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January 10, 2012

Highland Floating Rate Fund Undergoes Metamorphosis in Name Only

my name is.jpgOn January 9, 2012, Highland Funds will officially transfer management of their fund portfolios to a new entity called Pyxsis Capital. If history is any guide, Highland Floating Rate Fund investors should not expect a boost in performance following the name change. According to a 2005 study by Michael Cooper with the Krannert Graduate School of Management at Purdue University, funds that changed their names actually performed worse after the name change.

Highland's change of identity is understandable, particularly in light of the legal backlash faced by brokers and advisors who sold the Highland Floating Rate Fund to unwary investors. See our August 2011 blog posting in the California Securities Fraud Lawyer Blog: Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits.

Despite the name change, the Pyxsis Floating Rate Fund's management and investment strategy will continue to remain primarily focused in high-yield "junk bonds." High-yield bonds are characterized by high returns as a reward for the risk inherent in investing in below investment grade securities (rated below BBB by credit reporting agencies). The family of Pyxis floating rate funds plan to invest 75% of the fund's assets in bonds of which more than 80% are below investment grade.

Related Blog Posts:

Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits

J.P. Morgan Chase Fined $1.7 Million by Securities Regulators for Unsuitable Sales of Floating-Rate Funds

November 15, 2011

J.P. Morgan Chase Fined $1.7 Million by Securities Regulators for Unsuitable Sales Practices Involving Floating-Rate Funds & UITs

no dumping.jpgOn November 15, 2011 the Financial Industry Regulatory Authority (FINRA) entered into a settlement with J.P. Morgan Chase who consented to a fine of $1.7 million and agreed to reimburse customers in the amount of $1.9 million in connection with the failure to supervise unsuitable recommendations to invest in unit investment trusts (UITs) and floating-rate funds given to unsophisticated investors who had a conservative risk tolerance and little or no investment experience. FINRA further found that firm's brokers made the recommendations absent any reasonable grounds to suggest they were suitable for the affected investors.

"Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers," said Brad Bennet, FINRA Executive Vice President and Chief of Enforcement.

FINRA found that 260 unsuitable recommendations were made with regard UITs resulting in $1.4 million in losses to customers. Unreimbursed losses to customers based on unsuitable recommendations from brokers to purchase the floating-rate funds totaled $500,000.

A UIT is an investment vehicle comprised of a bundle of securities, which can include risky investments such as high-yield below investment-grade, or "junk" bonds. Floating-rate funds are mutual funds comprised of senior loans made to entities with low credit ratings that increases the credit risk associated with those funds. Generally, both types of instruments are not suitable for inexperienced investors with a low risk tolerance seeking preservation of capital.

Also included in FINRA's finding was that WaMu Investments Inc., which merged with Chase in July of 2009, also made unsuitable recommendations to customers related to the purchase of UITs and floating-rate funds.

J.P. Morgan Chase stipulated to FINRA's findings without admitting or denying the charge. The settlement agreement requires Chase to contact eligible customers and complete the process of making restitution payments by April 13, 2012. Accepting such payments, however, does not foreclose affected customers from pursuing arbitration or mediation to recover losses. FINRA encourages customers to consult with a securities lawyer to discuss their rights.

August 30, 2011

Highland Floating Rate Funds' Poor Performance Leads to Investor Lawsuits

Our securities law firm is currently pursuing a securities arbitration case on behalf of California investors who suffered losses in the Highland Floating Rate Advantage Fund [Symbols: XSFRX (Class A); XLACX (Class C); XLAZX (Class Z).] These funds are also referred to as "leveraged" loans because the borrowers typically have a significant level of debt relative to equity. The Highland Floating Rate Advantage Fund's share price declined 8% in 2007 and more than 50% in 2008.

Unlike their peers, the Highland Floating Rate funds have continued to disappoint investors. Compared to the performance of other loan participation funds, the Highland Floating Rate Funds are in a class by themselves due to their five-year history of negative returns. In June 2011, the Highland Floating Rate Advantage Fund and the Highland Floating Rate Fund [Symbol: XLFAX] were merged into the Highland Floating Rate Opportunities Fund. Below are the 5-year return results for the Highland Floating Rate Opportunities Funds:

Highland Floating Rate Opportunities Fund 5 Year Return*

Class C Shares [HFRCX] -20.41%
Class B Shares [HFRBX] -19.80%
Class A Shares [HFRAX] -18.39%
Class Z Shares [HFRZX] -16.96%


Highland's sales literature claims that its floating rate funds seek "capital preservation and the management of credit risk while utilizing leverage to increase yield potential." Investors were attracted to the Highland Floating Rate Funds because they supposedly offered a higher return without adding any significant risk. One of the main reasons the Highland Floating Rate funds performed so poorly is that they invested heavily in loans that were rated as below investment grade or "junk."

Securities Regulators Urge Investors to Use Caution when Investing in Floating Rate Funds

The Financial Industry Regulatory Authority (FINRA) recently issued an "investor alert" to warn investors who may be attracted to the high return promised by floating rate funds. In promoting these investments, FINRA expressed concern about brokers who downplay the potential risks while emphasizing the higher returns.

According to FINRA, floating rate funds have become increasingly popular since 2008 - having grown from $15 billion to $60 billion as of April 2011. These bank-loan funds are highly coveted during periods where investors are concerned with spiked interest rates. Although the funds are low in interest-rate risk, they carry a much higher credit risk. They often extend their portfolios to lower quality borrowers who typically have a higher rate of default than investment-grade bonds. Floating rate funds and other risky high-yield investments should play a very minor role in any investment portfolio--if at all.