RNCOX 10 Year Anniversary
On 2.21.2017, Senior Portfolio Specialist Allen Webb talked with CIO Patrick Galley about the 10 years of performance for the RiverNorth Core Opportunity Fund (RNCOX).
- Downloadable video file - Use this option if you have trouble viewing the embedded YouTube video above or if you would like to save the video to your desktop.
[BEGIN VIDEO TRANSCRIPT]
Allen: Patrick, I want to talk a little bit about the RiverNorth Core Opportunity Fund. First off, congratulations on quite a good year last year. Both share classes of the fund were up about 12 percent, so that's quite a nice return, as it relates to other capital markets returns. And, as well, on 12/31/2016, the fund crossed its 10-year anniversary, so congratulations on 10 years of providing investors with an attractive return in what's a pretty unique methodology.
Patrick: Thanks, Allen. Yeah... 10 years ago, we set out to launch a fund that was an opportunistic-focused closed-end fund strategy, whereas we were invested in closed-end funds 100 percent of the time, but whereas we could buy asset classes cheaply vis-a-vis closed-end funds. And if closed-end fund discounts were not attractive, we would skew the portfolio towards ETFs, waiting for opportunity. That was a way to just add alpha consistently over time, and I think over a 10-year track record, we were able to prove that philosophy through.
Allen: Patrick, obviously over 10 years there are good years and there are bad years, both on an absolute and a relative basis. Can you talk a little bit about how the fund did over the 10-year period, relative to what Morningstar considers its peers, as well as its benchmark, the S&P 500?
Patrick: Morningstar has the RiverNorth Core Opportunity Fund in the moderate allocation, 50 to 70 percent equity exposure, and we finished as of 12/31 in the top 3 percent for its 10-year track record, so, obviously, again, chipping away at the closed-end fund discounts proves that you can add alpha over a long period of time. We accomplished that without taking individual company risk, or security risk, and big bets on sectors. We’ve done it with chipping away at the exposure, not necessarily making big bets.
Allen: How about versus its benchmark, the S&P 500?
Patrick: We outperformed the S&P 500 by approximately 40 basis points on an annualized basis. That obviously adds up, cumulatively. We’ve also accomplished that with a lower volatility than the S&P 500 vis-a-vis maintaining a balanced strategy at the RiverNorth Core Opportunity Fund level.
Allen: Patrick, the Core Opportunity Fund was RiverNorth's first fund launch back in 2006, and certainly, we here consider it to be the flagship strategy at RiverNorth. Over the 10-year period for the fund, what are you proudest of, as you cross the 10-year track record?
Patrick: I think first and foremost you need to look at the 10-year track record, right? You can’t look at any individual year. That said, every single year since the inception of the fund, we never were at the very, very top, and we were never at the very, very bottom. We were always in the upper middle of all asset classes. By piecing together this alpha consistently, year in and year out, what that resulted in over 10 years is, the only asset class that beat us is mid-cap stocks, so you could put us up against any other asset class, and mid-cap stocks is the only asset class that out-performed us. Obviously, if you’re 100 percent in mid-cap stocks, you’re going to take a lot more risk. We accomplished that track record with a diversified portfolio over many, many asset classes, adding the alpha through opportunistically investing in closed-end funds.
Allen: Patrick, thinking about the 10-year track record of the fund, obviously Morningstar puts it in the balanced category, which is mostly peers that just invest in equity securities and fixed securities, and you kind of get the blended return of that portfolio. How important has using closed-end funds been to the strategy over the past 10 years?
Patrick: Closed-end funds are tremendously important in our strategy, obviously. Typically, 50 to 70 percent of the fund is invested in closed-end funds. The balance is ETFs and cash. The unique alpha that we're trying to extract from the closed-end funds is the discount-narrowing component. So, if a closed-end fund discount goes from 10 percent to 8 percent, that's 2.2 percent of excess return, on top of the underlying asset exposure. Over the 10-year period, closed-end fund discounts have ebbed and flowed. We saw 26 percent average discounts during a brief period in 2008, and we saw discounts, on average, trading at a premium in 2012. That volatility has led us to be able to extract that discount volatility, and add alpha to a diversified, balanced portfolio over time.
