“Discounts on closed-end funds are currently quite high,” said Jim Robinson, portfolio manager of the Robinson Tax Advantaged Income Fund, sub-advised by Liberty Street Advisors. “Within the municipal bond market, closed-end municipal bond funds may represent a particularly attractive opportunity.” Listen to this 18-minite Bond Buyer Podcast.

Why Closed End Funds Are Valuable

by The Bond Buyer Podcast

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Speaker 1:

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Lynne Funk:

Hello everyone, and welcome to another Bond Buyer Podcast. I’m Lynne Fund, innovation editor at the Bond Buyer. With me today is Jim Robinson portfolio manager of the Robinson Tax Advantage Income Fund at Liberty Street Advisors. Welcome Jim.

Jim Robinson:

Thanks Lynne.

Lynne Funk:

Well, it’s great to have you. Today, of course, we’re going to be discussing the muni market. You recently wrote a paper about the 60/40 rule, 60% of stocks and 40% bonds in retirement for portfolios. You say this concept should be and is changing. Tell me a bit about that.

Jim Robinson:

Yeah, so we probably should have retitled the days of a one stop shopping no longer exists in the bond market. For years, the whole concept of having 40% of the portfolio allocated to the bond market was one to provide income, but two, to also provide a negative correlation with risk assets or the equity market. And that worked terrifically for about 30 years from the early ’80s through 2009 up to the financial crisis. And the reason that worked primarily was because of high bond yields, which provided a buffer should bad things happen. In fact, the muni market for the 30 years from 1980 through 2010 averaged a yield of about 6%. To put that into context, over the last 10 years, it’s averaged a yield of about two and a quarter percent and to take it a step further, more recently, it’s around 1%.

Jim Robinson:

So the overall muni market is yielding 1%. So you’re not getting the income that you used to get out of bonds. And since the financial crisis, you really haven’t had the negative correlation that you expect from bonds. We’re in a world now where everyone’s watching the fed and what’s good for bonds is good for stocks and what’s bad for bonds is bad for stocks. One of the things that shocked me recently was looking at correlations of different asset classes between large cap growth stocks and the muni market, the correlation is A positive, which is not what folks typically want, but it’s also about the same correlation as large value stocks have relative to large growth stacks.

Jim Robinson:

So you’re really not getting any correlation benefit by owning bonds. That was the gist of the article. And so, with that as a backdrop, why do you own bonds? Well, typically, historically people own bonds because A, they wanted the income and they wanted little downside risk. Not much we can do about the downside risk right now, but bonds should be used for the income that they generate. And unfortunately, there isn’t a whole lot of income to be generated, which is why we’ve historically looked at alternative asset classes that provide higher levels of income, but also don’t offer the negative correlation, so that’s the trade off.

Lynne Funk:

Okay, okay. So I mean, hearing you say 1%, it’s pretty wild, right? What? The one year is that 0.05% right now. But it’s interesting though because muni’s, I mean, we’re in second quarter here, they’re just on a tear. I mean, fund flows keep rolling in, the federal government’s direct aid, the credit picture’s improving. Can you talk maybe a little bit about the sector broadly? Do you see any potential downside risk from muni’s?

Jim Robinson:

Well, clearly the downside risk across all bond markets is the potential for inflation. The feds outwardly said that they want inflation to run hotter than 2% for an extended period of time before they’ll even consider raising rates or tapering some of their purchases. One of the reasons that we really like the closed [inaudible 00:04:59] space, particularly for muni’s is with all the inflows that you’ve seen into the muni market, in a falling rate environment that we’ve experienced, particularly in muni’s since the recovery from the pandemic, the original hit from the pandemic. Every dollar that goes into an open ended mutual fund to invest in municipal bonds is dilutive to the existing shareholders of that fund.

