Third Avenue Value Fund, which Whitman ran from 1990 through 2012, now has just one Morningstar star, and has shed 7.5% in the 12 months through Dec. 9, according to Morningstar.

Chip Rewey was hired last year from value manager Cramer Rosenthal McGlynn to re-energize the firm. Chief Executive David Barse has been president since 1994. The firm's assets have fallen to $8 billion from a peak of $26 billion in 2006. The firm runs five funds and some separate accounts. Mr. Whitman, 90, still manages the firm, but he no longer works on individual investments for the firm. He actively trades for his family account.

Part of the reason the Third Avenue fund ran into deep problems, traders say: It allowed daily withdrawals but stuck with investments that have become harder to trade and have been steadily losing value as investors fled energy and other kinds of riskier debt. It has been harder to find traders willing to buy debt the fund holds, including energy company Magnum Hunter Resources Corp. and troubled Spanish gaming company Codere, traders say.

As the Third Avenue fund began to see losses, rival traders at hedge funds say they shorted, or bet against, some of the mutual fund's holdings, wagering that Third Avenue would experience investor withdrawals and be forced to sell some of its holdings. That caused further losses for Third Avenue fund.

"It all starts with maybe trying to overreach," Mr. Tjornehoj says. "Maybe this is the strategy--focused credit--that should only be available to institutions or accredited investors."

Now, investors are focused on whether other funds may run into similar investor withdrawals and problems as the year-end approaches. Many investors move to exit losing funds and investments late in the year to generate losses to reduce capital gains taxes, traders caution.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Daisy Maxey at daisy.maxey@wsj.com

(END) Dow Jones Newswires

December 11, 2015 09:09 ET (14:09 GMT)

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