NNGRY - TBLD: A Unique Fund Trading At An Enormous Discount

2023-10-27 13:47:59 ET

Summary

• Thornburg Income Builder Opportunities Trust offers a high level of current income with an 8.98% yield.
• The TBLD fund's shares have declined 8.18% since August, but distributions offset some of the losses.
• The fund invests in a mix of equity and debt securities, with a focus on the financial sector.
• The fund did manage to cover its distribution during the most recent period, which is better than many other funds.
• TBLD currently trades for an enormous discount on net asset value.

The Thornburg Income Builder Opportunities Trust (TBLD) is a closed-end fund aka CEF that specializes in providing a high level of current income for its shareholders. This is the stated purpose of many closed-end funds, particularly in the United States where things such as open-ended mutual funds and exchange-traded funds ("ETFs") have become more popular among those simply seeking the long-term appreciation of capital. Fortunately, the Thornburg Income Builder Opportunities Trust does not disappoint too much in this area, as the fund boasts a fairly attractive 8.98% yield as of the time of writing. This is, admittedly, not nearly as attractive as some other closed-end funds possess but it is still higher than can be obtained from common stocks or most ordinary fixed-income vehicles.

As regular readers may recall, we last discussed this fund in late August of this year. Unfortunately, it has not performed particularly well since that time, as its shares are down a fairly substantial 8.18%. This is worse than the 5.62% decline of the S&P 500 Index ( SP500 ) during the same period:

At first glance, this is almost certainly going to be quite disappointing to the fund's shareholders as well as potential investors. After all, there is frequently little point in investing in something that cannot even match the performance of an ordinary index fund. However, it is important to keep in mind that closed-end funds like this one tend to deliver a significant amount of their total return via distributions, which is primarily the cause of their high relative yields. These distributions serve to offset share price declines during challenging market conditions.

When we take this into account, investors who purchased the fund when my previous article was published are only down 6.88%. That is still worse than the S&P 500, but not to the same degree as would be expected if one were to merely look at the fund's share price performance.

About The Fund

According to the fund's website , the Thornburg Income Builder Opportunities Trust has the primary objective of providing its investors with a very high level of current income. This is not exactly unexpected when we consider that the name of this fund implies that it is trying to provide its investors with an ever-growing stream of income. Indeed, it has actually been able to accomplish that for people who have been reinvesting their distributions since the inception of the fund. This does not necessarily appear to be its strategy, though. The fund explains its strategy on the webpage:

The Trust seeks current income and additional total return by investing in a broad range of income-producing securities to include both equity and debt securities of companies located in the U.S. and around the globe. The Trust additionally expects to employ an options strategy to generate current income from options premiums and to improve risk-adjusted returns. There can be no assurance that the Trust will achieve its investment objective, and you could lose some or all of your investment.

In other words, this is a blended fund that invests in both debt and equity securities. However, it is somewhat weighted towards common equity. As we can see here, 59.19% of the fund is invested in common stock and only 35.43% of the portfolio is invested in bonds or other debt securities:

This actually makes a lot of sense as a portfolio if a fund wants to generate a high level of income and grow that income over time. After all, most debt securities simply pay out a fixed payment for their lifetime, so the best that can really be done with bonds is to keep rolling them over, which keeps income static. The common equity position provides the growth potential that allows the fund to continue to grow its income over time.

Unfortunately, this fund employs a call option-writing strategy that reduces the growth potential of the equity position. After all, as I discussed in a previous article :

The unfortunate downside of this fund's strategy is that it effectively caps the upside potential of that portion of the portfolio upon which call options are written. After all, the fund has to sell the stock at the strike price of the call option if the option gets exercised, regardless of the price of the stock in the market.

Obviously, this could be a problem if the fund has a substantial percentage of the portfolio overwritten. However, in this case, the fund only has options written against 8.3% of its portfolio. Thus, the fund retains nearly all of the upside potential from the common stocks in the portfolio. The Thornburg Income Builder Opportunities Trust is not an option-income fund like some others. In this case, the fund is only opportunistically writing call options as an incidental part of its strategy.

Thus, the fund is not really hurting its ability to generate growth from the common equity position, but it is improving the effective yield somewhat. This adds to the already high yields of many of the stocks that comprise the largest positions in the fund. Here are the largest positions in the fund's portfolio as of the time of writing:

Here are the yields for these positions:

We can see here that many of these yields are far beyond what would normally have been obtainable via investing in common equities only a few years ago. However, the S&P 500 Index ( SPY ) still only yields 1.56% and the MSCI World Index (URTH) yields 1.71%, so overall common equities do not have a high yield. This fund is simply investing a significant percentage of its assets into the financial sector, which tends to be one of the higher-yielding sectors globally. In fact, financials are the largest individual sector held in the fund's portfolio right now:

That is something that may concern some investors. After all, financials have been one of the hardest-hit sectors over the past two years as monetary policy around the world has tightened and pushed down the value of assets held by many banks globally. The FDIC states that American banks were sitting on $620 billion worth of unrealized losses at the end of 2022, and as rates have only risen since then, the figure is undoubtedly higher since then. However, this is just American banks and as I have noted in numerous previous articles, many other central banks around the world have been increasing their benchmark index rates as the effects of fifteen years of overly loose monetary policy have started to catch up to every nation. As such, we can project that the banking system globally is sitting on well over $1 trillion in unrealized losses right now. Indeed, the figure could be much higher than that. However, this is not the same problem that was seen back in 2007 with toxic mortgage debt that blew up the system. We have not been seeing a huge increase in default rates, so most of the banks are fine as long as they do not need to start selling off their assets at fire sale prices to meet the demands of their depositors. The basic banking model of lending depositors money out to others still generally works in a high-rate environment. Thus, as long as bank runs can be prevented, there probably is not too much to worry about as far as these companies are concerned. The Federal Reserve currently has a program in place that allows banks to post their depreciated assets as collateral for loans from the Federal Reserve at face value, which should help.

