RiverNorth Opportunities Fund (RIV)
This is a fund-of-funds that was created in late 2015 as a means of taking advantage of the ultra-wide discounts that existed during that time. Interest rates were about to be increased for the first time in nearly 9 years, and investors were scared of the ramifications for CEFs. The time frame of when a CEF is launched can be highly determinant of how well it will perform in subsequent years.
Launching a CEF when the market for such a fund is already "hot" typically leads to lower future returns. Launching when that strategy or sector is out of favor can be a significant advantage for future performance. For example, muni CEFs launched just after the Taper Tantrum of 2013 have performed better than those launched in 2016 (and likely for those launched in the later half of this year).
The annual report through the end of July was recently released, which provided some insight into where the CEF experts at RiverNorth feel there are some opportunities. The objective of the portfolio is simply total return consisting of capital appreciation and current income. They can own, in addition to CEFs, business development companies ("BDCs"), special purpose acquisition companies ("SPACs") and exchange-traded funds ("ETFs"). The portfolio is unlevered.
Remember, this fund is a term trust (meaning that it will self-liquidate at a certain time but not a certain price) with a slated date to convert to an open-ended fund during calendar 2021. There will be a shareholder vote that will allow for the conversion to an open-ended fund at NAV.
The Fund may be converted to an open-end investment company at any time if approved by two-thirds of the entire Board and at least two-thirds of the Fund’s total outstanding shares. The Board may at any time (but is not required to) propose conversion of the Fund to open-end status, depending upon its judgment regarding the advisability of such action in light of circumstances then prevailing.
The fund is a mix of CEFs and ETFs primarily using a tactical model that capitalizes on inefficiencies in the CEF space.
At the end of the quarter, the asset allocation was:
41% - fixed income
18% - equity
13% - SPAC
5% - BDC
5% - BDC baby bonds
11% - cash
Those are net of the short positions in the ETFs that the fund has in its portfolio. Those include PowerShares Senior Loan ETF; a short-term, high yield bond; and another high yield bond ETF. The aggregate total of those shorts is $13.6 million, or approximately 10% of the portfolio's net assets.
(Source: Annual Report July 2019)
The current asset allocation as of the end of July was primarily CEFs at 72%, 12.6% SPAC, and 10.2% in cash, with the rest in BDCs and bonds. This is a reduction of CEF exposure by 14% in the last six months- likely as discounts have tightened significantly. Most of that reduction in CEF holdings has gone to cash as those valuations have increased. The short position remains the same.
(Source: Annual Report July 2019)
Here is a look at the top ten holdings in the fund, where RiverNorth believes the most value lay in the CEF world. Its largest holding is the PGIM Global High Yield Fund (NYSE:GHY), which accounts for nearly 5% of the portfolio exposure. That is roughly the same as it was at the end of January.
The new funds on the list are:
- Invesco Credit Opportunities Fund (VTA)
- BrandywineGLOBAL Global Income Opportunities Fund (BWG)
- Templeton Global Income Fund (GIM)
(Source: Annual Report July 2019)
Looking at some of the holdings, it does look like they are piggybacking some activism, including Voya Prime Rate Trust (PPR), which Saba is building a position in currently. VTA is another fund being subjected to activism which has helped to close the discount.
The top fund list is dominated by floating-rate funds which have been out of favor for some time (going back about a year now). Fund flows have been pouring out, as investors anticipate the class to be weak for a while as the Fed continues to lower rates.
Most of the fixed income is exposed to credit risk and not interest rate risk. On the equity side, most of the exposure is to US stocks.
On an NAV basis, the fund has done okay, but it is nothing to write home about. NAV total return so far this year is +14.5%. The fund falls into the hybrid category, since it is a mix of stocks and bonds. In that category, it has the 6th best performance out of 15 funds. So smack in the middle using a one-year time frame.
The above performance compares RIV to the S&P 500 and the Barclays US Aggregate Bond Index. If one were to simply put 50% into the S&P and 50% into the iShares Core U.S. Aggregate Bond ETF (AGG), they would have achieved a total return of 14.7% this year, about 20 bps better than RIV has done with a similar allocation.
From the annual report:
For the twelve month period ended July 31, 2019, the Fund returned 3.77% on a net asset value (“NAV”) basis and 3.33% on a market price basis. The S&P 500 Total Return Index returned 7.99% during the same period. The Morningstar All Closed-end Fund Index return was 2.70% on a NAV basis and 5.14% on a price basis over the twelve month period.
The Fund benefited from its exposure to municipal bond and high yield bond closed-end funds, as these funds generally had positive NAV returns over the period in addition to narrowing discounts. In addition, several of the Fund’s holdings had corporate actions such as tender offers or rights offerings, which generated positive alpha.
