TBLD - TBLD: Offering A Great Deal Of Diversity And An 8.29% Yield

2023-08-23 08:18:59 ET

Summary

• The rapidly rising cost of living is a major problem for Americans, making it difficult to maintain their standard of living.
• The Thornburg Income Builder Opportunities Trust is a closed-end fund that offers a high level of current income with an 8.29% yield.
• The fund has a unique portfolio with a significant allocation to stocks and bonds, and it has outperformed major indices over the past year.
• The fund allows an investor to reduce the concentration risk across their entire portfolio due to holding very different stocks than many other closed-end funds.
• The fund is currently trading at an enormous discount to its intrinsic value.

There can be little doubt that one of the biggest problems facing the average American today is the rapidly rising cost of living. This has pushed up the price of everything that we purchase in our daily lives, which naturally makes it ever more difficult for people to maintain the standard of living that to which they have become accustomed. We can see the extent of this problem by looking at the consumer price index, which claims to measure the price of a basket of goods that is regularly purchased by the average American household. This chart shows the year-over-year change of this index during every month over the past 25 years:

As we can clearly see, the consumer price index began to increase at an accelerated rate about two years ago following the end of the COVID-19 lockdowns. The lockdowns were a period of time in which the Federal Government and the Federal Reserve printed an enormous amount of new money that they claimed was intended to support households and businesses through the crisis. This money-printing increased the nation’s monetary base by about 40%, which was far more than the actual increase in the production of goods and services during that time period. Thus, once the economy reopened and people started to spend all of this newly printed money, the nation ended up in a situation in which more units of currency were trying to purchase any given unit of economic output. That is the root cause of inflation in an economy. Unfortunately, wages earned by the average household did not increase at nearly the same pace as the prices of goods and services. This situation has strained the budgets of many households, particularly those included in the 64% of Americans that live paycheck-to-paycheck . This has ultimately led many people to pursue desperate measures to obtain the extra money that they need just to keep their standard of living relatively static.

As investors, we are certainly not immune to this. After all, we require food for nourishment and energy to heat our homes and businesses just like anyone else. We also might want to enjoy an occasional luxury from time to time. All of these things are considerably more expensive than they were only two short years ago. Fortunately, we have other options available to us that we can use to generate the extra income that we need to maintain our standard of living in the current environment. We do not have to take on a second job just to boost our incomes. One method that can be used to obtain extra income is to purchase shares of a closed-end fund that specializes in this task. These funds are, unfortunately, not very well followed by the financial media and many investment advisors are unfamiliar with them. As such, it can be difficult to obtain the information that we would really like to have to make an informed investment decision. This is a shame because these funds offer a number of advantages over ordinary open-ended and exchange-traded funds. In particular, a closed-end fund has the ability to employ certain strategies that have the effect of boosting its yields well beyond that of any of the underlying assets in its portfolio.

In this article, we will discuss the Thornburg Income Builder Opportunities Trust ( TBLD ), which is one fund that can be purchased by those investors that are seeking to earn a high level of income from their portfolios. This is immediately apparent by the fund’s 8.29% current yield, which is obviously quite a bit higher than most other things in the market. The fund is currently selling at a discount to its intrinsic value, which adds to its appeal. Let us investigate and see if this fund could be a reasonable addition to your portfolio today.

About The Fund

According to the fund’s webpage , the Thornburg Income Builder Opportunities Trust has the objective of providing its investors with a high level of current income. The fund also seeks to achieve capital appreciation, but this appears to be secondary to the current income objective. Ordinarily, this objective would indicate that this is a bond fund but that is not the case here. In fact, the Thornburg Income Builder Opportunities Trust is a blended fund that is weighted mostly to stocks:

As we can see, currently 61.92% of the portfolio is invested in common stocks, although it does have a significant allocation to bonds. This is in line with the strategy that the fund employs in the pursuit of its objective. This is described on the webpage:

“The trust will invest at least 80% of its managed assets, directly or indirectly, in a broad range of income-producing securities. The trust will invest in both equity and debt securities of companies located in the United States and around the globe. The trust may invest in companies of any market capitalization and may invest in both U.S. and non-U.S. countries, including up to 20% of its managed assets at the time of investment in equity and debt securities of emerging market companies. The trust’s global equity allocation is expected to represent 75% of its managed assets and may vary over time between 50% and 90% of managed assets. The trust’s global debt allocation is expected to represent 25% of managed assets and may vary over time between 10% and 50% of managed assets.”

