RiverNorth CIO Patrick Galley provides an update on RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (OPP).
[BEGIN VIDEO TRANSCRIPT]
ALLEN: Patrick, congratulations on the launch of the new RiverNorth/DoubleLine Strategic Opportunity Fund which was brought to market in September of this year. Also congratulations on your second closed-end fund offering in the last 9 months. I know that's a success for you considering the IPO market in the closed-end funds has been pretty challenging for the last few years.
PATRICK: At the end of the day the closed-end fund structure is the best way for RiverNorth to manage our assets. We're opportunistic buyers of other closed-end funds, so having a fixed pool of capital without redemption risk is ideal for us to opportunistically invest in other closed-end funds.
ALLEN: Patrick, looking at the strategy,this is not the first time that RiverNorth has collaborated with DoubleLine. The RiverNorth/DoubleLine Strategic Income Fund has been around for almost 6 years now. Can you talk a little bit about the similarities and differences between the new offering and what led to bringing a strategy that's somewhat similar in a closed-end fund wrapper.
PATRICK: Yeah, obviously the biggest difference is the fund we just brought out, ticker OPP, is a closed-end fund, so again we don't have to have the redemption risk. Unlike the open-end fund, we have redemption risk on a daily basis, so therefore we maintain a significant amount of liquidity in that fund. That comes in the terms of cash and also DoubleLine managing a third strategy, their core fixed income strategy which is not in the closed-end fund structure that we just launched in the RiverNorth/DoubleLine Strategic Opportunity fund.
ALLEN: Patrick, turning to some of the key features and attributes of RiverNorth/DoubleLine Strategic Opportunity Fund or OPP, can you talk a little bit about what the fund is actually doing? What's RiverNorth managing? What's DoubleLine managing? And then some of the investment parameters.
PATRICK: The RiverNorth/DoubleLine Strategic Opportunity Fund consists of two strategies. RiverNorth opportunistically investing in fixed income closed-end funds predominantly and DoubleLine managing their opportunistic income strategy, which is more or less DoubleLine's hedge fund strategy only available to accredited investors through their hedge fund or another listed closed-end fund, ticker DBL, that they're managing. Those two sleeves have a range of 10 percent to 35 percent on the RiverNorth side and the DoubleLine sleeve is a minimum of 65 percent to a maximum of 90 percent. The way one investor can look at it is you're getting a core DoubleLine opportunistic income strategy with a satellite of RiverNorth opportunistically investing in fixed income closed-end funds. Those sleeves are dynamic depending on the opportunity set predominantly driven by closed-end fund discounts.
ALLEN: So, with that, Patrick, investors can think of this as turning the dial towards closed-end funds as RiverNorth views closed-end fund opportunity to be attractive and dial down pushing capital to DoubleLine if the closed-end fund opportunity is less interesting.
PATRICK: Exactly. You're getting the bottom-up selection by RiverNorth on the closed-end fund side, DoubleLine on the opportunistic income side, which is mortgage back securities predominant. So, you're getting that bottom-up selection, but then I think also most importantly you're getting the tactical management of those strategies depending on the opportunity sets.
ALLEN: Patrick, talking about attributes for a minute, clearly we're in a low-interest rate environment and people are looking for ideas and things related to yield in this environment. Can you talk a little bit about things like expected yield or the portfolio? I know it's certainly early in the process — duration and some of the statistics that might be important to some of our viewers.
PATRICK: We just announced our first dividend, our monthly dividend, so it is a monthly pay. It's 11 cents per share and that comes out to about 6.6 percent annualized yield today. Truth be told we are currently ramping up the portfolio. The fund just launched at the end of September. We've taken our time. There's been a lot of volatility in the market. Obviously we've just gotten through an election, as well. Given that we're both opportunistic investors we wanted to take our time ramping up the portfolio. I think it's important to note RiverNorth and DoubleLine are more focused on total return than yield, so we're not going to let yield dictate the portfolio risk. We're going to focus on the downside risk as well.
ALLEN: Patrick, you mentioned the election and a little bit about ramping up the portfolio. Can you talk a little bit about the current opportunity in the closed-end fund side of the equation and sort of how that's affected the way you and your team have put together the portfolio in the first 30 to 35 days.
