IMS Strategic Income Fund: What Went Wrong?
Investors looking for investments with high-income possibilities and diversification thought they hit pay dirt with the IMS Strategic Income Fund (IMSIX). They were wrong. The complex structured investment product from Oregon-based IMS Capital Management may have offered strong income potential, but it also exposed investors to considerable risks.
Carl W. Marker and Don Shute are the managers of the fund, which is far from a traditional income fund. Launched in 2002, the IMS Strategic Income Fund entails a wide range of investing options, including everything from international stocks and bonds to reverse convertibles and real estate investment trusts.
It is the reverse convertible component of the IMS Strategic Income Fund that has fallen upon especially hard times. In simple terms, a reverse convertible note is a complex derivative tied to the performance of one or several stocks. Often touted for their high-yield potential, reverse convertibles also can deliver a knock-out punch to investors. If the reverse convertible is linked to a stock that falls sharply, investors could see their entire investment wiped out.
In the case of the IMS Strategic Income Fund, reverse convertible notes caused the fund to suffer huge losses this year because of their ties to stocks like General Motors Corp. GM shares have lost 90% of their value in 2008 - the lowest in 65 years - and the automaker is now trying to eke out a rescue package from the federal government in order to stave off possible bankruptcy.
Meanwhile, the IMS Strategic Income Fund is down 33% in value, making it one of the worst performers in the conservative-allocation category tracked by Morningstar, Inc.
Two years ago, an Oct. 16 column in the New York Times by chief financial correspondent Floyd Norris discussed the hazards of reverse convertible notes. Norris wrote that Alan Greenspan, former chairman of the Federal Reserve, often extolled the virtues of structured investment products like reverse convertibles yet never seemed to focus on their potentially explosive downside. One of these days, Norris said, “a blow-up will be severe enough to bring regulation and disclosure in these markets.”
Fast forward two years later, and Norris’ prediction has come to fruition. That blow-up is here.
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