The Third Avenue Focused Credit Fund (MUTF:TFCIX) became a very unfortunate example of how quickly things can spiral out of control when a high-risk asset class either goes bad, falls out of favor, experiences a liquidity crunch or some combination of all three factors. The Focused Credit Fund looked to invest in the low graded debt of highly leveraged companies hoping that they could rebound financially themselves or take advantage of a favorable economic cycle. The strategy worked well in the fund's early years amid the Fed's zero interest rate policy. From the fund's 2009 inception through roughly the middle of 2014, investors reaped an 80% total return. The fund was in the top 1% of high-yield funds in 2013.
But then things went south quickly. Credit spreads began widening rapidly with most below investment grade debt seeing their spreads more than double from the beginning of 2014 to their peak in early 2016.
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