Thus, the Thornburg Income Builder Opportunities Trust invests in both stocks and bonds, although it will generally have more exposure to stocks than to bonds. That seems strange for an income-focused fund because stocks are generally not very good income vehicles. As of the time of writing, the S&P 500 Index ( SPY ) yields 1.49% and the MSCI World Index ( URTH ) yields 1.64%. At these yields, a $1 million portfolio would yield less than $17,000 in annual income. That is certainly not going to be enough to support the lifestyle of anyone whose income was high enough to accumulate a $1 million portfolio! This is the reason why nearly any income-focused fund invests in bonds. After all, the ten-year Treasury yields 4.34% as of the time of writing, which would take the income from our hypothetical $1 million portfolio up to $43,400 annually. That is a lot better than what we could get from stocks, and higher income can easily be obtained by going to corporate bonds.

With that said, what some closed-end funds do is sell appreciated stocks to realize the gains while letting the principal remain invested. For example, if you purchased $1,000 of a given stock and the price went to $1,100, you could sell $100 worth of your position. That basically has the same effect as buying a stock whose price stays flat and has a 10% yield, as you get $100 that you can spend either way. The only disadvantage to this strategy is that stock prices can go down, but dividends tend to be sticky. Most companies hate to reduce their dividends, so buying high-yielding stocks tends to be a more reliable way to obtain income than relying on selling appreciated assets. Nevertheless, the fund is almost certainly relying on this strategy as a way to generate income for its shareholders using a portfolio that is weighted to common stocks.

One thing that we immediately note by looking at the fund’s explanation of its strategy is that the Thornburg Income Builder Opportunities Trust is a global fund that invests in assets all over the world. As such, we will probably see a somewhat different portfolio than most domestic equity funds possess. That is certainly the case, as we can see here:

I must confess that this portfolio surprised me when I saw it. With the exception of Meta Platforms ( META ), we do not see any of the American mega-cap technology stocks that make up the largest holdings in almost every equity fund. This is not necessarily a bad thing though because the fact that this fund’s portfolio is very different from most allows us to include it into a portfolio with other funds without having to worry about concentration risk. Concentration risk refers to the fact that most funds have large weightings to the same assets, particularly Apple ( AAPL ), Microsoft ( MSFT ), and Alphabet ( GOOG ) (GOOGL). As most funds are holding these same assets, an investor gains little diversification benefits from having multiple funds in a portfolio. Basically, the investor in multiple funds will believe that they are more diversified than they actually are because all of the funds are holding the same positions. The fact that this one has vastly different positions from most equity funds means that it will actually reduce your effective exposure to the commonly held positions if you include it in your portfolio.

Another thing that we note here is that many of the stocks listed on the above list have fairly high dividend yields. This chart details that:

We can clearly see that with the notable exception of Assicurazioni Generali and Meta Platforms, everything on the above list pays a dividend yield that is higher than the MSCI World Index. In fact, several of these companies have yields that are higher than even the benchmark ten-year U.S. Treasury bond. As such, it appears that this fund is at least partly trying to rely on dividend income from the common stock portion of its portfolio and not just converting capital appreciation for income. This is something that we can appreciate due to the fact that dividends tend to be relatively stable over time, and they are much more reliable than capital gains. However, it is important to note that several of these are foreign companies. Foreign companies sometimes have a policy of paying out a set percentage of their net income as a dividend, as opposed to a specified amount as American companies do. That can result in variable dividends over time and offset some of the preference for dividend income over capital gains.

Another thing that we immediately notice with the fund’s portfolio is that a significant number of the companies included on the list are not American companies. Indeed, only four of them are American, although two more are easily available on the New York Stock Exchange. This extends over the broader portfolio as well:

This is, to put it mildly, somewhat rare for a global fund. The Thornburg Income Builder Opportunities Trust only has a 46.7% weighting to the United States, whereas most global funds have somewhere between 60% and 70%. This is something that is nice to see though, for a few reasons. One of the biggest ones is that many foreign stocks have substantially higher yields than American ones, as we have already seen. That is one of the reasons why the MSCI World Index has a higher yield than the S&P 500 Index. This comes from the fact that the American market has generally outperformed the markets of many other countries over the past decade. For example, this chart shows the total return of the S&P 500 Index against the MSCI World Index over the past ten years:

Naturally, all else being equal, the outperformance of the S&P 500 Index has led to American companies having higher valuations and lower yields than foreign companies. We might expect that this would result in the Thornburg Income Builder Opportunities Trust underperforming the market because of its significant weighting to foreign stocks, but that is not the case. In fact, this fund has outperformed both of these indices on a total return basis over the past twelve months:

This fund was only created in July 2021, so it only has a two-year history. During that time, it has done okay though as the fund’s portfolio returned a 1.62% total return through the end of July 2023, but its shares have not performed as well in the market. Since its inception, the fund’s shares have underperformed both the American and the World indices:

That is not uncommon for a closed-end fund. In fact, one of the defining characteristics of these funds is that their market performance can differ from the performance of the actual underlying portfolio. This can sometimes result in an opportunity for investors to acquire the assets of the fund for significantly less than they are actually worth. We will discuss this in greater detail later.