Allen: You bring up a very good point. On those two bookends — 26 percent discounts in late '08, and then premiums in 2012 — does that change the way you think about the composition of the Core Opportunity Fund, or are there opportunities underneath the averages, if you will, at all times?
Patrick: Yeah. There's always opportunities in closed-end funds, because you have a diversified asset mix, meaning you can get equity exposure, you can get fixed-income exposure and all the sub-asset classes from there. There's usually always some kind of opportunity in closed-end funds. It varies, though, and we have to — the beauty of the [RiverNorth] Core Opportunity Fund is, we can dial up and dial down the closed-end fund exposure, typically having 50 to 70 percent closed-end fund exposure. Discounts are wider, we're going to have more closed-end fund exposure. Discounts are narrower, we’re going to have less closed-end fund exposure. You still have a balanced portfolio by utilizing ETFs in the portfolio construction.
Allen: Last question, Patrick. Not only did the fund have a nice year last year, from a return standpoint, but January was also a good relative and absolute return. Any thoughts about sort of where the opportunity set exists today? Is the portfolio pretty well-positioned to take advantage of what could be additional closed-end fund discount narrowing?
Patrick: Yeah. If you could tell me that volatility is going to go away, and uncertainty is going to go away in the future, then I would say there’s less opportunity. But I don’t think that’s the case. I think investors are still fearful over the capital markets in general. Equity markets just hit highs, so investors are starting to be fearful over equity valuations. Same thing on credit risk assets, and then especially on duration-based assets, with interest rates starting to increase, you’ve got fear over interest rates. All that fear will lead into opportunity in the future, we believe.
Allen: Patrick, congratulations to you and Steve, again, on a tremendous accomplishment with the 10-year track record, and we look forward to catching up with you in a couple of months.
Patrick: Thanks, Allen.
[END VIDEO TRANSCRIPT]
Video recorded 2.21.2017.
Produced by RiverNorth Capital Management, LLC ("RiverNorth" "we" or "us").
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Opinions referenced are as of the day recorded and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass.
Past performance is not a guarantee of future results. Diversification does not ensure a profit or guarantee against loss.
Investing involves risk. Principal loss is possible.
An investor should consider the investment objectives, risks, charges and expenses of the Funds (or of the Investment Company) carefully before investing. To obtain a prospectus containing this or other information, please call (888) 848-7569 or download the file from
rivernorth.com. Read the prospectus carefully before you invest.
Distributed by ALPS Distributors, Inc. Member FINRA. Allen Webb is a registered representative of ALPS Distributors, Inc.
ALPS Distributors, Inc. is not affiliated with RiverNorth Capital Management, LLC.
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
CFA® is a trademark owned by the CFA Institute.
* 2016 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. For the 1-, 5- and 10-year periods, respectively, RNCOX was ranked 53rd, 286th and 10th among 810, 606 and 419 funds in the Allocation 50%-70% Equity category for the period ended December 31, 2016 based on risk-adjusted performance.
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.
Alpha is a measure of performance on a risk-adjusted basis. The excess return of a fund relative to the return of the benchmark index is a fund's alpha.
Basis Points (BPS): A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.
Duration is a measure of the sensitivity of the price of a fixed income investment to a change in interest rates.
Blend Index consists of 60% S&P 500 Total Return Index and 40% Barclays Capital U.S. Aggregate Bond Index. S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy based on the changing aggregate market value of these 500 stocks. The Barclays Capital U.S. Aggregate Bond Index is an unmanaged index of investment-grade fixed-rate debt issues with maturities of at least one year. The indexes cannot be invested in directly and do not reflect fees and expenses.
More detailed information regarding these risks can be found in the Fund's prospectus.
Borrowing Risk – Borrowings increase fund expenses and are subject to repayment, possibly at inopportune times.
Closed-End Fund Risk – Closed-end funds are exchange traded, may trade at a discount to their net asset values and may deploy leverage.
Derivatives Risk – Derivatives are subject to counterparty risk.
Equity Risk – equity securities may experience volatility and the value of equity securities may move in opposite directions from each other and from other equity markets generally.
