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Home > Cases > Fidelity > Ultrashort Bond Funds: Ripple Effects of Subprime Take a Toll

Ultrashort Bond Funds: Ripple Effects of Subprime Take a Toll

A number of ultrashort bond funds have crashed and burned in recent months, reeling from the effects of a familiar culprit: lending woes in the subprime mortgage market. The first signs of trouble began to surface last year, when funds with ties to the performance of the housing market began to plummet in value.

As its name implies, ultrashort bond funds should be the most conservative and low-risk of bond funds, mirroring the safety of money-market funds that invest in U.S. Treasury and government-guaranteed securities but with a higher yield. The burst of the housing bubble, however, has altogether changed that perception. As market liquidity dried up, it generated a mass exodus of bond fund investors, forcing fund managers to sell the funds' assets at depressed prices in order to meet redemptions.

The dismal state of ultrashort bond funds has wreaked havoc on investors and created massive financial losses for them. Two Charles Schwab ultrashort bond funds - the Schwab YieldPlus Fund Investor Shares and the Schwab YieldPlus Fund Select Shares - are the subject of several investigations, as well as lawsuits from investors who say they the funds were marketed to them as safe investments that would provide “higher potential returns than money market funds, with only marginally higher risk.” Both funds have plummeted in value under the weight of securities backed by subprime mortgages.

Critics lay some of the blame for the ultrashort bond fund debacle with the major credit-rating agencies - Standard & Poor's, Moody's Investors Service and Fitch Ratings. Among other things, they say the credit firms missed the boat in assessing risk and giving bonds that had invested in riskier short-term debt the highest ratings possible.

Case in point: The State Street Global Advisors Yield Plus, Fidelity Ultra-Short Bond and the Schwab YieldPlus funds showed credit ratings of double-A or higher on their recent disclosure statements. Yet, all of the funds have recorded big losses. The Fidelity Ultrashort Bond lost 6.9 percent in the first quarter; State Street Global Advisors Yield Plus fell 14.1 percent, and Schwab YieldPlus sank a whopping 19.9 percent.

The Schwab fund in particular has been hit hard. Less than a year ago, it held $13.5 billion in assets; now it stands at around $1.5 billion.

It wasn't so long ago that investors and financial experts alike believed ultrashort bond funds were “almost” like money in the bank, with the safety of money-market funds in terms of risk. Now we're finding that “almost” means many different things in the investing world.

For investors who got into “safe” ultrashort bond funds that have since plummeted in value because of investments in mortgage-backed securities, many are making compelling cases that they were misled about the safety of the funds by their brokers. Win or lose, at the very least a number of investment brokers and securities firms will have a long road to haul in the months and years ahead in restoring the confidence of customers.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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