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For RNCOX (and similar funds-of-funds), the ER you are referring to is the "Total ER", which includes both RiverNorth's management fee, plus the management fees of the funds (CEFs) that it invests in.
Here's how it breaks down: Let's say you want to buy a CEF which holds a bunch of stocks. The CEF has an ER of 1%. Disregarding pricing spreads, you'll expect to get the return on those stocks, minus the ER of the CEF. So for your CEF to outperform, you need to expect your CEF's investment skill will deliver more than 1% of added value compared to just buying stocks directly.
Now we go one step up. You want to buy RNCOX, which holds a bunch of CEFs. RNCOX has a (non-total) ER of 1.20%. So for RNCOX to outperform, you need to expect RiverNorth's voodoo magic will deliver more than 1.20% of added value compared to just buying the CEF's directly. Those CEFs, in turn, still need to to deliver another 1% of added value to outeperform the underlying stocks, so that's how you ultimately end up with your total ER of 2+%.
In a traditional funds-of-funds, this makes sense. However in RNCOX's case, I think the total ER is misleading, because RNCOX's strategy is focused only on trading the CEFs themselves, and has very little to do with the actual strategy or management skill of the CEFs. When they buy a CEF, they're not thinking, "This manager is very good, and is likely to give returns of more than 2% over the market, so we can charge 2% for our services." Instead they're thinking, "This CEF is underpriced, and we expect it will go up more than 1.2%, so we can charge 1.2% for our services." So in my opinion, 1.20% is the ER that more accurately reflects their strategy.
Short summary: The 2.4% ER includes the ER of both RNCOX and the underlying CEFs, but since RNCOX's strategy is based on getting value from trading CEFs rather than their underlying stocks, it seems more appropriate to use a 1.2% ER.
The total E.R. is rather more variable than most. They have a strategic asset allocation with a tactical overlay (neutral might be 60/40 with 3% e.m. but in a given year it might be 65/35 with a tilt toward emerging markets). They then ask whether the best vehicle for implementing the plan is an ETF or a CEF. If CEF's are trading at irrational discounts, they implement with them knowing that carries higher expenses but expecting to more than make up it up in the arbitrage. If CEF's are priced in line with historic norms, they implement with low cost ETFs.
For the past year, the CEF discounts - marketwide - have been steadily widening so they've been putting more into CEFs knowing that there's apt to be short-term pain but anticipating an eventual mean reversion on the discounts that will profit long-term shareholders.
I am in their RNDLX, my only bond fund, but I do not understand spreading over so many CEFs with 1 to 2% in each of them. CEF itself is a diversisifed fund, right ? Then what difference those CEFs make if they spread so thin. I do not have holdings in front me now, but looked odd to me the last time I looked at them.
I do not understand spreading over so many CEFs with 1 to 2% in each of them. CEF itself is a diversisifed fund, right ?
I think you need to understand that for the CEF portion of RNDLX, the strategy isn't really about investing in bonds, it's about investing in CEFs. Unlike mutual funds, CEFs aren't priced solely based on NAV. Instead they trade like stocks and bonds, meaning that investors will pay a higher or lower price depending not just on the NAV, but also on how they expect the CEF will perform in the future. So when buying a CEF, you have additional risk that its value will go up or down regardless of the NAV of the underlying stocks/bonds. This is likely why RNDLX needs to diversify among so many CEFs.
Just as a reminder: RNDLX is very different from RNCOX. If you haven't, you might want to glance at the Observer's profile of RiverNorth DoubleLine Strategic Income. RNCOX allocates between CEFs and ETFs, depending on the opportunities available. RNDLX allocates between fixed-income CEFs and two separate strategies run by Jeffrey Gundlach; Mr. G's work has nothing to do with CEFs. Currently it's 54% CEFs and 46% DoubleLine.
Comments
Looking at their website, RiverNorth's actual management fee is 1.20%, which might still be high but it is a bit more reasonable: http://www.rivernorth.com/mutual-funds/rncix-rncox
Here's how it breaks down: Let's say you want to buy a CEF which holds a bunch of stocks. The CEF has an ER of 1%. Disregarding pricing spreads, you'll expect to get the return on those stocks, minus the ER of the CEF. So for your CEF to outperform, you need to expect your CEF's investment skill will deliver more than 1% of added value compared to just buying stocks directly.
Now we go one step up. You want to buy RNCOX, which holds a bunch of CEFs. RNCOX has a (non-total) ER of 1.20%. So for RNCOX to outperform, you need to expect RiverNorth's voodoo magic will deliver more than 1.20% of added value compared to just buying the CEF's directly. Those CEFs, in turn, still need to to deliver another 1% of added value to outeperform the underlying stocks, so that's how you ultimately end up with your total ER of 2+%.
In a traditional funds-of-funds, this makes sense. However in RNCOX's case, I think the total ER is misleading, because RNCOX's strategy is focused only on trading the CEFs themselves, and has very little to do with the actual strategy or management skill of the CEFs. When they buy a CEF, they're not thinking, "This manager is very good, and is likely to give returns of more than 2% over the market, so we can charge 2% for our services." Instead they're thinking, "This CEF is underpriced, and we expect it will go up more than 1.2%, so we can charge 1.2% for our services." So in my opinion, 1.20% is the ER that more accurately reflects their strategy.
Short summary: The 2.4% ER includes the ER of both RNCOX and the underlying CEFs, but since RNCOX's strategy is based on getting value from trading CEFs rather than their underlying stocks, it seems more appropriate to use a 1.2% ER.
Is there time in their busy day to find other "opportunities"?
The fund looks to me like a classic case of mean reversion plus steep fees.
For the past year, the CEF discounts - marketwide - have been steadily widening so they've been putting more into CEFs knowing that there's apt to be short-term pain but anticipating an eventual mean reversion on the discounts that will profit long-term shareholders.
Working on an interview with them this month.
For what that's worth,
David
I am in their RNDLX, my only bond fund, but I do not understand spreading over so many CEFs with 1 to 2% in each of them. CEF itself is a diversisifed fund, right ?
Then what difference those CEFs make if they spread so thin. I do not have holdings in front me now, but looked odd to me the last time I looked at them.
Mrc
Here's the fund's homepage if you'd like to poke about.
David