Convertible Security Risk – The market value of convertible securities adjusts with interest rates and the value of the underlying stock.
Exchange Traded Note Risk – Exchange traded notes represent unsecured debt of the issuer and may be influenced by interest rates, credit ratings of the issuer or changes in value of the reference index.
Fixed Income Risk – The market value of fixed income securities adjusts with interest rates and the securities are subject to issuer default.
Foreign/Emerging Market Risk – Foreign securities may be subject to inefficient or volatile markets, different regulatory regimes or different tax policies. These risks may be enhanced in emerging markets.
Investment Style Risk – Investment strategies may come in and out of favor with investors and may underperform or outperform at times.
Management Risk – There is no guarantee that the adviser's investment decisions will produce the desired results.
Large Shareholder Purchase and Redemption Risk – The Fund may experience adverse effects when certain large shareholders purchase or redeem large amounts of shares of the Fund.
Market Risk – Economic conditions, interest rates and political events may affect the securities markets.
Preferred Stock Risk – Preferred stocks generally pay dividends, but may be less liquid than common stocks, have less priority than debt instruments and may be subject to redemption by the issuer.
REIT Risk – The value of REITs changes with the value of the underlying properties and changes in interest rates and are subject to additional fees.
Security Risk – The value of the Fund may decrease in response to the activities and financial prospects of individual securities in the Fund's portfolio.
Short Sale Risk – Short positions are speculative, are subject to transaction costs and are riskier than long positions in securities.
Small-Cap Risk – Small-cap companies are more susceptible to failure, are often thinly traded and have more volatile stock prices.
Structured Notes Risk – Because of the embedded derivative feature, structured notes are subject to more risk than investing in a simple note or bond.
Swap Risk – Swap agreements are subject to counterparty default risk and may not perform as intended.
Tax Risk – New federal or state governmental action could adversely affect the tax-exempt status of securities held by the Fund, resulting in higher tax liability for shareholders and potentially hurting Fund performance as well.
Underlying Fund Risk – Underlying funds have additional fees, may utilize leverage, may not correlate to an intended index and may trade at a discount to their net asset values.
Large Cap Stock: S&P 500 Index
Mid Cap Stock: Russell MidCap Index
Small Cap Stock: Russell 2000 Index
International Stock: MSCI EAFE Index
Emerging Market Stock: MSCI EM Index
High Yield Bonds: Markit iBoxx USD Liquid HY Index
Investment Grade Bonds: Markit iBoxx USD Liquid IG Index
Total U.S. Bond: Barclays Aggregate Bond Index
Emerging Market Bonds: JP Morgan EMBI Global Core Index
Commodities: S&P GSCI-R Total Return Index
Gold: London Gold PM Fix
Cash: 3-Month T-Bill
Method: Linked monthly total returns of index representing each asset class.
Source: RiverNorth, iShares
The indices cannot be invested in directly.
1. S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy based on the changing aggregate market value of these 500 stocks. The index is unmanaged and cannot be invested in directly.
2. Russell MidCap Index is a market capitalization weighted index representing the smallest 800 companies in the Russell 1000 index.
3. Russell 2000 Index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.
4. MSCI EAFE is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
5. MSCI Emerging Market Index is an index created by Morgan Stanley International (MSCI) that is designed to measure equity market performance in global emerging markets.
6. Markit iBoxx USD Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe.
7. Markit iBoxx USD Liquid Investment Grade Index is designed to provide a balanced representation of the USD investment grade corporate market.
8. Barclays Capital U.S. Aggregate Bond Index is an unmanaged index of investment grade, fixed-rate debt issues with maturities of at least one year.
9. JP Morgan EMBI Global Core Index is a broad, diverse U.S. dollar denominated emerging markets debt benchmark that tracks the total return of actively traded debt instruments in emerging market countries.
10. S&P GSCI-R Total Return Index in USD in widely recognized as the leading measure of general commodity price movements and inflation in the world economy. The index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities future contracts.
11. London Gold PM Fix is the twice-daily act of setting gold prices by the five members of the London Gold Market Fixing Ltd. This rate is used as a benchmark for pricing the majority of global gold products and derivatives.