RMI Fund Update: December 2018
Senior Portfolio Specialist Allen Webb and Portfolio Manager Steve O'Neill talk about RiverNorth's latest closed-end fund offering RiverNorth Opportunistic Municipal Income Fund (RMI).
Allen: Steve, I'm excited for you to join us today to talk about the newest RiverNorth closed-end fund offering, the RiverNorth Opportunistic Municipal Income Fund, ticker RMI. We were out in October raising capital for the fund and priced about $120 million in assets at the end of October and now trading on the exchange under the ticker RMI. Maybe kick us off with what's the strategy for RMI and what are you trying to accomplish?
Steve: Sure. RMI is another relative value trading strategy from RiverNorth. What we're looking to do here is to try to generate alpha within the municipal bond market. The strategy is pretty simple. We're going to be buying both discounted closed-end funds in the muni sector. We're also going to be buying cash bonds. That cash bond manager is MacKay Municipal Managers. The idea is just to make a relative value trading when the opportunity presents itself. When closed-end fund discounts are wide, we're going to use more of the fund's capital to buy discounted closed-end funds. When discounts narrow, we'll push capital over to MacKay Municipal Managers, and they'll buy cash bonds for the portfolio. Essentially we're not timing the muni market. We're really timing the way we're getting that exposure. Investors are going to be getting tax-exempt income. Again, we think that there is trading alpha in the closed-end fund space, and we also think there's trading alpha within the municipal bond market. We think it's in an efficient fixed-income asset class. We think MacKay with their relative value approach is a really good partner for this strategy.
Allen: Maybe tell us a little about the guardrails on the size of both the sleeves. Two sleeves, two managers, how big or small can those sleeves be?
Steve: Sure. The RiverNorth sleeve can be anywhere from 25 to 50 percent of the portfolio. Obviously MacKay would be managing the balance. Coming out of the gate, we guided investors that we'd be about 45 percent on the portfolio, which is certainly the high end of the range, given that 50 percent is the top, but we think the opportunity set today is really exceptional. With closed-end fund discounts where they are, we wanted to get maximum exposure to the asset class.
Allen: You make a good point about where discounts are. We'll circle back to that in a second. Certainly the municipal component of the closed-end fund market is about a third of the market, correct? I guess it makes some sense to have a strategy offering that makes up a third of the market. Is that something RiverNorth's always wanted to do?
Steve: Yes. it's been something that we have thought about for a while. The muni strategy was one that we wanted to launch, but we thought that it would work best in a closed-end fund. Closed-end funds are not easy to launch. We took our opportunity when it presented itself. The opportunity presented itself because the landscape is just, I think, just so incredibly attractive. There's demand for exposure to discount and muni closed-end funds. Investors saw the opportunity. It was just one of those situations where we had been planning this for a long time. When the opportunity presented itself, RiverNorth quickly worked with the underwriters, and collectively the team brought a new fund to market.
Allen: Steve, looking at the MacKay Municipal Managers sleeve for a moment, I know obviously you're not a member of that investment team, but just tell us a bit about how they think about the muni space in the cash market. Is this a ladder buy-and-hold passive strategy, or do they think about things a little differently in the muni market?
Steve: Sure. They definitely think differently, and it's one of the reasons they've excelled as a manager but also one of the reasons that they work well with the strategy. We didn't want to work with a buy-and-hold manager. We need the capital to be flexible. We need to rotate between closed-end funds and cash bonds. We need a manager that's focused on liquidity, key sub-securities, trading volume and really relative value because we wanted a manager that we could call capital from. We also wanted a manager that would generate potential alpha for the fund. MacKay, I think, is a very atypical manager within the municipal bond market with their focus on relative value. I think that sets them apart. They're managing about a little over $30 billion today. The team came, Bob DiMella and his team came from BlackRock. They have had a lot of experience managing muni capital. They've also had a lot of experience looking at muni closed-end funds. It was really a natural fit for RMI.
Allen: Turning to RMI's portfolio, I know the fund has really only been around for about 30 days. Are there any high-level comments you can make about the portfolio as it stands today?