PATRICK: I think over the summer we saw discounts compress quite a bit, especially since the beginning of the year. Discounts were actually in the 98th percentile of widest discounts at the beginning of the year. Discounts contracted as kind of a risk-on mentality over the summer. When the fund launched at the end of September — obviously there's typically a fourth quarter tax loss selling period that goes on, so there's a seasonality effect in closed-end fund discounts. Plus put on top of that an election that causes volatility, both RiverNorth and DoubleLine wanted to take our time ramping up the portfolio. Current discounts — looking back, we were right. Since the fund launched discounts widened out approximately 3 percent. Taxable, fixed income closed-end funds are down approximately 4 percent. That's post the election, so as of November 9th, 2016. Now we obviously find this as a better opportunity to start investing capital. As of 10/31 the fund was 54 percent invested. We have plenty of dry powder to ramp up the portfolio. Plus we have a leverage component in the fund that we haven't tapped into yet, so we have that to deploy more capital into more volatility.
ALLEN: Patrick, you talked a little bit about what RiverNorth is doing in the portfolio. Can you turn your attention a little bit to the DoubleLine side of the portfolio? That is the majority of the assets. What are they investing in? What can people sort of expect as a portfolio composition from the DoubleLine side of the equation?
PATRICK: DoubleLine is managing their opportunistic income strategy. It's a strategy that the team's been managing for multiple decades, so it's nothing new to them. Like I said before, this is their hedge fund strategy, not to be confused with traditional hedge funds where it's long/short. DoubleLine's approach is more of risk integration. The way they think about that is they tend to have a mortgage-backed securities portfolio in the agency arena and also the non-agency arena. What that means is typically non-agency mortgage-backed securities are trading at a discount to par. When you have a risk-on type of environment, the non-agency side of the portfolio typically does well. Vice versa on a risk-off type of environment, the agency side of the portfolio typically does well as there's a risk-off mentality and everybody is going to a flight to quality.
ALLEN: In that respect people can think of the DoubleLine component as mostly mortgage-related and simply differences in the agency/non-agency relationship depending on the economic backdrop. Is that a fair way to think aboutit?
PATRICK: Yeah, that's a fair way to look at it. I would look at it. As far as a picture can go, you can look at it as a barbell approach. You've got the risk-on side of the barbell and the risk-off side of the barbell. They're risk integrated. That's a nice hedge to each other.
ALLEN: The DoubleLine opportunistic income sleeve is a nice component to what RiverNorth does, especially in times of discount widening. Is that fair?
PATRICK: Yeah, I think what you're getting is two alpha sleeves that are not necessarily correlated with each other.
ALLEN: Patrick, you mentioned leverage. Can you talk a little bit about just expectations around leverage at the fund level and at the closed-end fund level. Unlike the other RiverNorth closed end fund that has more closed-end fund ownership, this is less. Does that imply more leverage to get to kind of the yield you've been talking about?
PATRICK The way leverage is structured in this fund is we're looking through to the closed-end fund leverage as well. While we are going to have a bank line of credit to borrow, to enhance the yield and enhance the total return of the portfolio, we're going to cap the leverage at 33 and a third percent of managed assets. That includes the fund leverage plus the closed-end fund leverage. So, it's more conservative than the 1940 act would allow.
ALLEN: Patrick, last question, for those that do know RIV or RiverNorth Opportunities Fund, which is the closed-end fund launched back at the end of last year, that fund has some special features in the structure. There are some open-ending contingency features. There are some special distribution features. Can you talk about OPP and any similar features? Are those particular to RIV?
PATRICK: OPP also has an open-ending provision. In year five, I believe it's 2021, shareholders will automatically vote on whether the fund should convert to an open-end fund or stay as a closed-end fund. Obviously the idea there is to protect the fund from trading at any significant discount. If it's at any significant discount and 5 years from now, shareholders, it would behoove them to vote positively towards a conversion to an open-end fund to unlock that value and narrow the discount. Obviously I mentioned earlier that the closed-end fund structure is the best way for us to execute on the strategy and manage the strategy. It does give shareholders an option to vote on whether the fund should convert to an open-end fund and therefore not have discount risk.
ALLEN: Patrick, thanks as always for your time. Congratulations to the team on the new launch.
PATRICK: Thanks, Allen.
[END VIDEO TRANSCRIPT]
Video recorded 11.10.2016.
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RiverNorth/DoubleLine Strategic Income Fund
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