This paper reports on the Charles Schwab YieldPlus, a bond fund. YieldPlus returned -31.7% between June 2007 and June 2008. Though it told investors that it was an ultra short bond fund, it was in fact an ultra long bond fund. It held securities backed by illiquid long-term private label mortgages, violating concentration and liquidity limits stated in its prospectus. Up until 2007, these securities helped YieldPlus generate above-average returns. When the credit crunch hit the markets in 2007, credit and liquidity spreads widened and long term holdings of YieldPlus dropped dramatically and the fund suffered its largest losses in early 2008.
The paper finds that Schwab may have understated these losses by inflating its net asset value, or NAV while YieldPlus understated its credit and liquidity risks in its SEC filings and marketing materials.
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