The arrival of new strategies within the closed-end fund (CEF) universe is always an interesting event. There are much fewer new CEFs released on an annual basis than funds within the exchange-traded fund (ETF) world, which makes this experience more noteworthy.
This is primarily due to the fact that investment banks and fund managers must raise a large amount of capital prior to instituting an initial public offering. As such, the strategy or manager must have a definable edge and significant influence to debut a fresh opportunity relative to the existing market.
My ears perked up this month when I noticed the release of the RiverNorth/DoubleLine Strategic Opportunity Fund (NYSE:OPP). This fund marks another joint venture between RiverNorth (a prominent closed-end fund strategist) and DoubleLine Capital (a renown fixed-income manager). Previously, these two firms have successfully teamed up on open-ended mutual funds such as the RiverNorth DoubleLine Strategic Income Fund Inst (MUTF:RNSIX), which has $2 billion in total assets.
OPP debuted as a $210 million closed-end fund with two distinct portfolio sleeves that can be adjusted in size to capitalize on unique opportunities or manage specific risks. The tactical CEF income sleeve, managed by RiverNorth, has exposure limits of 10-35% of total fund assets. This strategy will invest in a diverse pool of other closed-end funds to provide a high level of current income and capital appreciation potential. The tactical CEF sleeve will be similar in overall composition to the same opportunistic portion of the RNSIX portfolio.
The DoubleLine portion of the OPP portfolio can be shifted between 65% and 90% of overall fund assets. As the more dominant strategy, this primarily fixed-income allocation will have a greater impact on the positioning and direction of the fund's net asset value.
DoubleLine will invest heavily in mortgage-backed securities, asset-backed securities, and other commercial mortgage-backed securities. It's my understanding after talking with a representative from RiverNorth that this bond sleeve will be similar in composition to the DoubleLine Opportunistic Credit Fund (NYSE:DBL).
According to the prospectus, starting allocations for each strategy within OPP will be 30% tactical CEF and 70% opportunistic income. OPP can also leverage the portfolio up to one-third of the underlying assets.
At first glance, this new offering will give CEF investors the ability to leverage the combined talents of both fund managers in a single investment vehicle. It also can potentially be a way to diversify or substitute for the premium-rich DBL, which has garnered a favorable following and track record over the last four years.
It's interesting to note that the premium has started to significantly drop in DBL around the same time frame that OPP debuted. Perhaps some astute CEF investors are making a relative value switch to achieve mostly a similar strategy without the embedded premium risk.
My advice to closed-end fund investors who are evaluating a newly issued fund is to be cautious with any quick judgments or share purchases in the first 30-45 days. This is known as the "green shoe" period, where the underwriters aggressively support the share price. Waiting until the fund is outside that window will provide a much better view of real market demand.
Furthermore, the fund typically has to declare its first distribution and future dividend schedule during the first month. This will be important to determine if the underlying assets are able to generate income at or above the actual dividend received by shareholders. If it falls short, the income that is received will be considered a partial return of capital. Based on the past history of DBL, it's likely (though not guaranteed) that OPP will set a reasonable bar to meet its income capabilities and shareholders' expectations.
The bottom line is that this new fund, while small compared to some of its peers with billions in assets, has several attractive qualities for CEF investors to consider. I have already added OPP to my watch list and will be monitoring its trading activity and holdings over the next several months as it begins its journey.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.