Jim Robinson:

So, if you’re invested in an open ended mutual fund that you think is giving you a 2% distribution yield and new dollars come into that fund that have to be invested at 1%, your distribution yields going down. And one of the benefits that a closed end fund has is that by definition it’s closed. So it doesn’t have to deal with new dollars coming in. And in fact, closed end funds have experienced exact opposite of what the open end fund environment has experienced in that their cost of leverage has gone down. It’s pretty much pegged at close to zero now because of short term interest rates being so low. So most tax exempt closed end funds over the last 12 months have increased their distribution yields at a time where other open ended mutual funds are actually decreasing distribution yields.

Jim Robinson:

That’s one of the big reasons why we like the space, but the risk clearly across all bonds is that if inflation does, in fact, reemerge, we’re going to see higher interest rates and then closed end funds in particular, that’s a problem. Because they tend to be long dated, typically have levered durations of around 10 years. And so, every 1% increase in interest rates is going to result in about a 10% decline in NAV for those funds. One of the things that we can do within our mutual fund that most advisors would be challenged to do on an account by account basis is we can hedge out a lot of that interest rate risk.

Jim Robinson:

So we use short positions and treasury futures contracts to dial the duration down inside of a year. Not because we’re making a call on where we think rates are going, but because we really just want to be rate agnostic. And at the end of the day, if I can provide our investors with a 3% distribution yield with minimal interest rate or credit risk in a world where I’m competing against a 1% distribution yield, we think that’s a pretty good value prop.

Lynne Funk:

Right, right. 2% makes a difference, right? So can you talk a little bit about taxables? That’s been, what? I think, 28% of the market so far this year. Where do you sit with taxables? Do you have them in your portfolio? Do you see this portion of the market going forward, being here to stay? [inaudible 00:07:59] being equal?

Jim Robinson:

We don’t hold them in our tax exempt or tax advantage portfolio for obvious reasons. We do hold them in the taxable equivalent fund that we run. Yeah, now I think they’re here to stay. I think it may in fact, be a growing area of the market going forward. Remember the big push in taxables was the shovel ready build America bond market that was hatched under the Obama administration and now we have his VP, Joe Biden pushing for infrastructure. I could see a second wave of taxable muni’s coming to market. Relative to say corporate bonds, one of the things that we love about the muni market is that credit issues get telegraphed years in advance, not days, weeks, months, but years in advance. So, I’m based outside of Detroit, Michigan, in Gross Point, Michigan. The epicenter of what went wrong in the muni market back in 2013 when Detroit declared its bankruptcy.

Jim Robinson:

Bankruptcies are really rare in the muni market. Detroit clearly benefited from going through that process, but they’re pretty unusual. The beauty of the muni market is that we all know that Illinois has its problems. We all know that that parts of Hartford, Atlantic city, these problems have been out there for years. So no one should be blindsided if something bad happens in those communities, whereas in the corporate market, if you think about a marginal energy company, a fracker. If the price of oil goes below $50, he’s, poof, out of business and declaring bankruptcy. It’s rare for bankruptcy to get declared in the muni market. And so, if you’re looking for a taxable equivalent to a corporate bond, we would tend to favor taxable muni’s just because of the lower default rates on a comparable rating.

Lynne Funk:

Yeah. It’s interesting too, because I think this will segue to something I want to talk about next, and that’s international investor interest in muni’s and I talked to a lot of folks, a lot of portfolio managers who say, “I can’t even tell you how many times I’m on the phone with somebody in the EU or in Canada, Canadian pension funds looking to invest in muni’s.” And the taxable portion of that I think is the most obvious choice for them for various reasons. So have you seen an uptick in interest from international investors?

Jim Robinson:

We’ve seen some international investors, we’ve seen a lot of crossover investors, so a pension plan, tax exempt entities that just view the overall characteristics of muni’s vis-a-vis short dated corporate bonds as being more attractive. Lower default rates, comparable yields. So they don’t benefit from the tax exempt status of the securities, but just the overall profile of the securities they find attractive.

Lynne Funk:

Right, and with rates negative in a lot of places around the world now, it makes tremendous sense. So can you talk a little bit about ESG. I feel like everybody I speak with, for sure, it comes up in conversation. It’s a little more time to really hit in muni’s. I think a lot of folks say I’m not the first, won’t be the last, muni’s were the original impact investment. Where do you see this area of the market in 2021 and perhaps beyond that?