Steve: Sure. I think the timing was good for the launch of RMI. I say that because we're right in the midst of tax loss selling. Investors that own municipal closed-end funds and really actually municipals more broadly, investors are harvesting loss. The asset classes had a negative total return. Muni closed-end funds have had a return four times worse than the asset class return. There's a lot of supply in the market. We did come to market. As you said, we raised about $120 million, which is a good chunk of change to put to work in the closed-end fund market quickly, but the supply was just so overwhelming that we think we had our choice. We basically deploy capital very quickly. The fund is fully invested today. We've also added leverage to the portfolio as we got in investors at the IPO. Today we're fully invested, working up additional leverage through tender option bonds, but it was just fortuitous timing that November was a peak tax loss selling time. We've seen discounts at really historically wide levels in that 99th percentile range. We were really excited to get new capital. I felt like we were one of a few buyers out there in the market. It was, quite frankly, fun to put that capital to work in the month of November.
Allen: Last question, certainly investors look at municipals for tax-free income. Is there any transparency on RMI's distribution going forward this early in the game?
Steve: Sure. We have set our initial distribution rate at five and a half percent. The board adopted a level distribution. That will be the distribution rate in the foreseeable future. The board will continue to declare dividends periodically. I think that the five and a half percent is going to include both tax-exempt income, but we also are including what we think are potential capital gains. The five and a half percent rate will be set, but the components of the distribution will include tax-exempt income, capital gains and potentially return to capital. Where we stand today, we feel good about the distribution rate. We think the earnings power of the portfolio is strong. From a trading perspective, from a closed-end fund discount perspective, we think that there's a lot of potential alpha for discounts to narrow a lot from here. It's unknown what will happen in the future, but I think the components of the distribution will be certainly heavily weighted towards net investment income will be 75 percent of that with the balance coming from capital gains.
Allen: Steve, congratulations on the capital raise and the fortuitous timing. Thanks as always for joining us.
Steve: Thank you, Allen.
Video recorded 11.28.2018
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Fund Risks: Credit Risk - a borrower may be unable to make interest or principal payments when they are due. Funds that invest in Municipal Bonds rely on the ability of the issuer to service its debt. This subjects the Fund to credit risk in that the municipal issuer may be fiscally unstable or exposed to large liabilities that could impair its ability to honor its obligations. Municipal issuers with significant debt service requirements, in the near-to mid-term, unrated issuers and those with less capital and liquidity to absorb additional expenses may be most at risk. To the extent the Fund invests in lower quality or high yield Municipal Bonds, it may be more sensitive to the adverse credit events in the municipal market. The treatment of municipalities in bankruptcy is more uncertain, and potentially more adverse to debt holders, than for corporate issues. Interest Rate Risk - the value of Municipal Bonds, similar to other fixed income securities, will likely drop as interest rates rise in the general market. Conversely, when rates decline, bond prices generally rise.
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The share price of a closed-end fund is based on the market's value.
Data source for closed-end fund market statistics are RiverNorth and Morningstar.
The price at which a closed-end fund trades often varies from its NAV. Some funds have market prices below their net asset values – referred to as a discount. Conversely, some funds have market prices above their net asset values – referred to as a premium.
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To the extent that sufficient investment income is not available on a monthly basis, the Fund's distributions may consist of return of capital in order to maintain the distribution amount. A return of capital occurs when some or all of the money that stockholders invested in the Fund is paid back to them. A return of capital does not necessarily reflect the Fund's investment performance and should not be confused with ‘yield' or ‘income.' Any such returns of capital will decrease the Fund's total assets and, therefore, could have the effect of increasing the Fund's expense ratio. In addition, the level distribution policy may require the Fund to sell its portfolio securities at a less than opportune time to meet the distribution amount.
Alpha is a measure of performance on a risk-adjusted basis.
A ladder strategy is one of the most common forms of passive bond investing. This is where the portfolio is divided into equal parts and invested in laddered style maturities over the investor's time horizon.
Buy and hold involves purchasing individual bonds and holding them to maturity.
A relative value strategy seeks to exploit differences in the price or rate of the same or similar securities.
CUSIP is an acronym that refers to Committee on Uniform Security Identification Procedures and the nine-digit, alphanumeric CUSIP numbers that are used to identify securities, including municipal bonds.
Tax loss selling is the selling of securities at a loss to offset a capital gains tax liability.
Initial Public Offering (IPO) is the process of offering shares in a private corporation to the public for the first time.
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RiverNorth Capital Management, LLC is the investment adviser to the Fund. MacKay Shields LLC is the subadviser to the Fund. ALPS Fund Services is the Fund's administrator.
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