OPP - OPP: Avoid This Amortizing Return Of Principal Fund
2023-07-16 11:04:45 ET
Summary
- The RiverNorth/DoubleLine Strategic Opportunity Fund (OPP fund) is not recommended for investors due to its inability to sustain its high distribution yield of 14.3%.
- The OPP fund, which combines strategies from RiverNorth Capital and DoubleLine Capital, has earned an average annual return of -0.2% over the past five years.
- Despite its high distribution payout, the fund's sustainability is questionable as it heavily relies on return of capital to fund its distributions.
In my continued review of DoubleLine managed funds, I am analyzing the RiverNorth/DoubleLine Strategic Opportunity Fund ( OPP ) in this article.
Simply put, I recommend investors seek out investment opportunities elsewhere. Although the OPP fund pays an attractive 14.3% distribution yield, there is no indication that the OPP fund is able to earn returns that can sustain the high distribution yield. Over the past 5 years, the OPP fund has earned an average annual return of -0.2%.
What is happening is that investors are simply paid back their principal through the distribution. The OPP fund is an amortizing 'return of principal' fund that I believe investors should avoid.
Fund Overview
The RiverNorth/DoubleLine Strategic Opportunity Fund is a closed-end fund ("CEF") that seeks to provide current income and overall total returns to investors.
The OPP fund is a collaboration between RiverNorth Capital Management, a niche investment manager behind the RiverNorth Opportunities Fund ( RIV ), and DoubleLine Capital, the firm started by famed investor Jeffrey Gundlach .
Strategy
The OPP fund combine RiverNorth's Tactical Closed-End Fund Income Strategy and Alternative Credit Strategy with DoubleLine's Opportunistic Income Strategy (Figure 1).
The Tactical Closed-End Fund Income Strategy seeks to arbitrage the discount and premium spreads from closed-end funds. The Alternative Credit Strategy seeks to achieve high income from alternative credit instruments like private loans to small and mid-sized companies. The Opportunistic Income Strategy seeks to generate superior risk-adjusted returns from fixed income investments.
The OPP fund may use leverage to enhance returns. As of March 31, 2023, the OPP fund had $364 million in managed assets and $267 million in net assets for 35% effective leverage (Figure 2). The OPP fund charged an annualized 2.11% net expense ratio for the six months to December 31, 2022.
Figure 2 - OPP fund details (OPP factsheet)
Portfolio Holdings
Figure 3 shows the OPP fund's strategy weights as of May 31, 2023. The OPP fund is currently 62% invested in the DoubleLine Opportunistic Income Strategy, while RiverNorth's Tactical CEF and Alternative Credit strategies have 21% and 16% of the portfolio respectively.
The credit quality of the OPP fund is roughly split between 1/3 Investment Grade, 1/3 High Yield, and 1/3 Unrated (Figure 4).
In terms of sector allocation, the biggest weight of the OPP fund is currently in Non-agency MBS securities (28%), High yield securities (19%), Investment Grade bonds (8%), and treasuries (8%) (Figure 5).
It is unclear how the 16% allocation to the Alternative Credit Strategy translates into sector allocations, as the sectors listed do not include private loans that should be backstopping the alternative credit strategy.
Furthermore, it is assumed that a portfolio lookthrough has been applied to the CEF Strategy to determine the underlying sector allocations.
Returns
Figure 6 shows the OPP fund's historical returns as of June 30, 2023. The OPP fund has generated poor long-term returns, with 3 and 5Yr average annual total returns of -0.8% and -0.2%, respectively.
2022 was an especially bad year, as the OPP fund lost 19.5% in value, basically wiping out the prior cumulative gains to date.
Distribution & Yield
Despite OPP's poor historical returns, the fund mains a high distribution payout. The OPP fund currently pays a $0.1021 / month distribution that yields 14.3% on market price. On NAV, the OPP fund is yielding 12.8%.
However, I am concerned about the sustainability of the OPP fund's distribution yield. Historically, the fund has relied heavily on return of capital ("ROC") to fund its distributions (Figure 7).
Figure 7 - OPP fund financial summary (OPP 2023 Semi-Annual report)
Furthermore, with long-term average annual returns of -0.2% over 5 years, I do not see how the OPP fund can fund its distribution, currently yielding 12.8 of NAV.
Similar to the RIV fund that I have written about here , the OPP fund appears to be yet another example of amortizing 'return of principal' funds that are designed to pay investors their own principal back through the distribution.
Long-term investors in 'return of principal' funds end up losing principal (as market price tracks declining NAV), and income (as lower NAV inevitably cannot sustain high distribution rates).
The OPP fund exhibits the classic declining NAV pattern of 'return of principal' funds (Figure 8).
Figure 8 - OPP fund has declining NAV pattern (morningstar.com)
Furthermore, the OPP fund's distribution has already been cut significantly since inception (Figure 9).
Figure 9 - OPP fund's distribution has been cut significantly since inception (morningstar.com)
Conclusion
The OPP fund combines a tactical closed-end fund trading strategy and alternative credit strategy from RiverNorth Capital with an Opportunistic Fixed Income strategy from DoubleLine Capital. Unfortunately, the end result is not an attractive fund.
Although the fund pays a generous 14.3% forward yield, I do not believe the distribution is sustainable as the fund has earned average annual total returns of -0.2% over the past 5 years. Instead, the OPP fund appears to be an amortizing 'return of principal' fund that simply pays investors their principal back through the distribution.
I recommend investors avoid this fund. Sell .
For further details see:
OPP: Avoid This Amortizing Return Of Principal Fund