Distribution Analysis

As mentioned earlier in the article, the primary objective of the Thornburg Income Builder Opportunities Trust is to provide its investors with a high level of current income. In order to accomplish that, the company assembles a portfolio of high-yielding common stocks and income-producing bonds from around the world. It then pays out the overwhelming majority of its investment returns to the shareholders. As such, we can assume that this fund will have a relatively high yield, especially because it can include capital gains in its distribution. This is certainly the case as the fund currently pays a monthly distribution of $0.1042 per share ($1.2504 per share annually) to its investors, which gives it an 8.29% yield at the current price. The fund has been remarkably consistent with its distribution over its history:

This history seems likely to appeal to any investor that is seeking a safe and secure source of income to use to pay their bills or finance their lifestyles. However, it is important to note that the fund has only been around for two years, so it has not really been tested by the market yet. The only real test that it had was in 2022 and the market weakness during that year had a much more significant impact on long-duration stocks than it did the value stocks that mostly comprise this fund’s portfolio. As such, we do not know for certain how well it would perform in a true bear market. We should still have a look at the fund’s finances, though. After all, we do not want to be the victims of a distribution cut that reduces our incomes and likely causes the fund’s share price to decline.

Fortunately, we do have a somewhat recent document that we can consult for the purposes of our analysis. The fund’s most recent financial report as of the time of writing corresponds to the six-month period that ended on March 31, 2023. As such, it should give us a pretty good idea of how well the fund handled the market weakness that existed during the final quarter of last year, as well as the rebound that happened in the early stages of this year that could have presented the opportunity to earn some capital gains.

During the six-month period, the Thornburg Income Builder Opportunities Trust received $5,212,196 in dividends along with $4,178,001 in interest from the assets in its portfolio. After we net out foreign withholding taxes, we get a total investment income of $9,057,745 for the fund 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, that was nowhere close to enough to cover the $20,051,819 in distributions that the fund paid out during the period. At first glance, this is something that could be concerning as the fund’s net investment income did not come anywhere close to covering its distributions.

Fortunately, the fund does have other methods that can be employed to obtain the money that it needs to cover the distributions. For example, it might have been able to obtain some capital gains that could be paid out. It was, in fact, quite successful at this. The fund achieved net realized gains of $17,640,839 and had another $75,832,891 net unrealized gains during the period. Overall, the fund’s assets increased by $78,105,858 after accounting for all inflows and outflows during the period. That is more than enough to maintain the distribution for quite a while, although the fund’s assets are still lower than they were at the start of October 2021. It does not appear that it will have any real difficulty sustaining the distribution at the current level, though, unless another severe market correction occurs.

Valuation

It is always critical that we do not overpay for any assets in our portfolios. This is because overpaying for any asset is a surefire way to earn a suboptimal return on that asset. In the case of a closed-end fund like the Thornburg Income Builder Opportunities Trust, the usual way to value it is by looking at the fund’s net asset value. The net asset value is the total current market value of all of the fund’s assets minus any outstanding debt. It is therefore the amount that the shareholders would receive if the fund were immediately shut down and liquidated.

Ideally, we want to purchase shares of a fund when we can obtain them at a price that is less than the net asset value. This is because such a scenario implies that we are acquiring the fund’s assets for less than they are actually worth. I hinted at the possibility of accomplishing this earlier in this article. That is, fortunately, the case with this fund today. As of August 18, 2023 (the most recent date for which data is currently available), the Thornburg Income Builder Opportunities Trust has a net asset value of $17.22 per share but the fund currently trades for $15.14 per share. This gives the fund’s shares a 12.08% discount on net asset value at the current price. This is a very large discount, albeit not as good as the 13.62% discount that the shares have averaged over the past month. However, any double-digit discount is generally a reasonable price to pay for the shares of a closed-end fund. Thus, the current price is quite reasonable.

Conclusion

In conclusion, the Thornburg Income Builder Opportunities Trust is a little-known fund that appears to have some decent potential. The fund has a very different portfolio from many other equity funds along with a lot of international exposure, which allows it to add a degree of diversification to a portfolio containing other funds. The fund’s portfolio performance has been quite decent too, although its market price has not reflected this. That has resulted in this fund boasting a substantial discount to its intrinsic value, though. Overall, it might be worth considering today.

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