Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 1, 1991 TAG: 9104020264
SECTION: BUSINESS PAGE: B5 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
But what about those promotions that yell "high yield," "special tax write-off" or "get in on the ground floor" on seemingly solid investments?
The legitimate investment market is not exempt from enticements and "hot" products.
Garrett Thornburg, a Santa Fe, N.M., manager of several short-term bond funds, recently cataloged some of the more recent innovations in misleading offerings.
They are not necessarily scams like Florida swamps, Thornburg said. But "investments are by nature an optimistic look toward the future." Wall Street tells few outright lies, he said, but often makes overly optimistic promises.
The question is, he said, where true optimism ends and unrealistic promotion takes over.
High yield is an example. Thornburg said an investment projecting 11.6 percent yield probably refers to a hypothetical annualized yield the sponsor had in the past.
Annualized means a return for a short period was projected over a year's time.
"Some promotional puffery should be quite obvious," he said. A promise to pay "7 percent above Treasury yields" probably refers to junk bonds that couple high return with tremendous risk. "Today, most of those issues are being sold at discounts with some for as little as a third of their value," Thornburg said.
He listed some of the latest investments being offered by brokers over the telephone:
Penny stocks. They are cheap to buy, but their low price is sometimes a cover for speculative high risk and promoter fraud.
Thornburg said Americans lose more than $2 billion a year through investments in fraudulent penny - or very cheap - stocks.
Partnership insurance. The newest promises for limited partnerships in real estate or commodity trading are insurance and guaranteed distributions.
"Even when the insurance is legitimate and not just a marketing gimmick," he said, "it may only insure for a limited period of time or for a very narrow set of risks."
As an example, insurance may protect real estate limited partners against loss from tenant default, but not from the greater risk of loss in property values.
Unprofitable partnerships must borrow money to make guaranteed distributions, he said, but the partnership ultimately must repay those loans.
Government plus funds. These invest in safe government issues, but boost income by writing covered calls. If the bonds are called, the yield may not cover the lost principal, resulting in a loss of value.
A second strategy is to pay a dividend exceeding earnings. "They are paying back your own money as part of the dividend yields," again resulting in loss of value.
Can't-lose funds. They promote a guarantee that investors will at least break even in 10 years. But that's provided they stay in the fund and reinvest all dividends during that time.
The guarantee isn't adjusted for the cost of living. "Subtract inflation, sales loads and insurance premiums," he said, "and you could probably do just as well by burying the cash in your back yard for 10 years."
Prime rate trusts. These promise yields equal to the prime rate by investing in portfolios of high-quality loans.
For the fund to pay prime, it must own loans paying at least 2 percent more to offset management costs and profits. Quality companies pay prime or below.
Thornburg said more than 80 percent of prime rate fund balances are in highly leveraged transactions. "Some of these loan participations are from companies already in Chapter 11. Others may not even be liquid and only worth what the fund manager says they are."
International multimarket trusts, which "are especially hot today." These promise yields in excess of 10 percent on short-term foreign bonds with sophisticated hedging against currency risk.
Because of the expense of hedging, a fully hedged portfolio would yield about 6.6 percent, the same as U.S. Treasuries, he said. The extra yield comes from taking currency risks.
"It's not the portfolio you are investing in, it's the currency fluctuation," Thornburg said. A gain in the value of the dollar against the Japanese yen could cause a 20 to 30 percent drop in value.
Before founding Thornburg Management Co. in 1982, he was a partner in the brokerage firm of Bear Stearns in New York. During the 1970s, Thornburg was chief financial officer of New York State's Urban Development Corp.
Thornburg's company operates short-term municipal and U.S. government bond funds.
by CNB