Tuesday, August 14, 2007

More On Sentinel's Halting of Redemptions

From Bloomberg:

Sentinel Management Group Inc., the Illinois-based firm that manages $1.6 billion, said it asked regulators for permission to freeze client withdrawals because credit-market turmoil made it impossible to trade.


Sentinel invests for clients such as managed-futures funds, high-net-worth individuals and hedge funds that want to be able to withdrawal their cash quickly. Its investments include short- term commercial paper, foreign currency, investment-grade bonds and Treasury notes, according to its Web site.


``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' according to the client letter, which does not specify which funds are affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''

From Sentinal's Website:

» Sentinel is a pioneer in the field. Since 1979, our success has been the result of managing clients' cash with utmost safety, daily liquidity and a high rate of return. Throughout our history, no client has suffered a loss as a result of its dealings with Sentinel.

» Sentinel is recognized by clients and peers for its professionalism and performance.

» Sentinel is registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Advisers Act of 1940. Our stewardship of client funds is overseen by multiple federal and industry regulators.

» We provide our clients with liquidity and operational ease. Funds can be added or withdrawn as late in the day as 4pm, Eastern time. A complete report of activity and value is provided daily.

They have three funds.

Treasuries Only Portfolio

» Treasury Bills, Notes, and Bonds
» Government National Mortgage Association (Ginnie Mae) obligations
» Repurchase Agreements collateralized by the above instruments

123 Portfolio

» Obligations of the U.S. Treasury and GNMA
» Short term commercial paper rated A1/P1
» Medium and long term debt rated AA or higher
» Bank time deposits
» Repurchase agreements collateralized by the above

They also have a prime fund which is currently off-line.

From what I am seeing, I don't see any major problems; this looks like solid conservative money-management to me. According to CBS Marketwatch:

Sentinel Management Group Inc., a firm that manages cash for other investors, has moved to halt client redemptions to avoid selling securities at deep discounts.

Sentinel told clients in a letter that it has asked the Commodity Futures Trading Commission for permission to halt withdrawals.

A liquidity crisis in credit markets has made it "virtually impossible" to properly price and trade securities, leaving highly rated debt trading like junk bonds, Sentinel explained in the letter, a copy of which was obtained by MarketWatch.

"We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients," Sentinel said. "We contacted the CFTC today and asked for their permission to halt redemptions until we can honor them in an orderly fashion."


However, Sentinel invested some of its clients cash in debt that had longer maturities. The weighted average maturity of the firm's prime portfolio was 396 months at the end of June, according to its Web site. The longer the maturity, the greater the potential risk.

Let's assume there aren't any off-balance sheet transactions or other accounting funny-business (and there is no reason to think so at this point). Sentinel is saying the market for even solid, high-quality paper is literally frozen right now, that Sentinel can't get a decent bid (offer to purchase) on large amounts of high-quality paper. Assuming that to be true, then the markets have a real problem.

The length of Sentinel's portfolio might be an issue right now, but again assuming they have stayed with their goal of only buying high-quality paper it still seems they should be able to get a decent bid.

I want to add with emphasis, there is no reason to think Sentinel has in any way violated its stated goal of managing funds in a very conservative manner. However, it's also a bit difficult to believe that no one is offering good prices on decent corporate and government paper right now. I'm not saying it can't happen, just that it would indicate a severe constriction in the debt markets.

This situation appears to be a riddle at this point. I'll keep an eye on this situation as it continues.