These Money Managers Blew It!

by Ryan Fitzwater, Director of Research, The Oxford Club


A new record was set last week.

But it wasn’t followed by celebration. The sound of champagne popping couldn’t be heard.

The only sound was a warning shot. A warning of what could be coming to a city, state or - must we say - federal government near you.

And there is a lesson to be learned - especially by the world’s top money managers.

On Thursday of last week, the Commonwealth of Puerto Rico filed for bankruptcy. It was a record-breaker indeed.

More than $70 billion in bond debt is being restructured, making it the largest local government bankruptcy in U.S. history.

The previous record-holder was Detroit. Four years ago, the city went through a “measly” $9 billion bankruptcy.

More record-setters are likely on the horizon. But today, we’re focusing on the money managers that blew this recent debt bet.

In the chart above, we have listed the top 10 holders of Puerto Rico’s general debt obligations. Two holders alone own more than 51% of its obligations. Massachusetts Mutual Life Insurance lent out more than $959 million to the Commonwealth. And Franklin Resources (NYSE: BEN) is more than $509 million in the hole.

Combined, Goldman Sachs (NYSE: GS), Loomis, Sayles & Company and New York Life hold another 16% of Puerto Rico’s debt.


Overall, there are more than 188 investment managers that are about to take a haircut on their Puerto Rican bond holdings.

But the impact doesn’t depend on just investment size. A millionaire losing $1,000 at the casino doesn’t even blink an eye. Rather, the companies that will feel the biggest impacts are those that allocated larger portions of their portfolios into Puerto Rican debt.

For Massachusetts Mutual Life Insurance, this is a small mistake. Just 0.66% of its total investments are in Puerto Rican bonds.

The situation is much worse for publicly traded Franklin Resources - 11.23% of its short-term and long-term investments sit in the distressed debt. Its bottom line will feel more pain.

The investment managers listed above are those that openly report their holdings. Others have undisclosed skin in the game as well. Hedge funds - which aren’t required to fully disclose their holdings - participated in a 2014 offering that raised $3.5 billion for the now-bankrupt island.

And general debt obligations aren’t the only loans outstanding in Puerto Rico. There are many other classes of debt. And every class has a different mixture of holders.

Hedge funds Fundamental Advisors and Aurelius Capital Management have already filed suit against the Puerto Rican government. Both hold bonds backed by sales tax revenue. They are the island’s second-largest debt class behind general obligations.

This is just the first in a long series of lawsuits over who gets paid first.

The process will get only bloodier from here.

Get ready to hear terms like “litigation,” “write-offs” and “haircuts” frequently in the coming months.

Investors should be wary of money managers that overallocate into distressed debt. Chasing yield comes with big risk. And Puerto Rico’s financial situation illustrates the negative outcomes that can follow.

Thoughts on this article? Leave a comment below.

P.S. High-yielding bond investing can be very risky. But it can also have equally high rewards. Want to learn how you can grow your wealth in the debt markets while protecting it from fiscal pitfalls like this? Click here.

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