By Jim Robinson
Chief Executive Officer and Chief Investment Officer, Robinson Capital
ROBINSON TAX ADVANTAGED INCOME FUND
ROBINSON OPPORTUNISTIC INCOME FUND

For income-oriented investors, many traditional fixed income safe-haven strategies have lost much of their effectiveness. These approaches either yield too little income or expose investors to potential risk–or both.

The days when investors could buy and hold the traditional “classic” 60 percent stock/40 percent bond portfolio are over. Government bond yields are marooned at historically low levels, unlikely to return to their previous levels anytime soon. Corporate bonds, high-yield bonds and dividend-paying stocks may not sufficiently improve the risk-reward proposition enough to make them worthwhile income-generating options.

However, municipal bonds offer a credible alternative for many investors seeking income. Not only do municipal bonds offer higher levels of income than many high-quality bonds, but they are also free from federal income tax amid a future that is likely to feature rising tax rates.

Within the municipal bond asset class, closed-end municipal bond funds offer additional compelling advantages. As the cost of leverage has fallen, distributions are rising at the same time that distributions from open-end funds are falling. Discounts on closed-end funds are also currently several hundred basis points wider than their historic average.

The Death of the 60% Stocks /40% Bonds Retirement Portfolio Allocation

For decades, the 60 percent stocks and 40 percent bond portfolio allowed investors to mitigate risk and gain ongoing retirement income while also providing potential for capital appreciation. This allocation also succeeded for many years in decreasing retirees’ portfolio income volatility, creating a win-win for retirees. That’s why many investors are still devotees of this allocation.

However, there are a number of reasons why this allocation is rightly out of favor. One of the biggest is a growing correlation between stocks and bonds that increases–rather than mitigates–risk. Risks around potential rising inflation connected to the growing federal deficit and rock-bottom interest rates have led some economists to believe that the movements of stocks and bonds could grow closer. This could create more risk in a portfolio exclusively composed of those two asset classes.

At the same time, yields on 10-year government bonds, which are often recommended as a portion of the 60/40 portfolio, are now exceptionally low. Rates of approximately 1.6 percent on the 10-year Treasury equate to income potential that does not exceed the riate of inflation, which currently runs around 2 percent. That means an investment in the 10-year Treasury yields a net loss after inflation. Because rates are set by the Federal Reserve Board, which has promised to maintain rock-bottom rates for the next several years, they aren’t likely to rise any time soon.

As if that wasn’t enough, a 40 percent allocation is now in a position to decrease capital appreciation potential, especially in a rising rate environment. That’s because when interest rates rise, the value of existing bonds falls. If rates rise, the value of existing bonds could fall enough so that they could lose value, undercutting the capital appreciation potential in a 60/40 stock/bond portfolio.

The specter of rising rates also increases the potential for volatility within the bond portion of the portfolio. That volatility has a destabilizing impact on income investors and retirees, who may then make emotional investing decisions that potentially harm their ability to sustain their lifestyles in the long term.

Few Good Choices Among the Typical Income-Producing Retirement Vehicles

Investors might decide to adjust their allocations to either increase the types of stocks or bonds within that allocation or expand or contract either the stock or bond portion. However, the traditional alternatives available to most investors and their advisors don’t offer many compelling advantages.

Government bonds of all maturities are near all-time lows. The Federal Reserve Board, which controls short-term interest rates and heavily influences government bond rates, has indicated that rates will stay lower for longer. This means that a meaningful increase in rates likely won’t occur for at least a few years.

Corporate bonds. Corporate bonds, while offering a bit more yield than government bond rates, are also near all-time lows. They also possess a higher potential for default. Default can come quickly in the corporate market—particularly in the high yield or speculative grade market—before investors can get out of the way. S&P Global Ratings predicts that the U.S. speculative grade corporate default rate could hit 7 percent by the end of 2021.[1] At that rate 133 defaults would occur.[2] When companies default, they stop paying interest on their bonds.

