Adding RMI To Flex Portfolio

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Use 5% of cash to start position in RiverNorth Opportunistic Municipal (RMI)

Remember, the liquidity on this new fund is still relatively low so use limit orders and size your positions appropriately.  I would not go over 10K shares of this (and that is likely a stretch unless you plan to hold for a very long time).

Three trades at $20.62, $20.68 and $20.65

Rationale: 

RiverNorth Opportunistic Municipal Income (NYSE:RMI)

This is another fund-of-funds from RiverNorth, a closed-end fund investment manager out of Chicago. They already have RiverNorth Opportunistic Income (RIV) launched a few years ago and RiverNorth Strategic Opp (OPP) launched in 2016 . RMI was launched on October 25, 2018 and has nicely outperformed the benchmark on NAV but lagged a bit on price. The NAV is up 6.02% so far this year- basically because it was launched at the best possible time when discounts on muni CEFs were very wide. But that driver is likely done for now as discounts are now tighter than average. In other words, do not expect that performance to continue. That said, it doesn't mean you have to run out and sell it.

  • Distribution yield: 5.40%

  • Leverage: ~38% (plus underlying leverage)

  • Payment: $0.0917 per month

  • Discount: 7.0%

  • Duration (estimated): 8.5 years

  • Expenses: 1.92%

  • Investment Grade: 89.4%

  • Total Net Assets: $130.8M

  • Term structure liquidating October 25, 2030

    • Within twelve months prior to the Termination Date, the Fund may conduct a tender offer to purchase 100% of the then outstanding shares. Following the completion of the tender offer, the Fund must have at least $100 million of net assets. The Board may then eliminate the Termination Date and convert the Fund to a perpetual trust upon the affirmative vote of a majority of the Board

Current Portfolio

The semi-annual report was recently released in mid-March with updated holdings. Closed end funds made up ~70% of the total portfolio with the largest holdings being:

  • Invesco Municipal Opp (OIA)

  • Nuveen AMT-Free Municipal Income (NVG)

  • Nuveen AMT-Free Quality Muni (NEA)

  • Nuveen Quality Municipal Income (NAD)

  • Blackrock Municipal 2030 Target (BTT)

Individual municipal bonds account for approximately 90.2% of the holdings with a concentration in two dozen higher coupon positions.

Investment Strategy

The Fund’s Managed Assets are allocated among two principal strategies: Tactical Municipal Closed-End Fund CEF Strategy (managed by RiverNorth) and Municipal Bond Income Strategy (managed by MacKay Shields). RiverNorth determines which portion of the Fund’s assets is allocated to each strategy and may,from time to time, adjust the allocations. The Fund may allocate between 25% to 50% of its Managed Assets to the Tactical Municipal CEF Strategy and 50% to 75% of its Managed Assets to the Municipal Bond Income Strategy. The Tactical Municipal CEF Strategy typically invests in municipal CEFs and exchange-traded funds (OTC:ETFS) seeking to derive value from the discount and premium spreads associated with CEFs. The Municipal Bond Income Strategy primarily invests in municipal debt securities of any credit quality, including securities that are rated below investment grade.

Currently, the split between the two sub-advisors is as follows:

RMI still appears to be cheap (and actually getting cheaper) at the current discount rate. Not to mention carrying a nice juicy distribution yield. The other benefit is the diversity and flexibility of the fund of funds platform giving them the ability to shift back and forth as conditions dictate.

The start date of the fund was nearly perfect IPOing when muni CEFs had been clobbered by the belief that rates would be heading much higher. It should prove to drive sustainable dividends and capital gains. It is the ONLY muni CEF (counting National, State and High Yield) where the NAV total return YTD (+6.9%) is higher than the share price total return YTD (+3.1%). Nobody knows about it yet.

Here’s my review of the new fund’s holdings:

The results were just as expected, and extremely encouraging. All numbers based on the 12/31/18 semi-annual report. Back in October when muni CEFs were at record wide discounts… They bought 43 different municipal positions (42 tax free plus taxable NBB) covering all the major fund families. It looks to me like they used “convergence” (typical of RiverNorth's investment strategies overall) as their primary buying criteria (yield was 2nd) and then set out to acquire shares opportunistically. They did not care if they bought sister funds that held the same securities. For example, they bought 6 Invesco national muni funds. They bought similar overlapping funds from Blackrock, Dreyfus, Nuveen, Pioneer, Putnam, etc. Their portfolio is up 7.3% just on share price (excluding dividends) since December 31st.

On the muni bond side, the MMD management team basically repeated the MMD IPO strategy that was so successful for so many years. Go for long, high quality, high coupon bonds with maximum call protection. Don’t pressure the distribution with call exposures for many years to come. They own 18 positions with an average coupon of 5.03%. They opted for the full 10 year call protection (or close to it) for 70% of the portfolio. Here is the near term call exposure table:

  • 2019: 0%

  • 2020: 0%

  • 2021: 0%

  • 2022: 0%

  • 2023: 4%

  • 2024: 4%

  • 2025: 4%

So my point of view is they timed the IPO perfectly and I trust they’ll have no trouble meeting the monthly managed distributions from income, supplemented by capital gains if necessary. Best of all they are allowing us to buy into their success for about 94 cents on the dollar.

The only downsides I see is liquidity: it averages a measly 16,000 shares traded daily. Also, the size of the fund could force them to do another rights offering, similar to what they did with RIV.

Video with transcript explains it all: https://www.rivernorth.com/pdf/rivernorth.rmi.semi.annual.report.pdf

Concluding Thoughts

For those wanting high-quality professional management of a municipal bond portfolio, RMI is a good choice at an attractive selection. You get two premier asset managers. MacKay Shields has a couple of open-end mutual funds that are typically near the top in performance annually. While the fund doesn't have a lengthy track record to judge performance, we know from other fund vehicles that both managers have provided value.

Liquidity in the fund is still being established but trending up. Average volume on Yahoo Finance is 19K share per day ($391K daily dollar volume). But in more recent weeks, we've seen volume tick higher and has been north of 25K and even 30K most days- perhaps do to our recommendation of the fund.

The current valuation is relatively cheap. While most muni CEFs are realizing tighter discounts over the last two months, RMI is seeing a widening discount. The NAV is on fire as half of the portfolio captures tightening discounts in the CEF positions. The other half, run by MacKay, is benefiting from the strong muni macro conditions we described earlier.

Our opinion is that the discount is likely to be nearing its nadir and given the strength/momentum of the NAV, could pull up the price sharply.