The Fund’s exposure to bank loan closed-end funds detracted from performance relative to the benchmark. While these funds generally had positive performance, they did not keep up with the Fund’s benchmark. Also, the Fund’s hedging through taking short positions in US equity and credit focused exchange-traded funds (“ETFs”) detracted from performance, as both of these sectors posted positive returns over the period.
Since inception, RIV has just eked out a gain against the Vanguard Target Retirement 2020 Fund Inv (VTWNX), which is a 50/50 blend of stocks and bonds.
On September 20th, RIV announced a new rights offering - this is the third that the fund has conducted in the few short years it has been around. The reason is simple, pure economics. The fund, when it launched, was under $75 million in assets. At that level, it is not a very profitable endeavor for the fund sponsor, RiverNorth.
At the time of launch, the demand for such funds (or any funds in general) was tepid at best. So, the take-up of new shares was extremely low. The only way to grow the fund into a size that makes sense (from the sponsor's perspective) was to slap current investors with what has turned out to be a series of rights offerings. This is where the sponsor offers you the opportunity to pony up more capital so as to keep your existing allocation in the fund the same. This is typically done at a discounted price.
If you are an investor in the fund and you like the fund with the ability to allocate more capital into it, then exercising the rights is often a no-brainer. You would simply subscribe to the offering through your broker (careful, some charge fees for doing so). Some investors may not want, or have, the ability to buy more shares. If you don't participate, then your stake in the fund is diluted.
Our typical strategy for non-core funds is to simply sell the shares when a rights offering is announced and then reassess as we approach or surpass the rights ex-dates (the dates after you are no longer eligible to subscribe).
Back to RIV. To make its first rights offering less dilutive, the fund first shifted the distribution from an "income-only" policy to a "managed distribution policy". The payout was boosted from $0.14 to $0.21, an increase of 50%! That sent the shares to a premium, as investors were sucked in by the higher yield. As soon as the fund reached a premium, which was likely its goal in the first place with that change in distribution policy, it issued the rights offering.
When the fund IPO’d back in 2015, it issued 3.75 million shares of stock at an offering price of $20 per shares gross of underwriting expenses. The rights offering in 2017 issued another 1.56 million shares at a $19.54 subscription price, and the offering in 2018 another 1.79 million shares at a subscription price of $16.93. Both of those offerings were done at 95% of the market price per share.
In addition to those rights offerings, the fund entered into a sales agreement with Jones Trading Institutional whereby it can, from time to time, offer and sell up to 3.3 million additional common shares to the public. During the last reported period ending January 2019, it sold an additional 30K shares for $586K net new assets under management.
All of these factors are an effort to expand the size of the fund to make it more economical, but may often not be in the best interest of the shareholders. In the last two years, the rights offerings that RIV has conducted have cost the fund 32 and 26 cents, respectively, on NAV.
Some additional comments on the rights offerings:
- Only primary rights holders can "oversubscribe". That means you have to have been issued the rights because you owned shares before the ex-date. You cannot buy the rights on the secondary market and oversubscribe.
- If the discount widens beyond the -5% threshold, you should not subscribe, as it would make more sense to simply buy shares in the open market. The current discount is just -0.76%.
- For those that do not want to participate but want to continue holding the shares for whatever reason, I would recommend selling the rights as soon as possible to take advantage of the theta arbitrage (that is the time value of the rights).
For those owning RIV, you now have a choice to make. The price of the shares is already down 69 cents from the date of the announced latest rights offering. This compared to the NAV, which is only down 9 cents. This is why we like selling out of a position that is conducting a rights offering and then buying back later.
If we look back at the last rights offering from RIV, the announcement came on September 18th, 2018, and the results were announced on November 2nd, 2018. The gross proceeds of the offering were $30.3 million, pushing the fund to $120 million. With each new rights offering, the size of the gross proceeds expands as the number of shares outstanding increases.
If an investor held shares throughout the offering and did not subscribe, their total return would be -6.8%. But the environment at the time has to be taken into consideration. The fourth quarter last year saw significant selling pressure, which is why we included another CEF fund-of-funds for comparison.
Looking at the 2017 offering and the discount/premium levels during that time, the picture is a bit clearer. What we have typically seen is selling pressure when the offering is announced and then a slow tightening shortly thereafter.
If I had to play this tactically, I would be looking to get in around mid-December once tax-loss harvesting plays out and the rights offering is fully completed. We may then see a rebound in the discount/premium as long as the environment for CEFs at the time remains positive.
If you don't own it and are fairly sophisticated, RIV isn't the best investment, as there are a lot of the junkier funds in here at a high cost.
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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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.