What David Barse Learned From Watching A Credit Fund Blow Up

Tracy Alloway (0:11)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:19)

Joe, do you remember what was happening in 1962? I mean, from a financial markets perspective, just to be clear.

Joe Weisenthal (0:28)

I thought you were asking me what my personal recollection was from 1962

But no, not only do I not personally remember what happened in 1962, probably couldn't actually tell you anything that I know about financial markets in 1962 So no, I'm drawing a blank here.

Tracy Alloway (0:46)

Okay, well, you're gonna enjoy this then. I find this really interesting. I think you will too. But in 1962, there was a little stock market crash and it became known as the Kennedy slide. Not many people remember it now, but it was really interesting because it was basically the first crash that happened in a stock market that had mutual funds in it, because mutual funds hadn't really been around in 1929 or in the Great Depression.

Joe Weisenthal (1:14)

So that's interesting. So was the crash associated with something mechanically with the funds or was it just sort of like a coincidence that there were these new vehicles at the time?

Tracy Alloway (1:26)

Ah, okay. So this is where it gets really interesting because as stock started to fall on this one particular week in 1962, there was this real concern that all these newfangled mutual funds were going to end up making the crash worse. Basically, people thought that investors would be able to sell their holdings much more easily because they were wrapped up in these mutual funds.

Now, in the end, that didn't actually happen. The mutual funds actually came in and bought a bunch of stocks. So they ended up supporting the market and everyone was kind of saved thanks to mutual funds. But it's clearly interesting because it gets to this big question of how open-ended funds behave when there's trouble. And you and I both like to talk about market structure.

We talk a lot about the rise of passive investing, but we also talk about ETFs and sometimes mutual funds.

Joe Weisenthal (2:24)

Right, exactly. And you hear it a lot these days, people warning about ETFs are getting so big and so enormous and they're so liquid and people are concerned about the underlying assets in them. And we haven't really seen any big structural systematic problems yet, but if you ask people like, oh, what are you most worried about? Or what could bring on another financial crisis?

Even if people are sort of vague and hazy about how it would work, there's like this suspicion that modern wrappers of assets or modern vehicles are somehow going to be involved.

Tracy Alloway (2:59)

Right, that's exactly right. And of course, there's an overriding discussion as well about how mutual funds are constructed and how the benchmarks that they follow are actually defined and constructed. And that's something that we've spoken about before. In terms of these worries over mutual funds or ETFs, basically open-ended vehicles wrapped around certain assets, there was one moment in time that happened relatively recently, certainly much more recently than in 1962

Do you remember that one, Joe?

Joe Weisenthal (3:31)

Yeah, I think it was that late 2015 and everyone started reading white papers about the connection between junk bond ETFs and junk bonds and whether that was going to create a problem.

Tracy Alloway (3:44)

Yeah, that's exactly right. And we also had a credit fund. I think at one point, this credit fund was worth about $3.5 billion, the Third Avenue Credit Fund, and it experienced a bout of redemptions that basically spooked the entire market.

Joe Weisenthal (4:02)

Yeah, I remember that. And in the end, the market overall was fine, and we didn't have many big systemic problems, but people thought, okay, this could be a harbinger. I mean, I think people were relieved that it didn't, but it seemed like the type of thing that spoke to a lot of these anxieties which we've been talking about for a while.

Tracy Alloway (4:22)

Yeah, exactly.

So today, I'm quite excited about our guest because our guest is actually the former CEO of Third Avenue. It's David Barse. And he's not only going to be talking about his experience at the fund and his opinions about general liquidity and mutual funds and ETFs, but we're also gonna go into a really interesting discussion about indexes specifically and also his new venture, which is kind of an interesting tweak on existing index investing.

Joe Weisenthal (4:55)

I can't wait.

Tracy Alloway (5:04)

All right, so without further adieu, David Barse, welcome to the show.