Jim Robinson:

It’ll find its way into the muni market. We don’t have that mandate and so, we aren’t particularly sensitive to it. And quite frankly, investing in closed end funds, would be really challenging for us to avoid. They all want a lot of the same things. That said, much of the muni market is somewhat ESG agnostic. I think eventually if it isn’t out there already, you will find certain communities get labeled as more ESG sensitive than others. But a lot of the muni market, if you look at transportation, that’s clearly ESG sensitive. So yeah, I would expect it to continue. Years back, I managed a portfolio for a family office that half the family were Christian scientists and as a result, we couldn’t own any hospital bonds.

Lynne Funk:

Oh, wow.

Jim Robinson:

So, I mean, you’ll find pockets throughout the investor base out there. You’re going to get investors who don’t want to own tobacco settlement bonds, because they view it as sin. So yeah, I see ESG ultimately permeating all investment areas at some point.

Lynne Funk:

And we’re going to take a short break. We’ll be right back with Jim Robinson.

Speaker 1:

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Lynne Funk:

And we’re back. So Jim, we were just talking about ESG, but in muni’s in general, how do you tell the story of the municipal market to your clients?

Jim Robinson:

So for us, much of what we do is buying other managers, basically. So we’re buying closed end funds that are managed by BlackRock, Eaton Vance, Nevine, WAMCO, PEMCO, you name it. We get a little bit of comfort in knowing that we have arguably the world’s best muni managers out there working on our behalf. But at the end of the day, when you aggregate all of our holdings, we really have just a big muni index fund. Last I looked, on a look through basis to the underlying holdings of the bonds that we own, we had over 10,000 unique credits or 10,000 unique bonds, probably 2,000 unique credits. In my simple mind that’s just probably the world’s largest muni index fund out there. I look at something like an MUB, which is an ETF that invests in municipal bonds and it owns three, 4,000 security.

Jim Robinson:

So we’re two, three times that in terms of exposures that we have out there. That’s pretty much by design. We’ve certainly noticed over the years that every manager has their tendencies where they’re going to play. Nevine tends to have a higher concentration in Illinois paper. They’re based in Illinois, that makes sense. It’s their backyard, so they understand. But we don’t necessarily want to have a higher concentration in Illinois paper, nor do our investors. So we offset that by having exposures to other managers to bring that down to index levels.

Jim Robinson:

So what we push with our investors is the overall benefits of the muni market vis-a-vis other investments. And the biggest thing as I mentioned earlier is default rates are much, much lower. A typical, triple B rated muni bond has the default rate of about a AAA corporate bond historically. It’s highly unusual and also is highly telegraphed well in advance. So the comfort that we get is in having an asset class that historically has had very few defaults.

Lynne Funk:

Well, thanks Jim. is there anything else that we didn’t touch on today that you wanted to talk about? Something I missed.

Jim Robinson:

Well, yeah. Going back to the 60/40 argument. Our position is look, if you’re looking for income out of your bond portfolio, focus on income, don’t count on it providing this counterbalance to risk assets that it historically has provided. So, one of the things that our fund does by offering three X the yield of the underlying muni market is you don’t need to put as much money into our fund to generate the same level of income. In fact, you need to put about a third of your money in there. And with what you don’t invest in bonds use the remaining money to find the counterbalance to risk assets. It may be something as simple as cash, it may be precious metals. It could be cryptocurrency, it could be a lot of things. But bonds aren’t going to provide you with that counterbalance.

Lynne Funk:

Jim, thank you so much for joining me today. Hopefully we’ll look forward to speaking in the future.

Jim Robinson:

Thank you Lynne.

Lynne Funk:

Thank you for listening to this Bond Buyer Podcast. I produced this episode with audio production by Kelly Malone. Special thanks to this week’s guest, Jim Robinson. Rate us, review us and subscribe to our content at www.bondbuyer.com/subscribe. From the Bond Buyer, I’m Lynne Fund. Thanks for listening.