Stocks. Then there are stocks, which possess significant capital appreciation potential. Dividend-paying stocks also offer ongoing income. Many expect U.S. companies to decrease dividends slightly in 2021—by 0.7 percent over what they paid in 2020. This is mainly due to a decline in payouts from financial services companies and the oil and gas sector due to pandemic-related issues.[3] Actual dividend rates have been falling over the past five years, except for a COVID-fueled blip last March.[4] In March 2016, the S&P 500 dividend rate was 2.13 percent; nearly five years later, in February 2021, the S&P 500 dividend rate had fallen to 1.53 percent.[5]

The Case for Municipal Bonds

In this environment, the case for municipal bonds is strong. Municipal bonds are exempt from federal taxes, which raises their effective yields, with investors even in middle tax brackets. This tax exemption will be especially advantageous if the Biden administration is able to implement its plans for higher corporate and individual tax rates. Essentially, higher tax rates make tax-exempt asset classes more attractive.

After the 2007-09 Great Recession damaged the finances of municipalities, there was concern that the COVID-19 crisis would also negatively impact cities, counties and states. However, good news has emerged that state tax revenues has stayed essentially flat instead of declining.[6] In addition, the recently passed $1.9 trillion stimulus plan includes approximately $350 billion in direct aid for state and local governments.[7]

This positive news on the state and local government fiscal front means that there is even less risk of default than is typical within the municipal bond market. Unlike the high-yield corporate bond market, credit risk is often signaled years in advance in the municipal market. In addition, defaults have historically been incredibly rare in the municipal bond market.

Another aspect of the municipal bond market that heightens its appeal is the fact that there is currently slow supply growth in a growing demand market.

 The Case for Closed-End Municipal Bond Funds

Within the municipal bond market, closed-end municipal bond funds may represent a particularly attractive opportunity. At a time when the cost of leverage is falling, discounts on closed-end funds are wide. These advantages translate to higher yields and

At a time when yield distributions are falling in the open-end muni bond fund market, the falling cost of leverage creates the opposite trend for the closed-end muni bond fund market. When yield is scarce, every basis point matters. In addition, the structure of open-end muni bond funds means that the need to invest fund inflows into lower yielding bonds not only creates lower distributions but is also dilutive to current shareholders.

Because closed-end municipal bond funds are trading at significant discounts currently, there is also the opportunity for capital appreciation when that gap closes. This dynamic is similar to 2012-13, when a several hundred basis point discount between funds’ net asset values and their underlying intrinsic value created the opportunity for fund investors to profit when these funds swung from a discount to a premium.

Investors who want to potentially profit from this disconnect should consider the funds with the largest irrational discount, not the funds where the discount can be more easily explained due to bad performance, poor use of leverage, high expenses or difficult-to-value securities.

Due to these factors, many tax-exempt closed end funds now provide up to three times the yield available in the underlying muni market, a significant advantage for yield-starved investors. Certain funds in this sector also offer the ability to hedge interest rate risk inherent in longer-duration closed-end municipal bond funds.

About Jim Robinson

Jim Robinson is the CEO and CIO of Robinson Capital Management, the sub-advisor to the Robinson Tax Advantaged Income Fund and the Robinson Opportunistic Income Fund. Jim, who founded Robinson Capital Management LLC in 2012, is a veteran investment manager and bond trader with more than three decades of experience. His role includes overseeing the day-to-day operations and activities of the Funds, including investment strategies and processes, risk management, regulatory compliance, asset allocation modeling, external manager due diligence and selection, trading and personnel.

About Liberty Street

The Liberty Street Funds offer investors and financial advisors mutual funds sub-advised by independent boutique managers who possess expertise in their asset class. Because Liberty Street focuses on boutique managers, financial advisors can provide value-added strategies in actively managed and less-correlated portfolios to their clients. Through its selective multi-manager family of funds, Liberty Street provides access to timely investment strategies. The Liberty Street Funds are based in New York City, NY and advised by Liberty Street Advisors, Inc. HRC Fund Associates, LLC, Member FINRA/SIPC, is an affiliate of Liberty Street.

