An alternative play on a financials rebound (VVR)

By: ispeculatornew
Date posted: 10.15.2008 (5:00 am) | Write a Comment  (0 Comments)

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With everything that has been going on in the past few months, once of most discussed subjects is the use of mark-to-market accounting for illiquid assets. Many of these illiquid assets are mortage backed securities (MBS) as well as other asset backed securities (ABS). While some of these are truly risky because of potential bankruptcies, others are considered very safe because they are senior. By senior, I mean that an important portion of the mortgages in an MBS would have to default in order to have any kind of impact on the investors of these senior notes.

The problem however is that like many other investments, these notes are something that many financial firms are trying to get rid of because of the stigma associated with it, often without much regards to the price. Many of the big financials wanted to sell these assets to avoid any possible write-downs. These write-downs would not happen because of a deterioration of the loans but rather because of declining prices.

I have seen a lot of research suggesting that these prices are now underpriced and many of the biggest investors have been buying such assets (biggest one is probably Blackrock). The problem is that for small investors, getting involved in such a market is nearly impossible. But there exists a few indirect plays and one of them I have been looking for is VVR, Van Kampen Senior Income Trust, which is down 53.02% in the past year. Here is the official description of what they do: “The Trust invests primarily in a portfolio of interests in floating or variable-rate senior loans to corporations, partnerships and other entities, which operate in a variety of industries and geographical regions. It invests in various industries, including aerospace/defense, automotive, broadcasting (cable), printing and publishing, entertainment and leisure, healthcare, buildings and real estate, electronics, personal and miscellaneous services, finance, paper and forest products, and beverage, food and tobacco”

So I would consider that for now, this could be a good short to medium term investment as these illiquid assets are bought back by the US Treasury and as many other investors (often vulture funds) get involved in this market. The fund manager estimates the NAV to be 4.49$. The security also currently offers a 12.43% dividend yield.. not bad hey?

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