March 10, 2011

RiverNorth-Jeffrey Gundlach Fund Attracts Nearly $50 Million in Assets

Unique income mutual fund combines closed end funds and core bonds, leavened with DoubleLine’s mortgage-backed expertise.

Since launching at year-end 2010, the RiverNorth-DoubleLine Strategic Income mutual fund (RNDLX) has attracted about $50 million in assets, according to Patrick Galley, CIO of Chicago-based RiverNorth.

Patrick Galley of RiverNorthIn an interview on Wednesday, Galley (left) said RNDLX was designed to complement the RiverNorth Core Opportunity Fund, using a core and explore strategy where the core is fixed income provided by RiverNorth’s closed-end fund expertise and a bond portfolio managed by DoubleLine’s Jeffrey Gundlach, with  “opportunistic income” provided by a mortgage-backed portfolio managed by Gundlach, formerly of TCW fame.

“Thirty-five percent of the fund are closed-end funds managed by RIverNorth,” Galley said, where his firm can take advantage of finding “excess returns that come from a structural inefficiency in the closed-end fund space," while 25% is the Gundlach mortgage-backeds, a strategy that Galley said is normally available only through a Gundlach hedge fund, “and then a core portfolio managed by Jeff” that follows the  Barclays aggregate bond index.

Galley, who writes a regular blog for AdvisorOne on the closed-end fund universe, said that while Gundlach was at TCW he ran a closed-end fund in which RiverNorth had invested, and after Gundlach left TCW, RiverNorth approached the sometimes controversial money manager to see if the two firms could partner.

“RiverNorth had always wanted to launch a fund with lower volatility but that was focused on providing income,”  to complement the RiverNorth Open Opportunity fund. That fund, profiled in Investment Advisor last year, is now approaching a soft close, Galley said, and has posted nearly “9% annualized returns” since its 2006 launch.

In October 2010 the partnership between DoubleLine and RiverNorth was announced and the registration statement for the fund was filed with the SEC. Galley,  Stephen O’Neill, RiverNorth portfolio manager, and Gundlach, CEO and CIO of DoubleLine, manage the RiverNorth-DoubleLine Strategic Income fund.  

Acknowledging that nobody knows where interest rates will go, Galley argues that the fund’s structure and investing philosophy makes it “well positioned to take advantage of multiple outcomes in the capital market s and the economy.”

As for performance and income, Galley said that with the three-month old fund, “we’re talking about a 6% to 7% yield (after fees) on what I would consider to be a pretty benign risk—we’re not investing in a bunch of high-yield bonds.”  What Galley calls the “opportunistic income sleeve,” Gundlach’s actively managed portfolio, “is yielding in the low double digits,” while the core fixed income is yielding  4% to 5%. Galley said the fund will begin to pay out monthly dividends starting this month.

Galley said the fund “makes a lot of sense for advisors. They understand closed end funds, know Jeffrey and his team—they don’t have to worry about buying and selling closed end funds—we have models that do that efficiently.”

As for the state of the bond and equity markets two years into the current bull market, Galley sees the “irony” that after a nearly 100% rise in equities, “now equities are seeing inflows. It’s so typical,” meaning investors buying high. “I’m not saying we’re looking at a bear market,” pointing out that “there’s a wall of money starting to come into” the markets. That translates into closed end fund discounts, he says. “They’re still pretty wide,” suggesting that spells opportunity in some equity closed end funds.

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