 

RISKS AND OTHER DISCLOSURES

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.

Please find the iShares National Muni Bond ETF prospectus offering here.

Performance data quoted represents past performance and is no guarantee of future results. Total return figures include the reinvestment of dividends and capital gains. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. For the most recent month end performance, please call (800) 207-7108. Returns showing less than one year are cumulative. The gross operating expense ratio for the Class A, C, and Institutional Shares are 3.10%, 3.85%, and 2.85%, respectively. The total net annual fund operating expenses after fee waiver and/or paying for operating expenses are 2.98%, 3.73%, and 2.73% for the Class A, C, and Institutional Shares, respectively. The contractual agreement between the Fund and the Advisor is in effect until April 30, 2021. Without the contractual agreement, performance would have been lower. Performance results with load reflect the deduction for Class A Shares of the 3.75% maximum front end sales charge. Class C Shares are subject to a contingent deferred sales charge of 1.00% when redeemed within 12 months of purchase. Performance presented without the load would be lower if this charge was reflected. Because of ongoing market volatility, Fund performance may be subject to substantial short-term changes. *ITD represents inception-to- date; Inception 9/30/2014.

Subsidized 30-Day SEC Yield is based on a 30-day period ending on the last day of the previous month and is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period. This subsidized yield is based on the net expenses of the Fund of which the yield would be lower without the waivers in effect. Negative 30-Day SEC Yield results when accrued expenses of the past 30 days exceed the income collected during the past 30 days. Unsubsidized 30-Day SEC Yield as well as Unsubsidized Tax-Equivalent Yield are based on total expenses of the Fund. Tax-equivalent yield is for illustrative purposes only and assumes a 43.40% Federal marginal tax rate and does not take into account any other taxes. Each individual’s actual tax burden will vary.

As of 4/26/21 the LMBITR 12 Month Distribution Yield was 1.00% and Robinson Tax Advantaged Income Fund (ROBNX) 12 Month Distribution Yield was 3.02%.

As of 3/31/21 the Top Ten Holdings (% Net Assets, Excluding Cash): Western Asset Managed Municipals Fund Inc 6.98%, BlackRock MuniYield Fund Inc 6. BlackRock MuniYield Fund Inc 6.26%, iShares National Muni Bond ETF 6.22%, VanEck Vectors High Yield Muni ETF 5.90%, Invesco National AMT-Free Municipal Bond ETF 5.11%, Nuveen New Jersey Quality Municipal Income Fund 4.67%, MFS Municipal Income Trust 4.31%, BlackRock MuniHoldings Fund Inc 4.14%, BNY Mellon Strategic Municipal Bond Fund Inc 4.14%, and BlackRock MuniVest Fund Inc 3.86%.

Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

The views expressed in this material reflect those of the Fund’s Investment 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 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  https://www.foreside.com/

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.

Correlation: is a statistic that measures the degree to which two securities move in relation to each other.

Credit Quality: Credit quality ratings are sourced from, Standard & Poor’s (S&P), a Nationally Recognized Statistical Organization (NRSRO). The ratings represent the NSRSO’s opinions as to the quality of the securities they rate. Ratings are relative and subjective and are not absolute standards of quality. The Credit Quality Ratings reflected in this material are based on the S&P’s assigned rating of AAA as the highest to D as the lowest credit quality rating for each security of the closed-end funds held by the Fund. The credit quality breakdown does not give effect to the impact of any derivative investments, including but not limited to futures, options, and swaps, made by the Fund. Not Rated refers to a security that is not rated by the S&P but may be rated by other NSRSOs.

Distribution Yield: A distribution yield is the measurement of cash flow paid by an exchange-traded fund (ETF), real estate investment trust, or another type of income-paying vehicle. Rather than calculating the yield based on an aggregate of distributions, the most recent distribution is annualized and divided by the net asset value (NAV) of the security at the time of the payment.

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.

The Fund is distributed by Foreside Fund Services, LLC.