This has not been a good month for markets. Stocks have crapped out and the bond market couldn’t avoid some of the splashes. But some parts have done better than others, and one in particular has held up intriguingly well.
Generally speaking, safer, high-grade debt has held up better than riskier, lower-rated bonds, but nothing has been immune from the financial turbulence. Here’s an overview of the price action, based on a mix of indices and the largest and most liquid ETFs for each bond market segment.
The outlier at the bottom of the table at is PRIV, otherwise known as the SPDR SSGA Apollo IG Public & Private Credit ETF, one of the most talked-about ETF launches of recent years.
It’s an actively managed ETF run by State Street Global Advisors that aims to invest about 80 per cent of its money in investment-grade debt, and 20 per cent in junk-rated or unrated securities.
However, the most interesting aspect is that PRIV aims to hold 10-35 per cent of its assets in untraded private credit instruments sourced by Apollo, with the investment company promising to offer firm intraday bids on everything it puts in.
PRIV only started trading on Feb 27, and since then it has outperformed pretty much every single other corner of the global bond market. The only things we can find that has done better is Treasury bills.
It only manages $55mn as of the end of Thursday, and eyeballing its full holdings it seems PRIV is mostly invested in agency MBS and Treasuries. But there are already a smattering of ISIN-less securities in the portfolio that look like private debt securities, and they’ve mostly marked with a market value above their par value.
The PRIV prospectus doesn’t spend much time on how these private securities are valued, only noting that “here are multiple methods that can be used to value a portfolio holding when market quotations are not
readily available”. An accompanying FAQ doesn’t shed much more light:
How are the private securities valued?
In calculating PRIV’s NAV per Share, PRIV’s investments are generally valued using market valuations. A market valuation generally means a valuation (1) obtained from an exchange, a pricing service, or a major market maker (or dealer) or (2) based on a price quotation or other equivalent indication of value supplied by an exchange, a pricing service, or a major market maker (or dealer).
Pursuant to Fund Board approved valuation procedures, the Board has designated SSGA as the valuation designee for PRIV. These procedures address, among other things, (1) determining (a) when market quotations are not readily available or reliable and (b) the methodologies to be used for determining the fair value of investments, and (2) the use and oversight of third-party pricing services for fair valuation.
Every security held by PRIV is reviewed and valued daily as part of its NAV calculation process.
PRIV has kept its market value partly thanks to consistently trading at a slender premium to its net asset value, so it seems traders aren’t enormously worried about this. You can also make a decent argument that ETFs are actually better vehicles for less liquid assets than mutual funds.
However, Alphaville is planning on (belatedly) spending a bit more time thinking through some of the potential issues here, given how PRIV is probably just the starting shot of ETF-ising private markets. Let us know your own thoughts by email or in the comments.
