Yesterday, I was contacted by a client who asked me about the effect on SIP funds that had undergone the change from the Fixed Income Fund to the Short-Term Bond Fund (Here is T. Rowe Price's notice about the change and new fund).
For those that don't know, The Fixed Income Fund, which used to be called 'Fund D', was for years an investment with above-market returns and below-market risk. Almost 70% of SIP participants were invested in 'Fund D' - and why shouldn't they have been? You might ask 'How could this fund have such characteristics (and why couldn't I get into it)? The answer is that this fund was, to the best of our analysis, subsidized by Kodak. One way the principal was protected (that would be the below-market risk part) was through an insurance wrapper. About a week after the bankruptcy filing, T.Rowe sent notice to fund participants that the wrapper would be going away effective February 1.
This was, to say the least, worrisome to a number of people, although in truth the fund was changing from exceptionally low risk to very low risk. We've been doing our best to give our community some relief from worry. "It's very unlikely," we said, "that your principal will fall off a cliff on February 1."
Based on all the hype and hysteria that had been generated since Kodak's bankruptcy filing, it's easy to understand why SIP participants would want to confirm that their SIP balance did not go down on 2/1/2012 (I'm calling the day 'Ex-Fund-D-Day').
What I found when I checked was a welcome 3.5%+ increase in SIP short-term bond fund values compared to the day before! For Kodak retirees that did not move their funds for fear of losing principle, this is a very welcome one-time gain.
In the end it seems that Fund D went out with a bang. This is the closest thing to a free lunch that we've ever seen. Now that the SIP fund options have changed we continue to believe that patience, due diligence, and sobriety are the best way for SIP investors to move forward.
It's essential to note that this may not happen the next day, that in fact this increase is caused by some specific movements in bond markets, and it should in no way be looked on as what will happen tomorrow. But it's something to be happy about on a day many Kodakers were dreading.
If you want to talk about the details, you're more than welcome to contact us at Brighton Securities to get answers to your questions. Our phone number: 585.473.3590
Financial Advisor Brighton Securities