Honestly, we probably do not need to worry about the fund's large allocation to financials any more than we would need to worry about the S&P 500 Index having a similarly large weighting to technology companies. As long as your portfolio is properly constructed to ensure that you are not overly exposed to any individual sector, this fund should not cause problems for you just because of that. With that said though, the financial sector will probably continue to be under pressure as long as rates continue to rise so the risk should not be totally ignored.

The major positions in the fund are relatively consistent with what it had the last time that we discussed it, although there have been two major changes. These are that Taiwan Semiconductor ( TSM ) and Altria Group ( MO ) have been removed and replaced with ING and CME Group. There have also been some changes to the weightings of the largest positions in the fund, but there are a number of possible causes for that. For example, one stock outperforming another in the market will cause that to occur. This suggests that the fund has a fairly low annual turnover, but its 58.30% figure is actually about the average for an equity fund.

This does suggest that the fund may be employing a buy-and-hold strategy to a degree though, which makes sense considering that several of the stocks that comprise its largest positions pay sufficient yields for it to not need to rely too much on trading to generate a respectable return, and of course to realize cash that could be distributed to the fund's shareholders.

Distribution Analysis

As mentioned earlier in this article, the primary objective of the Thornburg Income Builder Opportunities Trust is to provide its investors with a very high level of current income. In order to achieve this objective, the fund invests in a portfolio of both common stock and various debt instruments, some of which have fairly high yields. The fund also will occasionally sell call options to obtain premium income, which acts as a synthetic dividend from the stocks in the portfolio and boosts its income. Finally, the fund might also be able to realize capital gains during certain market conditions, although that has certainly become much harder lately than it was back in mid-2021 when this fund was first launched.

The fund's basic business model is to collect all of the money that it realizes from all of these various sources and then pay it out to its investors, net of its own expenses. As such, we can probably expect that it will have a very high distribution yield.

This is certainly the case, as the fund currently pays a monthly distribution of $0.1042 per share ($1.2504 per share annually), which gives it an 8.98% yield at the current price. This is quite a bit better than many other things in the market, and it is certainly better than most indices. However, it is not as good as what some pure fixed-income funds are able to pay out. The fact that this fund has been able to maintain a stable payout since it first launched could be appealing to some investors, however:

As regular readers are certainly well aware, many closed-end funds have been forced to cut their distributions within the past twelve months or so as weak stock and fixed-income performance have resulted in losses piling up. The fact that this one has not been forced to take that step yet could therefore be quite attractive, especially for those investors who are seeking a stable and secure source of income to use to pay their bills or otherwise finance their lifestyles. However, it is curious that this fund was able to accomplish a task that few others have so we will want to analyze the fund's finances closely in order to determine exactly how sustainable the distribution actually is.

Unfortunately, we do not have an especially recent document to consult for the purpose of our analysis. As of the time of writing, the fund's most recent financial report corresponds to the six-month period that ended on March 31, 2023. As such, it will not include any information regarding the performance of the fund's portfolio over the past seven months. That is disappointing, as the market has deteriorated significantly since July, and it is quite possible that the fund's finances currently look worse than this document suggests. Nevertheless, this report is all that we have to go on at the moment so we should still have a look.

During the six-month period, the Thornburg Income Builder Opportunities Trust received $5,212,196 in dividends and $4,178,001 in interest from the assets in its portfolio. We have to subtract the money that the fund paid in foreign withholding taxes, which leaves it with a total investment income of $9,057,745 during the period. It paid its expenses out of this amount, which left it with $4,683,947 available for shareholders. As might be expected, this was nowhere close to enough to cover the $20,051,819 that the fund paid out to its shareholders during the period. At first glance, this is likely to be quite concerning as the fund's net investment income was insufficient to fully cover the distribution.

However, the fund does have other methods through which it can obtain the money that it needs to cover the distribution. For example, the fund might be able to realize some capital gains by selling appreciated securities during favorable market conditions. As mentioned throughout this article, the fund also employs a call-writing strategy to earn some premium income. This premium income is not considered to be investment income for tax purposes, but obviously, it does still represent money coming into the fund that can be distributed to the shareholders. Fortunately, the fund had a great deal of success at earning money through alternative sources during the period. The Thornburg Income Builder Opportunities Trust reported net realized gains of $17,640,839 and had another $75,832,891 in net unrealized gains.

Overall, the fund's net assets increased by $78,105,858 during the period after accounting for all inflows and outflows. Thus, the fund clearly managed to cover its distributions during the period with money left over.

Valuation

As of October 25, 2023 (the most recent date for which data is currently available), the Thornburg Income Builder Opportunities Fund has a net asset value of $16.51 per share but the shares currently trade for $13.83 each. This gives the fund's shares an enormous 16.23% discount on net asset value. This is quite a bit better than the 14.02% discount that the shares have averaged over the past month, and it clearly represents a good entry point for anyone who wants the fund today.

Conclusion

In conclusion, the Thornburg Income Builder Opportunities Fund is a rather interesting fund that invests in a number of stocks that are not frequently seen in the portfolios of most Americans. This could provide some diversification for a portfolio.

Unfortunately, the Thornburg Income Builder Opportunities Trust has been a bit of an underperformer recently, but few things have really performed especially well in the current market. This is one of the few funds that managed to cover its distribution during its most recent reporting period, and it is trading at an enormous discount on net asset value.

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