RiverNorth Capital Management is a $2 billion Chicago-based money management firm specializing in closed-end funds that manages several CEF-focused mutual funds, some of which are sub-advised by DoubleLine, Oaktree and Manning & Napier.
Brian Schmucker, founder and chief executive officer of RiverNorth, founded the firm in 2000. He started the company as a traditional RIA and after connecting with Patrick Galley in 2004, the firm’s focus shifted to trading closed-end funds. Galley serves as chief investment officer and chairman of RiverNorth Funds.
They began incorporating CEFs into separate managed accounts and seeded their first fund in December 2006. That fund, the RiverNorth Core Opportunity Fund, now has about $650 million in assets. “The investors that have allocated to us, whether they be family offices or advisors for institutions, have allocated because they understand what we do, they respect what we do,” Schmucker says.
“CEFs are a relatively unique security,” Galley says. There are about 600 CEFs that trade in the U.S., and approximately one in five New York Stock Exchange-listed securities is a CEF. These funds trade at a discount or premium to their NAV.
For example, say $500 million is raised for a particular fund strategy. Of that, approximately 5 percent of the capital comes out to pay expenses and commissions. Now you have a security that’s worth $475 million but gets priced as if it was $500 million, meaning it is trading at a five percent premium to its NAV. In the secondary market, not a lot of investors want to pay $1.05 for $1.00 worth of assets. Supply and demand dynamics take over, and the fund typically starts to trade at a discount to its NAV.
“That’s were RiverNorth comes in,” says Galley. “We are buying $1.00 worth of assets for .90 cents on the dollar or .85 cents on the dollar.”
“We don’t know of any other investment vehicles where you know what it is worth versus what the price is,” said Schmucker.
Their second mutual fund was launched three years ago this December with Jeffery Gundlach and the team at DoubleLine as sub-advisors. The fund, RiverNorth/DoubleLine Strategic Income Fund, quickly rose to over $1 billion and was soft closed.
It has been re-opened due to current opportunities in the fixed-income CEF space. “The recent dislocation in the marketplace has been good for us,” Schmucker says. “There is no shortage of volatility in the current environment.”
“A year ago, approximately 70 percent of all fixed-income CEFs traded at a premium to their NAV because investors were looking for yield and CEFs offered attractive yields,” says Galley. “All they could see was the yield and they were greedy about that yield. Today that’s completely opposite, as investors saw some market price volatility and now they are fearful. So today approximately 70 percent of the whole CEF space trades at a discount of wider than five percent. The market has gone from greed to fear in a short few months.”