For more information, financial professionals should contact their wholesaler by calling HRC Fund Associates, LLC. Advisors, Inc. at libertystreet@hrcfinancialgroup.com or 212-240-9726. Individual investors and shareholders should contact their financial advisor, or the Fund at 800-207-7108.


Disclosures

Robinson Tax Advantaged Income Fund

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about the Robinson Tax Advantaged Income Fund please download here. Read the prospectus carefully before investing.

The Fund may not be suitable for all investors. We encourage you to consult with appropriate tax and financial professionals before considering an investment in the Fund.

An investment in the Fund is subject to risk, including the possible loss of principal amount invested and including, but not limited to, the following risks: Market Turbulence Resulting from COVID-19: the outbreak of COVID-19 has negatively affected the U.S. and worldwide economy. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund. Municipal Bond risk: The underlying funds in which the Fund invests will invest primarily in municipal bonds. Litigation, legislation or other political events, local business or economic conditions or the bankruptcy of the issuer could have a significant effect on municipal bonds and may cause them to decline in value. Closed-end fund (CEF), exchange-traded fund (ETF) and open-end fund (Mutual Fund) Risk: The Fund’s investments in CEFs, ETFs and Mutual Funds (“underlying funds”) are subject to various risks, including management’s ability to manage the underlying fund’s portfolio, risks associated with the underlying securities, fluctuation in the market value of the underlying fund’s shares, and the Fund bearing a pro rata share of the fees and expenses of each underlying fund in which the Fund invests. U.S. Treasury Futures Contracts Hedge Risk: To the extent the Fund holds short positions in U.S. Treasury futures contracts, should market conditions cause U.S. Treasury prices to rise, the Fund’s portfolio could experience a loss; and should U.S. Treasury prices rise at the same time municipal bond prices fall, these losses will be greater than if the hedging strategy not been in place. Leveraging risk: The underlying Funds in which the Fund invests may be leveraged as a result of borrowing or other investment techniques. As a result, the Fund will be exposed indirectly to leverage through its investment in an underlying fund that utilizes leverage. The use of leverage may magnify the Fund’s gains or losses and make the Fund more volatile. Fixed income/interest rate risk: A rise in interest rates could negatively impact the value of the Fund’s shares. Generally, fixed income securities decrease in value if interest rates rise, and increase in value if interest rates fall, with longer-term securities being more sensitive than shorter-term securities. Tax Risk: There is no guarantee that the Fund’s income will be exempt from regular federal income taxes. Portfolio Turnover Risk: The Fund’s turnover rate may be high. A high turnover rate may lead to higher transaction costs, a greater number of taxable transactions, and negatively affect the Fund’s performance. High Yield (“Junk”) Bond risk: The underlying funds in which the Fund invests may invest in high yield (“junk”) bonds which involve greater risks of default, downgrade, or price declines and are more volatile and tend to be less liquid than investment-grade securities. Liquidity Risk: There can be no guarantee that an active market in shares of CEFs and ETFs held by the Fund will exist. The Fund may not be able to sell some or all of the investments it holds due to a lack of demand in the marketplace or other factors such as market turmoil, or if the Fund is forced to sell an asset to meet redemption requests, it may only be able to sell those investments at a loss. Derivatives Risk: The Fund and the underlying funds may use futures contracts, options, swap agreements, and/or sell securities short. Futures contracts may cause the value of the Fund’s shares to be more volatile and expose the Fund to leverage and tracking risks; the Fund may not fully benefit from or may lose money on option or shorting strategies; swaps may be leveraged, are subject to counterparty risk and may be difficult to value or liquidate. Diversification does not assure a profit or protect against a loss.

Robinson Opportunistic Income Fund

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about the Robinson Opportunistic Fund, please download here. Read the prospectus carefully before investing.

The Fund may not be suitable for all investors. We encourage you to consult with appropriate financial professionals before considering an investment in the Fund.

