February 22, 2012

RiverNorth to Soft Close Gundlach Strategic Opportunity Fund

Existing investors can buy shares in fund till March 30

RiverNorth CEO Brian Schmucker talking to AdvisorOne at Schwab Impact in November. RiverNorth CEO Brian Schmucker talking to AdvisorOne at Schwab Impact in November.

In December 2010, RiverNorth Capital Management launched the RiverNorth/Double Line Strategic Income fund (RNDLX/RNSIX), an open-end mutual fund that combined the fixed income and mortgage-backed expertise of Jeffrey Gundlach and DoubleLine Capital with RiverNorth’s closed-end fund expertise. On Wednesday, RiverNorth announced that the fund will close to new investors on March 30, 2012.

In a statement, Patrick Galley, CIO of RiverNorth, said the decision was made to ensure that the fund’s assets “don’t exceed a level where they would alter or impact the Fund’s investment strategy.”

In an interview Wednesday, RiverNorth CEO Brian Schmucker pointed out that existing investors in the fund and advisors who have allocated to the fund on behalf of their clients may still continue to purchase shares after March 30.

In the statement, Galley noted that during the Strategic Income fund’s first year of operation, the Fund raised $675 million and that RNDLX/RNSIX's  assets had grown to $887 million as of Feb. 21, 2012. Schmucker said the plan had always been to close the fund as it neared the $1 billion in assets mark, which he said would likely happen by the March 30 close. "We soft close a fund when not doing so would hinder performance," he said.

Last November, Schmucker spoke about RiverNorth's collaboration with Gundlach on the Strategic Income fund and closed-end funds in a video interview during the 2011 Schwab Impact conference. At that time, he signaled that RiverNorth was considering a soft close as the fund continued to attract assets at a very healthy clip.

"We could manage more money than that," said Schmucker in the most recent interview, but there were capacity constraints on both RiverNorth's end in the closed-end space, which by its nature has limited trading, and on DoubleLine's end, particularly in its "opportunistic income" sleeve, which he characterized as "Gundlach's best ideas." Beyond those constraints, Schmucker said that RiverNorth wanted to "preserve its investor base," which he called "a pretty sophisticated base; they’re familiar with closed end funds, and we didn’t want to shut them out."

In an AdvisorOne interview last March, Galley said the Strategic Income Fund was designed to complement the RiverNorth Core Opportunity Fund (RNCOX), itself a top performing 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 Gundlach, with “opportunistic income” provided by a mortgage-backed portfolio managed by Gundlach, formerly of TCW fame.

RiverNorth soft closed RNCOX last June when it reached the $500 million in AUM mark, again due to capacity constraints which would limit RiverNorth's ability to provide alpha.

"it’s important to know your capacity constraints and stick to it," said Schmucker. "From an investment management standpoint it’s the right thing to do."

As for the entire closed-end fund universe, Schmuck said that in the space "discounts are very narrow right now," but that there "remains a tremendous amount of uncertainty" among investors, which can produce trading opportunities in the CE space.

When asked if RiverNorth takes into consideration macro economic or political issues that can create that uncertainty, he said that's "really DoubleLine's area of expertise." DoubleLine has "a deep bench looking at macro trends" which Gundlach's firm can use for the opportunistic income part of the fund's strategy, while at RiverNorth, "it's a bottom up world we live in." Instead, RiverNorth stays focused, he said, "on trading the closed end fund space; we can be more reactive rather than making bets on what might happen."

RiverNorth CIO Galley regularly writes for AdvisorOne on the closed-end funds universe.

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