An investment in the Fund is subject to risk, including the possible loss of principal amount invested and including, but not limited to, the following risks, which are more fully described in the prospectus: Market Turbulence Resulting from COVID-19: the outbreak of COVID-19 has negatively affected the U.S. and worldwide economy. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund. High yield (“junk bond”) risk: High yield (“junk”) bonds are speculative, involve greater risks of default, downgrade, or price declines and are more volatile and tend to be less liquid than investment-grade securities. Closed-end fund (CEF), exchange-traded fund (ETF) and open-end fund (Mutual Fund) risk: The Fund’s investments in CEFs, ETFs and Mutual Funds (“underlying funds”) are subject to various risks, including management’s ability to manage the underlying fund’s portfolio, risks associated with the underlying securities, fluctuation in the market value of the underlying fund’s shares, and the Fund bearing a pro rata share of the fees and expenses of each underlying fund in which the Fund invests. Derivatives risk: The Fund and the underlying funds may use futures contracts, options, swap agreements, and/or sell securities short. Futures contracts may cause the value of the Fund’s shares to be more volatile and expose the Fund to leverage and tracking risks; the Fund may not fully benefit from or may lose money on option or shorting strategies; swaps may be leveraged, are subject to counterparty risk and may be difficult to value or liquidate. Leveraging risk: The underlying Funds in which the Fund invests may be leveraged as a result of borrowing or other investment techniques. As a result, the Fund will be exposed indirectly to leverage through its investment in an underlying fund that utilizes leverage. The use of leverage may magnify the Fund’s gains or losses and make the Fund more volatile. Fixed income/interest rate risk: A rise in interest rates could negatively impact the value of the Fund’s shares. Generally, fixed income securities decrease in value if interest rates rise, and increase in value if interest rates fall, with longer-term securities being more sensitive than shorter-term securities. ETN risk: Investing in ETNs exposes the Fund to the credit risks of the issuer. Tax risk: There is no guarantee that the Fund’s distributions will be characterized as income for U.S. federal income tax purposes. Liquidity Risk: There can be no guarantee that an active market in shares of CEFs and ETFs held by the Fund will exist. The Fund may not be able to sell some or all of the investments it holds due to a lack of demand in the marketplace or other factors such as market turmoil, or if the Fund is forced to sell an asset to meet redemption requests, it may only be able to sell those investments at a loss. Portfolio Turnover Risk: The Fund’s turnover rate may be high. A high turnover rate may lead to higher transaction costs, a greater number of taxable transactions, and negatively affect the Fund’s performance. Bank loan risk: The underlying funds may invest in loan participations of any quality, including “distressed” companies with respect to which there is a substantial risk of losing the entire amount invested. LIBOR risk: Many financial instruments use a floating rate based on the London Interbank Offered Rate (“LIBOR”), which is expected to expire by the end of 2021. Any effects of the transition away from LIBOR could result in losses. Convertible securities risk: The underlying funds may invest in convertible securities, which are subject to market risk, interest rate risk, and credit risk. Preferred stock risk: The underlying funds may invest in preferred stock, which is subject to company-specific and market risks applicable to equity securities, and is also sensitive to changes in the company’s creditworthiness and changes in interest rates.

S&P 500 Index: consists of 500 large cap common stocks which together represents approximately 80% of the total U.S. stock market. It is a float-adjusted market-weighted index (stock price times float-adjusted shares outstanding), with each stock affecting the index proportion to it’s market value. Basis Point: refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.

It is not possible to invest in an index.

The views expressed in this material reflect those of the Fund’s Advisor as of the date this is written and may not reflect its views on the date this material is first published or anytime thereafter. These views are intended to assist shareholders in understanding the Fund’s investment methodology and do not constitute investment advice. This material may contain discussions about investments that may or may not be held by the Fund. All current and future holdings are subject to risk and to change.

The Fund is distributed by Foreside Fund Services, LLC.

All investments involve risk and may lose value. A stock may trade with more or less liquidity than a bond depending on the number of shares and bonds outstanding, the size of the company, and the demand for the securities. Past performance is not a guarantee of future results.